SUPPLY CHAIN MANAGEMENT

A recommended text book for MBA level students

Author: Dr. ARUNACHALAM RAJAGOPAL,

Former Professor, Sharda University, Greater Noida
About the author:
The author Dr.Arunachlam Rajagopal mechanical engineer from Anna University, Chennai.
He obtained his post graduate degree M.Tech (Industrial Management) from IIT Madras and
also holds a MBA degree from REC, Trichy (Presently, NIT, Trichy). He obtained his
doctoral degree from Anna University. His area of research interest lies in Operations
Management, Supply Chain Management, and Business Analytics.
He worked as Engineer / Senior Engineer at BHEL, Trichy for nine years during which
period he was involved in the project management function. He subsequently operated a
small transportation firm for five years and then took up teaching assignments at various
leading business schools in India. He was involved in teaching Operations Management,
Supply Chain Management, Operations Research, Business Statistics, and Business
Analytics. He has been very innovative in all his teaching assignments at Anna University,
Chennai; BITS-Pilani; Sona College of Technology, Salem; Adhiyamaan College of
Engineering, Hosur; Sharda University, Greater Noida, UP, India.
Table of Contents:

CH01: SUPPLY CHAIN MANAGEMENT - INTRODUCTION

CHO2: VALUE CHAIN AND OTHER SCM CONCEPTS

CH03: SUPPLY CHAIN STRATEGY AND PLANNING

CH04: FORECASTING IN A SUPPLY CHAIN

CH05: LOGISTICS NETWORK: PLANNING AND DESIGN

CH06: FACILITIES LOCATION

CH07: SUPPLY CHAIN CAPACITY PLANNING

CH08: SOURCING AND PROCUREMENT

CH09: INVENTORY MANAGEMENT

CH10: TRANSPORTATION – ITS ROLE IN LOGISTICS

CH11: WAREHOUSING

CH12: MATERIAL HANDLING SYSTEMS

CH13: PACKAGING MATERIALS AND PRACTICES

CH14: ROLE OF INFORMATION TECHNOLOGY IN SCM

CH15: REVERSE LOGISTICS SYSTEM

CH16: GOBAL LOGISTICS SYSTEM

CH17: SUPPLY CHAIN PERFORMANCE

Ch18: SUSTAINABLE SUPPLY CHAIN

CH01: SUPPLY CHAIN MANAGEMENT - INTRODUCTION
Learning objectives:
1. Highlight the importance of supply chain and its management
2. Define logistics and supply chain
3. Recognize the three flows in a supply chain
4. Learn about supply chain types
5. Understand the supply chain: manufacturing and service
6. Differentiate between logistics and supply chain management

Importance of supply chain management could be well understand from the fact that there has
been many literature published on this subject in recent times, in the form of books, and
research articles. Further, many workshops, seminars, and international conferences are being
conducted on the various aspects of logistics and supply chain Management.
Supply chain Management, according to Wisner (2012), could impact the competitive
advantage of companies in a very significant manner. Michael Porter (1998) in his five
forces model puts forth ‘cost leadership’ as the first generic strategy for enhancing the
competitive advantage of companies. Supply claim management, according to many
researchers, is one of the fertile grounds for achieving cost leadership and enhancing
competitive advantage of companies.
Supply chain management as a concept owes its origin to logistics. In the ancient times
logistics was meant primarily to meet the needs of warfront. Logistics has its roots from the
Greek word ‘logos’, which means ratio, calculation, reasoning etc. Logistics was originally
meant to ensure supplies that the military needs as it moved from its base stations to forward
positions for attacking the enemy or resisting enemy attack. The supplies ensured for
military logistics were food, water, clothing and uniforms, fuel, and ammunition. The
function of making available these supplies at the warfront is very essential. Many times in
the history, logistics meant success or failure in war. The concept of logistics which was very
successfully employed in military to ensure supplies to the battle field got the attention of
business managers and this gave birth to the concept of business logistics.
Even though the practice of logistics in military has been for quite long, business logistics
evolved in a significant manner only in the 1950s and later. The development of business
logistics was necessitated by the increasing complexity of various businesses. Increased
customer awareness and more demanding customers of the present times have made it
eventually essential for business managers to build and develop their logistics infrastructure
in order to survive and grow in the marketplace.
A professional working in the field of logistics management is often called a ‘Logistician’.
Now, in the era of supply chain management, there are supply chain managers or logistics
managers in the business firm’s organizational structure and in some occasions at the Vice-
President level of the company. This is an indication of the importance attached of logistics
and supply chain management in the business activities.

Logistics definition: A dictionary definition of logistics is given below.

“The branch of military science having to do with procuring, maintaining and transporting
material, personal and facilities”.
A much simpler and lucid definition for ‘logistics’ has been given by the Oxford English
Dictionary as: “The commercial activity of transporting goods to customers”.
A detailed definition for logistics as given by Ernst & Whitney (1987) is also given below for
ready reference: “Logistics is the process of planning, implementing, and controlling the
efficient and cost effective flow and storage of raw materials, in-process inventories, finished
goods, and related information from the point of origin to the point of consumption for the
purpose of conforming the customer requirements”. The definition given by Ernst & Whitney
(1987) details the various processes involved in the logistics function and this definition is
quite appealing.

Logistics management
Let us try to understand what is logistics management? In simple terms, logistics
management could be defined as efficient and effective movement of material from point of
origin to the point of consumption. It involves forward and reverse flow of goods,
information, and funds. The logistics activities in any origination could be grouped under the
following in a broader manner:
1. Inbound logistics
2. Internal operations
3. Out bound logistics
Inbound logistics: is to do with ensuring raw material supplies, component parts and sub-
assemblies in order to enable smooth functioning manufacturing or assembly of the product.
The inbound logistics also includes temporary storage of raw materials and components in
raw material warehouse.
Internal operations: is the process of converting raw material, components and sub-
assemblies in to the finished product. This would involve movement of material and work-in-
process (WIP) from one place to another as per the manufacturing / assembly requirements
within the factory for value addition by the different processing centres / assembly lines. This
movement of material within the factory premises is termed as internal logistics.
Outbound logistics: is to do with continuous and uninterrupted supply of finished goods to
the customers at the right time and right place. The outbound logistics includes
transportation, finished goods warehouse / distribution centres, and other distribution channel
infrastructure.
 Raw Inbound Manufacturing: Outbound
material Logistics internal logistics Logistics Customers
suppliers
Figure 1.1 Components of logistics

Supply chain
The scope of logistics management in business applications expanded further to cover
additional aspects of business processes which enable smooth transfer of material along with
value adding stages; from one stage to another and so on. This gave rise to the concept of
supply chain and its management. A supply chain is a sequence of organizations, their
facilities and functions, involved in making products and services and delivering them to
customer. The supply chain starts with the suppliers of basic raw materials and extends to the
manufacturing or service providing companies, to wholesaler, to retailers, and then to the
final customer. The facilities in a supply chain could include raw material warehouses,
factories / processing centers, finished goods warehouse, distribution centers, retail outlets,
and other office premises involved in the activities of the supply chain.
The business aims at providing customers with products and services of value and makes
profit for itself and this business activity occurs through what is called supply chain. It should
be noted that supply chain exists:
 Irrespective of whether an organization recognizes the concept of supply chain or not,
 Independent of whether a business house has a separate logistics or supply chain
function / department or there exists a manager to look into the various aspects.
It has been pointed out that the future business wars will be fought not between business
houses but between supply chains. This observation should possibly be sufficient enough to
understand the importance of supply chain concept. I am sure you appreciate now that we
need to know some basic concepts of supply chain and its management in order to deal with
the business.
According to Mentzer et al (2001) supply chain is defined as “a set of three or more of the
upstream and downstream flows of products, services, finances, and information from a
source to a customer”. Supply chain can be understood in a broader sense as “all those
entities involved from supplier of raw materials, manufacturing units, distributors, retailers
and the ultimate customers”. It deals with flow of products (materials and components) from
raw material supplier, through manufacturing units, to distributors and / or retailers, and
finally to the final consumer. Supply chain involves not only flow of products, but also flow
of information and cash.
Every organization is a member of at least one supply chain, and many organizations could
be member of multiple supply chains. Russel (2006) has defined supply chain is an integrated
group of business processes and activities with the same goal – providing customer
satisfaction. A supply chain consists of all stages involved, in fulfilling a customer order.
The supply chain activities involved in making available a product or service to a customer(s)
starts from the firm(s) supplying raw materials and ends with delivery of the product or
service at customer hands and providing service to his/her satisfaction. It is very important to
note that the customer is part of the supply chain.
Within an organization the supply chain includes all functions/activities involved in fulfilling
a customer order. The typical functions are new product development, supplier selection and
development, manufacturing, storage, transportation, and distribution, customer service, and
so on. Supply chain consists of supplier network in the upstream, the focal firm where the
transformation process adds value to the material inputs and converts them into finished
goods, and the downstream distribution network through which the finished goods are
distributed to the customer for consumption. The Figure 1.2 depicts the supplier network,
enterprise or the focal firm, and distribution network.

Customer
S21 S11 RWH
R1
S22
Factory-1
S12 DC1 R2
S23
R3

S24 S13

S25

S26 S14
Customer
Factory-2
S27

R4
S28
S15 FGWH DC2 R5
S29 H
R6

Figure1.2 Supply chain (supply network, enterprise, and distribution network)

Tier 1 suppliers: S11, S12, S13, S14, S15, …

Tier 2 suppliers: S21, S22, S23, S24, S25, S26, S27, S28, S29, …
Raw material warehouse: RWH
Manufacturing units / Assembly lines: Factory-1, Factory-2
Finished goods warehouse: FGWH
Distribution Centres: DC1, DC2
Retailers: R1, R2, R3, R4, R5, R6, ….

The supplier side functions of the supply chain include supplier identification and selection,
supplier development, and supplier integration. Logistics involved in shipping of raw
materials to the manufacturing unit should be considered carefully. This might involve milk
runs to collect the raw materials and components from suppliers. Proper routing of milk runs
could save cost to the firm and the supply chain. The key components of supply chain include
right decision on number of suppliers, raw material warehouse (number, ownership, and
location), etc.
Internal logistics is to do with decision on movement of material within the manufacturing
facility during the various stages of value addition in converting the raw material into
finished goods. Right selection of material handling systems (fuel efficiency and hauling
capacity) and optimal routing of material movement would reflect deeply on the production
cost resulting in lower cost of goods sold and higher profitability.
The distribution / demand side supply chain activities are transportation / shipment of
finished goods to warehouse / distributors, retailer, and customer. The distribution channel
design and infrastructure has a propound impact on the supply chain performance.
The distribution or outbound logistics involves finished goods warehouses, distribution
centers, etc. The movement of material across these facilities needs to be carried out by
proper designing of the distribution network. The movement or transportation of products in
the distribution side / outbound logistics should be optimized in order to achieve lower
logistics cost. Modern logistics management techniques like cross docking, break bulk, and
backhaul operation could help in achieving this lower cost objective. These concepts are
discussed further in later chapters.
Supply chain activities begin with customer order and end when a satisfied customer has paid
for his or her purchase. Supply chain brings an image of product or supply moving from
suppliers to manufacturers to distributors to customers along a chain. Further, it is equally
important to visualize the flow of product(s), funds, and information related to the product, in
both the directions of this chain.
Russel (2006) has defined “supply chain is an integrated group of business processes and
activities with the same goal … providing customer satisfaction”.
A typical supply chain comprises of various suppliers of raw material, components and
systems. This in most cases involves suppliers, supplier to suppliers etc. This is termed as
tiers of suppliers (tier1, tier2, etc) in supply chain parlance. Some of the members shown in
the distribution chain, like wholesaler or distributors could be absent in certain supply chain.
For example, a leading jewelry manufacturer in India distributes its jewelry products through
company owned exclusive showrooms (retail outlets in various cities).
We should also remember that more than one player could be involved at each stage of the
supply chain. There could be more than one supplier to the organization, and may distribute
goods and services to the customers through many distributors and retailers. Hence, in
essence, supply chain is a network of many companies or firms from raw material stage to the
finished product stage and ultimately delivery of goods and services to the satisfaction of
customer. The members in a supply chain, in general, are: 1. Raw material supplier 2.
Manufacturing firm 3. Wholesaler 4. Dealer / distributor 4. Retailers 5. Final Customers.
A typical supply claim network is provided in Figure 1.3. The manufacturer receives the
material from two tier 1 suppliers. Supplies 1 in tier 1 receives its input raw material from
one supplier in tier 2.

Tier-2 Tier-1 Raw Factory Finished

Supplier Supplier1 material goods

Tier-1
Supplier2

Retailer 1
Final
Consumer Dealer / Wholesaler
Distributor
Final
Retailer 2
Consumer

Final
Consumer

Final
Consumer
Figure 1.3 A typical supply chain

The distribution side consists of finished goods warehouse (1 No), distributor (1 number tier
1), Retailers (2 numbers, tier 2). Each of the retailers would be providing the products to
many final customers / consumers. The real life supply chain scenarios will be complex in
terms of numbers. For example, the products of a famous biscuit manufacturing company are
available across India in close to 5 million retail outlets and reaches over 50% of Indian
homes.
The supply chain network shown in Figure 1.3 is typical supply chain configuration and the
actual real life supply chain would be highly complex involving may number of suppliers in
the different tiers of supply chain. The distribution chain would involve many distributors and
each distributor would be supplying finished goods to many more retailers. The retailers
would eventually provide the finished goods to the final customer for consumption.
Companion like Wal-Mart reach out to 100 million every week. (Source: Wal-Mart web
site).

Type of supply chain

For reinforcing into our minds, we shall recapitulate that a supply chain comprises of a set of
three or more companies linked by upstream and downstream flows of products, information
and cash. According to Collier (2007), the basic purpose of a supply chain is to co-ordinate
the flow of materials, services and information along the elements of the supply chain to
maximize customer value. John T. Mentzer has categorized the supply chain into the three
types: Basic supply chain; Extended supply chain; Ultimate supply chain
The basic supply chain, as shown in Figure 1.4, consists of the company, an immediate
supplier, and an immediate customer linked by flows of products and services, cash, and
information.

Immediate Focal Immediate

supplier company customer

Fig 1.4 Basic Supply Chain

An extended supply chain includes suppliers of the immediate supplier and also the
customers of the immediate customer and all these organizations are directly linked by one or
more of the upstream and downstream flows of products, services, cash and information. An
extended supply chain is depicted in Figure 1.5 shown below.

Supplier’s Immediate Focal company Immediate Customer’s

supplier supplier customer customer

Figure 1.5 Extended Supply Chain

An ultimate supply chain, as depicted in Figure 1.6, includes all the companies involved in
the upstream and downstream of the company in the supply chain. All these companies are
directly linked by the flows of products and services, cash, and information.
Basic raw
Immediate Focal firm Immediate Ultimate
material 000 000
supplier customer customer
supplier

Figure 1.6 Ultimate Supply Chain

forward flows of products and services, cash, and information.

return flows of products and services, cash, and information.
000
indicates the in between supply component of the organizations as well as
demand component organizations of the Supply Chain.

Yet another classification of the supply chain could be based on the type of operation of the
firm, whether it is a manufacturing firm or a service firm? A typical supply chain for a
manufacturing firm in shown in Figure 1.7. It comprises of raw material and components
supplier firms, raw material storage warehouse, manufacturing firm, finished goods storage
warehouse, distributor, retailer and final consumer.

Supplier 1

Raw material
Supplier 2 warehouse Manufacturing Finished goods
warehouse

Supplier 3

Final consumer Retailer Distributor

Example:
FigureTata passenger
1.7 Typical car,chain
supply Kirloskar Power, and ITC
for a manufacturing Classmate.
firms

The service supply chain, as shown in Figure 1.8 is much shorter in terms of the number of
links in the supply chain meant for delivering the service to the final consumer.
 Input raw
material stores
Supplier

Storage Service Customer

Supplier

Figure 1.8 Typical supply chain for a service provider organization

Service supply chain example: Hotel Sangeetha, and McRennet (Chennai)

Supply chain classification based on type of industry

We will explore two supply chain types based on the sector in which the supply chain
operates, one from agriculture based food processing sector and another from automotive
sector.

a) Agri-based food processing sector supply chain

A simple supply chain involved in converting wheat into bakery products has been
considered for demonstration. The wheat is sourced from wheat suppliers in the harvest
season. The procured wheat is stored in the warehouse and then transported to flour mill
based on the demand requirements. The flour mill supplies wheat flour to the baking
company (Say, McRennet) where the bakery products are made. The bakery manufacturing
units convert the wheat flour along with other typical ingredients, as shown in Figure 1.9, into
bakery items. The baked items are sent to 24 retail stores located in the city for purchase and
consumption by final consumer. This supply chain which is based on agricultural raw
material operates four bakery manufacturing units in Chennai metropolitan city.

Incidentally, you might have noticed that one of the typical members of the supply chain –
the distributor is not present in this simple supply chain which uses wheat and other
agricultural raw material, as main ingredients. The number of stages in a supply chain may
differ from one type of supply chain to another.
 Customer
Retailer

Wheat Wheat
Flour R01

P1

Yeast
R02

P2
Salt

Wheat P3
Flour

P4

Note: other ingredients like milk powder, R24

fat, sugar, etc., are used for different
varieties of breads. Tooti Frooti is used
for fruit breads

Figure 1.7 Chennai Bakes Supply Chain Network

b) Automobile manufacturing sector supply chain

The automobile manufacturing supply chain is more technology based compared to the
previous example considered for agriculture input based supply chain. The steel
manufacturer receives iron ore from the steel mines and further processing is done to convert
the iron ore into steel sheets. The steel sheets, in coils, are supplied to the automobile
companies where it is converted into panels of desired shape using heavy duty press. Then,
the panels are welded together for manufacturing the automobile. Of course, a lot of other
component parts / items also go into manufacturing the automobile. The components and
systems are engine, transition, axles, wheels and tyres, breaking system, steering system, fuel
tank and fuel lines, exhaust, dash board and controls. The most important of the items, the
chassis is made of steel channel members. Steel companies supply the steel channels for
further processing and fabrication of the chassis for the final assembly of all other auto
components on to the chassis for making the automobile in the assembly line.
 Iron ore Steel plant Storage: Automobile
steel coils assembly line

Final Distributor
customer

Figure 1.8 Automobile manufacturing supply chain

The automobile supply chain configuration shown in Figure 1.8 has been purposely made
very simple for better understanding, but the real life automobile manufacturing supply chain
could be much more complex in nature. A much more detailed of the automobile supply
chain has been shown in Figure 1.9 for better understanding..

Table 1.1: Typical components of passenger car manufacturing

Component / systems that goes to build a Typical plant details
passenger car
Electrical systems Gurgaon; Manesar Plant
Interior (Seat, floor, components, etc) Producer one a million cars per year.
Power train of the Engine 7 process shop; 5 assembly lines.
Chassis ----------------------------------------------------
Body and main parts (door of windows) 3047 nationwide service outlets;
Braking system and 40,000 cars serviced every day.
Fuel supply system (fuel tank and lines) ----------------------------------------------------
Exhaust system It just takes 12hrs to produce a car; and a
Suspension and steering system car is produced every 12 seconds
Air conditioning system
Bearings
Front Axles of Rear Axles;
Wheels and tyres

The various raw materials, components, sub-systems that go into the processing shop and/or
assembly line have been shown in Table 1.1 and Figure 1.9 for clarity of understanding. This
list however is not exhaustive as the actual number of items that goes into making an
automobile car is around 30,000. The Figure 1.9 indicates distributors as D1, D2, D3, and D4
however the actual number of dealers in the distribution network will run into thousands.
 Customer
Steel plant Steel supplier

D1
Engine &
transmission
Fasteners

D2
Engine Casting
Chassis &
body Press
Fuel tank & lines

D3
Silencer & Exhaust
Assembly Line

Suspension & steering

D4
Front & Rear Axle

Wheels & brakes Dealer

Network
Tyres

Bearings

Interior

Air conditioning

Electrical wiring

Audio

Switches, Fuses, etc.

Lights, bulbs, etc.

Dashboard Instruments

Alternator & Starter

Radiator & cooling system

Figure 1.9 Automobile supply chain

Supply chain Management
Supply chain management involves the efficient and effective co-ordination of all the
business processes from raw material supply to delivery of finished goods in the hands of
final consumer. In the words of John.J.Mentzer (2001), ‘Supply chain Management is the
systemic, strategic coordination of the traditional business functions within a particular
company and across businesses within the supply chain, for the purpose of improving the
long term performance of the individual companies and the supply chains as a whole’.
According to Council of Supply Chain Management Professionals (CSCMP), “Supply Chain
Management encompasses the planning and management of all activities involved in
sourcing and procurement, conversion, and all Logistics Management activities. Importantly,
it also includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers, and customers. In essence, Supply Chain
Management integrates supply and demand management within and across companies.”
Now, let us see the definition for logistics management. The CSCMP definition of logistics
management “Logistics is that part of the supply chain process that plans, implements, and
controls the efficient flow and storage of goods, services, and related information from the
point of origin to the point of consumption in order to meet customers’ requirements”.

==================================================================
Paradigm shift in supply chain management
According to Sahay and Jain (2002), the role of supply chain has changed considerably over
the last three decades and there was a paradigm shift. In 1970’s, supply chain management
primarily focused on the integration of warehousing and transportation within the firm. The
focus was also on quality management in organizations. The focus of supply chain
management (SCM) in 1980’s shifted to re-engineering of the cost structures. Techniques
like Business process reengineering, lean and flexible manufacturing, and just-in-time (JIT)
became the focus management practices for companies to gain a competitive advantage in a
quality oriented environment established through efforts of the previous decades. The next
decade, the 1990’s saw a focus shift from cost reduction to improving customer service. In
the new millennium, globalization and information technology have provided the catalyst for
supply chain management to become the strategic means for companies to manage quality,
satisfy customers, and remain competitive. The present trend in supply chain management is
towards disintermediation, mass customization, and electronic commerce.
==================================================================

Council of supply chain management professionals have differentiated between logistics

management and supply chain management. As is evident from the above definitions by
CSCMP, logistics is one of the functions contained within supply chain management and
logistics management is a part of supply chain management. Supply chain management
encompasses logistics management and more. For example, supplier relationship and
customer relationship are certain activities that are covered as part of supply chain
management and these activities are not functions of logistics management.

Supply chain management activities:

The supply chain activities have been identified by Singla (2002) as: forecasting, production
scheduling, advanced planning, sourcing and procurement, order processing, warehousing,
transportation and logistics, sales force automation and customer service.
The other supply chain activities which have not been exclusively included in the above list
but still important are inventory maintenance, protective packaging, material handling, and
information maintenance.

Views of understanding supply chain:

There are two views of understanding the supply chain: cycle view, and push / pull view.
Cycle view considers supply chain to consist of four business cycles. An alternate way of
understanding the supply chain is push/pull view. Push approach is forecast based - product
and services are manufactured and pushed into the market; whereas the pull approach is
demand based - the products are pulled through the supply chain based on customer demand.

Supply Chain Cycle View: The supply chain cycle view consists of customer order cycle,
replenishment cycle, manufacturing cycle, and procurement cycle.

Push and pull view of supply chain: We shall discuss here the push / pull approach to
understanding the supply chain.
Push approach: This approach aims at manufacturing product based on some forecast and
pushes the product through the various stages of supply chain. A push system produces goods
in advance of customer demand based on a forecast for future sales and moves the products
through supply chain to points of sale where they are stored as finished goods inventory.
The traditional processes have been based on a preplanned schedule of its activities. The
process will simply produce as per the original production plan and push the product to the
next work center without taking into account what the next subsequent work center is doing
or what is the job for which the process is waiting. The demand in the subsequent work
center is not taken into account in a traditional process. The material sent to the next work
center when there is no need for it might make the job wait and it adds to the work in process
inventory and increase in related holding cost. This act of pushing the inventory to the next
stage continues till the customer end of the supply chain. This builds up inventory at all
levels, increases waiting time of jobs, and results in cost escalations in the supply chain. This
type of production system is termed as ‘push’ system.
Pull approach: In contrast to the above, the pull type of operations system is demand based.
The work center processes the items that are needed by the next work center and the materials
or products are pulled through the supply chain or value chain. The total value chain is driven
by the philosophy of ‘pull’ based operation and is in tune with the customer demands. This
type of supply chain is called ‘pull’ based supply chain and implementation of ‘pull’ type of
processing systems are carried out through just-in-time techniques like Kanban.
Supply chains adopting this strategy pull their products through the various supply chain
links. A pull system produces only what is needed in the supply chain and are in response to
customer demand signals from downstream stages. Information technology solutions like
point of sale (POS) data and EDI networks between the different members of the supply
chain enables implementation of a pull system in the supply chain. The operations are
demand driven in pull processes unlike the push approach that is forecast driven. It has been
felt by academicians and professionals, involved in supply chain activities, that the best
approach in promoting a product is to pull through distribution channel by directly
stimulating demand at the consumer level.

Summary:
Supply chain management, as a concept owes its origin to logistics. Scope of logistics
management in business applications expanded further to cover additional aspects of business
link which enables smooth transfer of material along the value chain; and this gave rise to the
concept of supply chain and its management. Supply chain includes warehouses, factories,
processing centers, distribution outlets, retail outlets, and other office premises. It involves
three flows: products and services, information and cash.
Supply chain is a set of three or more of the upstream and downstream flows of products,
services, finances, and information from a source to a customer. Supply chain activities begin
with customer order and end when a satisfied customer has paid for his or her purchase.
Supply chain brings an image of product or supply moving from suppliers to manufacturers
to distributors to customers along a chain. The stages in a supply chain are: supplier, focal
firm, distributor, wholesaler, retailers, and final customers.
The basic supply chain consists of the firm, an immediate supplier, and an immediate
customer; an extended supply chain includes suppliers, of the immediate supplier and also the
customers of the immediate customer; an ultimate supply chain includes all the companies
involved in the upstream and downstream of the supply chain. A firm is a supplier as well as
a customer, except those firms at the very beginning of the supply chain who are only
suppliers and those firms at the very end of the supply chain who are ultimate customers.
Logistics and supply chain management have varying connotations; and in fact, logistics is
one of the functions contained within supply chain management. There are two views of
understanding the supply chain: cycle view, and push / pull view. Cycle view considers
supply chain to consist of four business cycles. An alternate way of understanding the supply
chain is push/pull view. Push approach is forecast based - product and services are
manufactured and pushed into the market; whereas the pull approach is demand based - the
products are pulled through the supply chain based on customer demand.

End Chapter Questions

1. What is the origin of supply chain management?
2. What do you understand by the term logistics?
3. What constitutes a supply chain? Define it clearly.
4. List out the various facilities in a supply chain.
5. What are the three flows in a supply chain?
6. What do you understand by the term ‘tiers of suppliers in a supply chain’?
7. Enumerate the major supply chain activities.
8. Could a firm be member of more than one supply chain? Explain your response
briefly.
9. Differentiate between logistics management and supply chain management.

Essay questions
1. Draw and explain the supply chain network for a typical manufacturing firm in core
engineering sector.
2. Pictorially depict the supply chain for a cosmetic item like toilet soap in the FMCG
sector and explain the supply chain for this product.
3. Trace the evolution of supply chain management focus as a paradigm shift in the three
decades starting from 1970s.
4. Identify and explain the basic functions of supply chain management.
5. Differentiate between the ‘push’ and ‘pull’ view approach to supply chain
management.

References
1 Council of Supply Chain Management Professionals (www.cscmp.org)
2 Collier (2007), Operations Management, Cengage India.
3 Ernst and Whinney (1987), ‘Corporate Profitability and Logistics’ National
Distribution / Logistics Group, Montvale N.J.
 4 John T. Mentzer (2001), ‘Supply Chain Management’, Response Books, New Delhi,
India
5 Lambert D. M. and Pohlen T. L. (2001), ‘Supply Chain Metrics’ The International
Journal of Logistics Management, Vol.12, No.1, pp1-19
6 Russel (2006), Operations Management, Wiley India
7 Sahay B. S. and Gupta A. K. (2002), ‘Supply chain management in Indian FMCG
Sector’, Productivity, Vol.42, No.4, pp.564-573
8 Sahay B. S. and Jain R. (2002), ‘Supply chain management in the Twenty-first
century’, Supply Chain Management: in the twenty-first century, Macmillan(India),
pp.5-22

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Mini Case 1.1: “Growth strategy with a humanitarian touch” Hindustan Unilever
Hindustan Unilever Limited (HUL) is India’s largest FMCG (Fast Moving Consumer Goods)
company. HUL caters to nutrition, hygiene, and personal care products for the customers. A
company with deep roots in local cultures has a commitment for achieving exceptional
standards of performance and productivity. HUL is an 18,000 employee strong organization.
The turnover of the company was Rs 37,660 Crores and profit after tax was Rs. 6,080 crores
for the year 2018-19. It has come up to this stature through planned growth, acquisition, and
mergers. The company brands comprises of the following categories.
Food & Refreshment: The brand items under this category are Annpurna, Brooke Bond 3
Roses, Brooke Bond Red Label, Brooke Bond Taaza, Brooke Bond Taj Mahal, Bru,
Cornetto, Kissan, Knorr, Kwality Wall’s, Lipton, and Magnum.
Home Care: The brand items under home care category are Active Wheel, Cif, Comfort,
Domex, Rin, Sunlight, Surf Excel, Vim.
Personal Care: The brands under this category are Aviance, Axe, Breeze (Soap), Brylcream,
Citra, Clear, Clinic Plus, Close Up, Dove, Elle18, Fair & Lovely, Hamam, Indulekha, Lakme,
Lever Ayush, Lifebuoy, Liril, Lux, Pears, Pepsodent, Pond’s, Pure Derm, Rexom, SunSilk,
Sure, TIGI, TONI & GUY, TREsemme, Vaseline.
Water Purifier: Pureit is an in-home water purifier and the first of its kind. This purifier is
meant for purifying tap water and makes the water safe to drink.

HUL & Technology Adoptation:

HUL believes that the technologies like Internet of Things, Cloud Computing, and Artificial
Intelligence opens up a lot of opportunities. Especially, data management and analytics would
get more attention at HUL. The strategy involved in exploiting data collected in the
company’s supply chain will be as per the following steps:
Step 1: What data do we have and what more do we need?
Step 2: How to acquire the data?
Step 3: How to store the data?
Step 4: How to manage the data?
Step 5: How to use the data?

Step 1: involves defining a strategy for data application in HUL.

Step 2: involves identifying the source for obtaining data. It could be to collected internally,
buy data from vendors, obtain through partnerships with other firms.

Step 3: This step defines the data architecture to be adopted and technology deployment.
Technology identification could involve defining hardware and software (Database
technology).

Step 4: involves security of the data. This might involve Data Server Configuration and
firewall to be used. This step also would define authority for accessing, editing, and
modifying data. This is very essential to ensure data integrity in the total organization and
also prevent any abuse of data.

Step 5: This is the most important aspect of data management strategy to be followed in any
firm. How to analyze the data collected and obtain usable information out of it. Further, it is
very important to know, how to use the information so obtained through data intelligence for
decision making and monetization of this information for better performance of the firm and
the total supply chain.

HUL Re-imagining Supply Chain:

HUL aims at having a holistic view towards managing the total value chain, in order to
completely transform the way business is carried out by the firm in a connected world. The
HUL supply chain involves: Plan, Source, Make, and Deliver.

Plan: The firm aims at adopting and achieving the following:

 1 Day planning cycle time (Real time)
 Integration of the supply chain operations
 Segmentation of the activities / functions in order to enhance productivity and
ultimately profitability.

Source: The sourcing strategy for the HUL would involve:

  Integrated e-tendering
 Real time Forecast and proving information to suppliers
 Smart Inventory Modeling

Make: The strategy to be adopted for the ‘make’ part of the supply chain which involves the
production operation or assembly line execution or service rendering would follow the
important strategies as follows:
 Digital Factory
 Smart adaptation of Robotics
 Network Redesign

Deliver: this part of the supply chain involves new logistics models involving deployment of
information technology to reduce cycle time. This would result in reduction of cash-to-cash
cycle in the value chain. The firm aims at establishing efficient fulfillment centres. This
activity could involve operations such as cross dock, break bulk, and value added servicing
like packaging and labeling.

The firm aims at having end-to-end cost focus, needless to mention that it involves supply
chain and logistics cost.

Project Shakthi:
Project Shakthi is a rural initiative by HUL and it targets villages populated 2000 on a unique
win-win business solution model. The project Shakthi impacts in twin ways - one, it provides
an entrepreneurial opportunity to needy rural women folk; and second, the Shakthi Vani
programme contributes towards increasing awareness. HUL benefits by enhancing its rural
reach by taking its brands to the remotest of the villages. Project Shakthi provides advantages
of micro-credit to rural entrepreneurs and business opportunity to distribute HUL products on
a direct-to-home basis.
HUL provides training to entrepreneurs, and make them business savvy and competent
business people in the rural India. Shakthi has far reaching impact on the rural India by
creating livelihood for under privileged women. The programme has already benefited
45,000 families of Shakthi entrepreneurs covering 135,000 villages across 15 states.
Questions:
1. Comment on the products offered by HUL supply chain.
2. What are the supply chain management initiatives taken by HUL?
3. Comment on the effectiveness of the Shakthi programme in building a strong supply
chain.
4. How is the basic tenet of supply chain which is taking care of the mutual interests of
all the supply chain partners ensured in Shakthi project?
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 1.2: Grasim
Grasim Industries has been ranked #205 in the list of Global 2000 companies by Forbes
during the year 2018. Grasim is present in a variety of businesses like viscose fibre,
chemicals, cement, financial services, fertilizers, insulators, and textiles. Aditya Birla Group
has a 133,000 strong workforce. Aditya Birla Group operates in 33 countries across six
continents. During the year 2017-18, the revenue was Rs. 57,338 crores and profit (EBITDA)
was Rs. 10,881 crores. The company claims that it engages with the textile value chain and
offers consumers with fashionable clothing in an eco-friendly manner.
Viscose fibre is the most sustainable as it is highly bio-degradable. The bio-degradation data
are: Vicose  8 weeks; Cotton  15 weeks; Synthetic  more than 100 years.
In the chemicals industry, Grasim is #1 in Caustic Soda and Epoxy business. Ultratech is a
premium cement brand in India. The company has established market leadership in key
cement markets. Further, Ultratech has a strong nationwide network.
Grasim relies on renewable sources of energy, solar and others. Further, Grasim has a strong
commitment towards maintaining a sustainable logistics. The steps taken in this direction are:
reducing energy consumption in transportation of raw materials and products; improving
transportation safety by continual training of drivers in this aspect.
Questions:
1. Comment on the business sectors in which Grasim is present and the products offered
by Grasim.
2. Visit the company’s website and discuss on the different supply chain in which
Grasim Industries is present.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 1.3: Colgate Palmolive
The Colgate Palmolive provides consumer products for oral care, personal care, household
care, and dental healthcare products (through dentists). Colgate has been ranked as India’s #1
most trusted brand. The company believes in providing world class products to its customers.
The various products categories provided by Colgate Palmolive are:
Oral Care: Toothpaste, Tooth brush, Tooth powder. Whitening products, and Mouthwash.
Personal care: Bodywash, liquid hand wash, shave preps, skin care, and hair care.
Household care: Surface Care is offered in this category.
From the Dentist: Gingivitis Treatment, Sensitivity Treatment, Tooth Whitening, Fluoride
Therapy, Mouth Ulcer Treatment, and Specialty Cleaning.
Colgate Palmolive employs 38,000 people in its business activities. These employs are
committed to bring you safe and effective products. Colgate Palmolive takes care of the
interest of its various stake holders like employees, consumers, business partners,
shareholders, and others. The total revenue was Rs. 4367.24 crores and profit after tax was
Rs. 673.37 crores for the year 2017-18. Colgate Palmolive has three high level officials for
Supply Chain & Logistics related activities in the management committee of the company,
one member each for Supply Chain (Toothpaste), Supply Chain (Toothbrush), and Customer
Services & Logistics.
Questions:
1. What are the products and services offered by Colgate Palmolive?
2. What importance is given to supply chain management by Colgate Palmolive? Please
highlight the actions taken.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 1.4: TTK Prestige Limited
The TTK Group was founded in 1928 by Shri T.T.Krishnamachari who pioneered organized
distribution in India. TTK Group is involved in 30 product categories with 7 group
companies. TTK Group turnover is over 30 billion rupees. TTk Group has 16 manufacturing
units, 12000 employees, and its products are exported to every continent.
TTK Prestige Limited incorporated in 1955 and is the flagship company of the group. TTK
Prestige is the market leader in kitchen appliances. TTK Prestige has 10 of the group’s
manufacturing facilities under its fold and works with 3000 strong human capital. The
company has captive design and tool-room facilities.
The company has over 600 products in its business portfolio. The company makes products
such as Pressure Cooker, Pressure Cookware, Cookware, Cook Tops, Cook Appliances,
Cooking Solutions, Kitchen Hoods, Grinders, and Induction Cook Tops.
The company’s strategy for innovation is based on five pillars of Trust, Innovation,
Smartness, Health, and Modernity. Core values of the company are:
 Quality products at affordable prices
 Trust, Transparency, Knowledge and ‘Prestige’ in all walks of business
 Fair dealings with every stakeholder
 Respect for Environment
TTK Prestige distributes its products through a versatile distribution network. TTK Prestige
distribution network has 25 branch locations, over 250,000 sq. ft of warehousing, and several
thousand retail outlets. The distribution is done through:
Own retail 17%
Modern Format 21%
Institutions 4%
Traditional Trade 58%
TTK Prestige has achieved total sales revenue of Rs. 2,106.91 crores and profit after tax of
Rs. 192.35 during the year 2018-19.
Questions:
1. What are the product categories in the TTK Prestige Supply Chain?
2. Describe the strategies adopted by TTK Prestige in having a robust distribution
network for its products.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 1.5: Push Pull Supply Chain in Textiles
The changes in the global business require firms to adapt to the newer environment by
altering one or more of their strategies. The strategy followed by companies could not be
similar and no one strategy is a panacea to all business problems and situations.
Supply chains could follow either push type or pull type strategy depending upon the supply
chain network design and the strategy adopted for meeting the expectations of customers. In
fact, companies may not be able to adopt a purely push type or a pull type of supply chain
strategy. These are portions of the supply chain strategy. There are portions of the supply
chain which needs to stock inventories in order to hedge against uncertainties. Also, other
portions of the supply chain could follow minimum inventory and the supply chain could be
configured to follow a pull type of supply chain strategies that responds to the demand
requirements from customers.
Apparel industry is one where the push-pull combination strategy has been successfully
implemented. The supply chain prior to weaving, adopts a push type of inventory
management. In this portion of the supply chain, raw cotton is procuring season and stocked
for making yarns. Yarns, also being more a generic product are made to stock. Then onwards
the dyeing and weaving process follow a pull type of supply chain management and responds
to customer demand and requirements. The supply chain, after weaving, follows pull based
supply chain wherein the woven fabrics are stitched into apparels for different customer
requirements (size, fabric type, color, etc.,).
ABC Ltd., a typical textile firm based in Gujarat has successfully adopted the synchronized
push-pull supply chain strategy to meet customer requirements and at the same time reduce
inventory costs by holding less of finished goods inventory of apparels.
Questions:
1. Highlight two unique features of the textiles supply chain.
2. Give your suggestions for enhancing the competitiveness of textiles supply chain.
----------------------------------------------------------------------------------------------------------------
CHO2: VALUE CHAIN AND OTHER SCM CONCEPTS

Transportations creates space and time value – anonymous

Learning objectives:
1. Learn the business logistics basics.
2. Understand value chain model.
3. Learn about the latest logistics practices like VMI, Mass Customization, 3PL, etc.

Business Logistics:
An important aspect of business logistics is related to movement of materials and flow of
information, in the following three supply chain operations:
 Flow within the manufacturing / servicing facility
 Incoming raw materials and other supplies flow in the supply chain
 Outgoing finished products flow in the demand chain.

The main components of supply chain are inbound logistics, internal operations, and
outbound logistics. We shall discuss the flow of materials and information through these
three elements of the supply chain first and then learn the concept of value chain
subsequently.

Inbound logistics
Inbound logistics consists of all the activities involved in moving the raw material,
component parts, etc, from supplier / raw material warehouse and making it available for the
manufacturing operations. The inbound logistics could have facilities like raw material
warehouse operated by focal firm, dedicated warehouses by vendor, etc. It also involves
transportation and material handling equipments required for moving raw material, and other
purchased components to the manufacturing / service facilities of the focal firm. The size of
the raw material warehouse, number of warehouses required, any other equipment which may
be required in case of operations like raw material mixing (preparation of raw material in
order to meet the specifications for manufacturing) are some important aspects to be taken
care of in the inbound logistics.
Inbound logistics essentially consists of receiving, storing, and making available the input
raw materials and other supplies for the manufacturing operations. This also involves
activities like material handling, warehousing, inventory control, vehicle scheduling and
maintenance, and material returns to suppliers.
 Material Supplier-1

Material Supplier-2
Raw Material
Warehouse Manufacturing

Material Supplier-3

Component Supplier-1

Inbound Logistics
Component Supplier-2

Figure 2.1: Typical inbound logistics

The inbound logistics involves material / components / parts are to be transported from the
raw material / component supplier to warehouse and also material to be moved from the
warehouse to the manufacturing plant based on requirement. Generally, trucks are made use
of for transportation purposes of raw material. In case of companies involved in
manufacturing cement, steel, aluminum, etc., which involves movement huge quantities of
raw material, special equipments like dumpers and heavy duty hauling trucks are used.

Internal Operations Logistics

Internal logistics refers to the storage and movement of material with in the manufacturing
facility. The material movement in internal logistics, in general, would be lighter compared
raw material handling. The equipment used for moving material from one machinery to
another in manufacturing for further processing are pallet trucks, forklifts, etc.

M/C-1 M/C-2

Bin Forklift Finished goods

movement warehouse

M/C-3 M/C-4 Distribution

Figure 2.2: Internal operations logistics

Internal logistics generally involves smaller quantities of material but more frequently.
Further, the movement of material in internal logistics between machineries and equipment
for processing would be short travels. The details of material handling equipment used in
internal logistics would be covered under chapter 12 later in this book.

Outbound logistics
The outbound logistics comprises of all the activities involved in transport, storage and
distribution of finished goods to the customer. The movement of material in the outbound
logistics is generally carried out by using trucks. The movement of finished goods, in
general, involves considerable quantity of materials transported over long distances. In many
cases bulk transportation methods and containerization of goods are made use of in the
outbound logistics. The finished goods movement could happen in any of the following
manner:
i) Through distributor to retail store and finally to the customer.
ii) To the retail store which offers the products to customers.
iii) Directly to customers.

Retail Store Customer

R1
Tanjore warehouse

R2
Fertilizer Plant -,
Ernakulam
R3

R4

R5

Trichy warehouse R6

Figure 2.3: FACT fertilizer plant – distribution through dedicated warehouse

The outbound logistics many a times involves channel intermediaries like wholesalers and
distributors and retailers. The products are sent directly to customer when the order value is
high. However, companies like Dell computers deliver the desktop and laptop computers
directly to customer. This happens because online ordering by customers is entertained by
the company. Dell computers adopt a concept called ‘mass customization’ which shall be
discussed later in this chapter.
The outbound logistics could involve temporary storage of finished goods in warehouse. The
material handling equipment used in warehousing are pallet trucks, forklifts, etc. The
activities involved in warehousing are receiving, put-away, storage, retrieval, and despatch.
The Figure 2.3 shows the warehouse storage at two locations in the vicinity of demand
centres. The fertilizer is distributed through the dealer network during agricultural sowing
season. The fertilizer plant of this public sector company is located in Ernakulam, India.

The outbound logistics involves ‘distribution centers in certain cases, as shown in Figure 2.4.
The distribution centers are not meant for storage like warehouses. The distribution centers
facilitate operations like break bulk, cross docking, etc. The long distance movement of
finished goods from the manufacturing plant or finished goods warehouse, closer to the
manufacturing plant, is done using heavy duty long-haul trucks. The truckload, in general,
will be meant for more than one customer. In such cases, the truck load is segregated
customer wise in the distribution center and sent to customers by small trucks. When the full
truck load is meant for a single customer, may be a retail store, the truck load is directly
delivered to the customer. The distribution center also facilitates logistics operation like
‘cross docking’.

Retail Store Customer

Manufacturing
plant R1
FG warehouse
Long haul
R2

Long haul R3
DC

Distribution centre
R4

Figure 2.4: Typical outbound logistics

In the Figure 2.4 which depicts outbound logistics in the distribution network, the distributor
has been omitted for the sake of clarity in understanding. The real life supply chains would
involve more of channel members like wholesaler and / or distributors and the actual supply
chain would be much complex.

Value Chain Model - Michael Porter

Value chain is an approach to view firm as part of a chain or network of firms which offer
value to customers. In a value chain business processes linked by many firms create, add,
and offer value in the form of products and services to customers. The term value chain and
supply chain are used interchangeably by many authors. The Figure 2.5 depicts the value
chain model by Michael Porter.
The value to a customer is the customer perception of benefits in the products and services
offered by the firm. The decision to buy a product or service is made by comparing the
perceived benefits with the price. The customer is satisfied when the perceived benefits are
higher than the price paid by him / her. A customer in dissatisfied when the perceived
benefits are lower than the price of the products and services. The value in its simplest form
could be defined as:
Value = Perceived benefits / Cost to customer
The value chain accepts a set of inputs like raw materials, components, and parts and
transform into finished products and services. The transformation process adds value while
transforming the inputs into finished goods and services. The finished products and services
are offered to customers through sales and marketing. In this process of value addition and
product distribution to customers, the value chain creates a margin to the firm and the value
chain.
Every firm and its supply chain would strive to achieve competitive advantage in the market
place. Michael Porter explains that the value chain model is a systematic way of analyzing
the supply chain activities in order to create a competitive advantage for the firm and its
supply chain. Michael Porter argues that the value chain could create competitive advantage
for the firm by:
1. Providing products and services to customers at lower price.
2. Offering customers with products of higher quality.
3. Meeting special needs of niche segments.
“The value chain is a basic tool for diagnosing competitive advantage and finding ways to
create and sustain it.” – Michael E. Porter
 Figure 2.5 Porter’s Value Chain Model

The value chain, as propounded by Michael Porter, envisages two categories of activities:
primary activities and secondary activities.

Primary activities
The primary activities in the value chain comprises of inbound logistics, internal operations,
outbound logistics, marketing and sales, and customer service. The inbound logistics, internal
operations, and outbound logistics have already been covered in the previous sections of this
chapter. We shall discuss the remaining two primary activities of the value chain here.

Inbound logistics: is to do with ensuring raw material supplies, component parts and sub-
assemblies in order to enable smooth functioning manufacturing or assembly of the product.
The inbound logistics also includes temporary storage of raw materials and components in
raw material warehouse.

Internal operations: is the process of converting raw material, components and sub-
assemblies in to the finished product. This would involve movement of material and work-in-
process (WIP) from one place to another as per the manufacturing / assembly requirements
within the factory for value addition by the different processing centres / assembly lines. This
movement of material within the factory premises is termed as internal logistics.

Outbound logistics: is to do with continuous and uninterrupted supply of finished goods to

the customers at the right time and right place. The outbound logistics includes
transportation, finished goods warehouse / distribution centres, and other distribution channel
infrastructure.
Marketing and sales: aims at achieving the organizational goals by meeting the needs and
wants of the customer in an efficient and effective manner. Marketing finds ways of
identifying customer needs and make available the products to create customer satisfaction
thereby adding value.

Service: include activities related to providing customer service to enhance or maintain the
value of the product. This includes initial product installation, repair, spare parts supply, and
other customer support like customer training for certain products.

Secondary activities
Secondary activities include the firm’s resources that support the primary activities of the
value chain. The secondary activities are: procurement, technology development, human
resource management, and firm’s infrastructure.

Procurement: refers to purchasing inputs required for the operations of the firm where the
input materials are transformed into finished products. The purchased inputs include raw
materials, components, and parts as well as supplies and other consumables. This includes
purchase activities related to procurement of machinery and equipment required by the firm.

Technology development: The use of technology in the value chain could include areas such
as product design, process technology. Process technologies to be considered for deployment
in the manufacturing activities of the value chain are robotics, computer aided design, and
computer integrated manufacturing.

Human resource management: takes care of the human resource requirement of the firm
which includes activities like recruiting, hiring, training and development, and compensation.
The main objective of this function is to provide human resources for the value chain.

Firm’s infrastructure: includes general management, planning, finance, accounting, legal

work, government affairs, and quality management. The firms’ infrastructure supports the
entire value chain activities.

Latest developments in logistics

The latest logistics practices are mass customization, vendor managed inventory, 3PL, and
4PL activities.

Mass customization
The concept of postponement is closely related to mass customization. The component parts
are held in generic form as closer as possible to customer end of the supply chain. Assembly
starts on receiving confirmed orders from the customer. The final assembly could be done
either in the warehouse or at retailer end. This strategy is called build-to-order (BTO). When
the products made would be customized according to the individual preference of the
customers on a large scale, it is termed as ‘mass customization’. Dell Computers, for
example, has successfully implemented this concept. The computer manufacturing company
achieves this by following a very unique manufacturing strategy closely supported by its
component suppliers, transport service provider, and online order taking from customers by
the company.
Postponement is the process of delaying product customization until the product is closer to
the customer end of the supply chain. Concept of postponement envisages that supply chains
carry inventory in generic form of components, semi-finished products awaiting final
assembly at the customer or distribution end (Naylor et al, 1999, Christopher and Towill,
2000) Modular design employed during product design stage enables postponement and
increases supply chain agility or flexibility. Components are carried in generic form, as
mentioned earlier, up to the material decoupling point and after this point the product is
custom assembled to meet specific customer demand. The material decoupling point should
lie as far downstream in the supply chain and as closer to market place as possible. The
supply chain could adopt ‘lean’ strategy up stream of material decoupling point and a more
agile or flexible approach in the downstream towards customer.

Vendor managed inventory (VMI)

Inventory management and control has been an area of intensive research for quite long.
Inventory management is of importance due its direct impact on supply chain performance.
A research study indicates that materials accounts for 55% of cost of goods sold.
Vendor managed inventory (VMI) is a concept in which supplier takes the responsibility for
the parts supplied by them. The supplier firm deploys its personnel in the supplier works in
order to maintain required inventory of parts. The supplier also takes responsibility for
assembly of their components parts into the product. The buyer firm does the final inspection
for ‘passing’ the product. Vendor managed inventory is a popular concept due to the
advantages it provides to both the parties i.e. vendor and buyer. The buyer firm benefits by
transferring the inventory management and control responsibility to the supplier. The
supplier firm benefits in terms of higher visibility of the supply chain. Supplier has firsthand
information on the inventory at the assembly line and this increases their knowledge of
customer demand and allows better planning of supplier’s production plans.
An efficiently managed vendor managed inventory (VMI) system will reduce stock-out and
inventory cost. The supplier benefits due to VMI deployment are more liberty on co-
ordination of inventory and transportation, consolidation of dispatches to the buyer.
==================================================================
Case in Point: VMI deployment
Baiman et al (2001) have brought out that vendor managed inventory is a special case of
outsourcing. The supplier is provided floor space in the assembly line; supplier will assemble
his parts / components on to the product by using his manpower. Supplier takes full
responsibility for availability and quality of parts supplied. The buyer company does a
supervising job by carrying out the final inspection before passing the product. Volkswagen
practices vendor manager inventory (VMI) at its Brazilian pant.
The suppliers are allotted space in the assembly line for mounting of complete assembly like
chassis, axles, wheels and tyres, engine, etc. The company Volkswagen does the final testing
of the product.
==================================================================

Third party logistics services (3PL): refer to the use of external companies to perform
logistics functions, which have been traditionally performed within an organization. Third
party logistics providers specialize in performing most or all of the logistical tasks that
manufacturers or other channel members would normally perform themselves. The third
party logistics (3PL) provider is responsible for the physical transfer of products from the
consignor to the consignee. 3PL services provide all or a significant part of the logistics
requirements of the firm which has outsourced its logistics activities. Third party logistics
providers act as an intermediary and a linkage between the shippers and the carriers. Main
logistics services provided by the third party service providers are: warehousing and
transportation, distribution, and other value added services. The value added services
provided by third party logistics providers are warehousing, repackaging and labeling, etc.
They also provide services like: forwarding and clearing in case of exports / imports;
financial services like freight payments, cost accounting and control, and information
services like Internet based parcel tracking, etc. The following are the major reasons for the
use of 3PL by the firms:

1. Enable the firm to focus on core competencies.

2. Resource constraints - manpower, equipment, and time.
3. Lower cost of logistics by employing 3PL.
4. Improved service - due to larger network of the 3PL provider and specialization.
 Client 3PL Providers

Figure 2.6 Outsourcing logistics services (3PL)

3PL service providers offer their logistics services at lower cost than the firms who hire third-
party providers. The Figure 2.6 shows a schematic view of 3PL service provider. 3PLs are
currently growing rapidly into a major industry. This trend of growth is attributable to the
higher growth rate of our economy and globalization. In fact, globalization has brought with
it additional requirements of logistical services when the supply chain has to operate at the
global level.

Fourth party logistics services (4PL): is an integrator that assembles the resources,
capabilities, and the technology of its own organization and other organizations in order to
design, build and run comprehensive supply chain solutions.

 Greater Functional Integration

 Broader Operational Autonomy

Business Process Management

Client

Client 3PL Providers

4PL

Client
IT Service Providers

Figure 2.7 Fourth Party Logistics (4PL)

Fourth party logistics (4PL), as shown in Figure 2.7, is the most innovative and fast
developing form of outsourcing logistics. A fourth party logistics provider is a non-asset
based integrator which pools the resources, capabilities, and technology of its own
organization and resources of other organizations to design and offer supply chain solutions.
Fourth party logistics provider would in general be non-asset based, as far as, logistics,
transportation, and supply chain management assets are concerned. But, a 4PL company
owns ICT (information and communication technology) infrastructure, and intellectual
capital.

UPS and similar companies provide a wide range of 4PL services such as: i) Logistics Design
and Planning ii) Distribution iii) Order cycle management iv) After sales service parts. These
4PL companies also provide industry relevant customized logistics solutions. Another 4PL
company, provides supply chain solutions, value added services, customs related matters, and
much more. This 4PL company is a non-asset based company as far as logistics assets like
truck, airplanes, or vessels. It provides logistics services such as manage the information
flow, carrier and vendor management, and other services like customs clearance, etc.

Summary
Business Logistics is that part of the supply chain process that plans implements and controls
the efficient flow and storage of goods and services and related information from point of
origin to point of consumption in order to meet customer expectations. An important aspect
of logistics is to manage and control the movement of materials and flow of information, in
the three links of the supply chain viz. supplier network (inbound logistics), focal firm,
distribution network (outbound logistics). The movement of material occurs both within the
firm and inter-firm across the supply chain. This transport of material from one firm in the
supply chain to another is also called as external logistics which comprises of inbound and
outbound logistics.

Inbound Logistics: refers to the activities associated with receiving, storing, and making
available the inputs like raw materials and other supplies to the manufacturing unit. This also
involves activities such as material handling, warehousing, inventory control, vehicle
scheduling and returns to suppliers.

Internal Logistics: refers to the movement of materials within manufacturing where the inputs
like raw material, components, and parts are transformed into finished goods. The value
addition occurs during the transformation of inputs into finished products or finished goods in
manufacturing.

Outbound Logistics: refers to activities associated with collecting, storing, and physically
distributing the products to the customers (physical distribution cycle). It includes distribution
of finished goods, order processing, warehousing, material handling, delivery vehicle
operations, scheduling, shipping etc.

Value Chain is an approach to view a firm as a chain or network of basic activities that add
value to its products and services, and thus add value and provide a margin to the firm and its
value chain. The value chain is a basic tool for diagnosing competitive advantage and finding
ways to create and sustain it.

The various latest trends in logistics practices are Mass Customization, Vendor Managed
Inventory, Third party logistics services (3PL), and Fourth party logistics services (4PL).

End Chapter Questions

1. What are the three major links in the value chain which involve logistics activities?
2. Differentiate between internal and external logistics.
3. What do you understand by inbound logistics?
4. What are the specific activities that comprise the outbound logistics?
5. Discuss the role of ‘postponement’ with respect to ‘build-to-order’ strategy.
6. Provide an example of a company that has successfully implemented ‘mass
customization’.
7. Highlight the mutual benefits that accrue to the supplier and buyer firms by
implementing vendor managed inventory.
8. What do you understand by 3PL services?
9. Briefly explain 4PL services.

Essay questions
1. What are the major reasons for the firms to use 3PL? Also, discuss the role played by
3PL in facilitating smooth flow of materials through the supply chain.
2. Explain 4PL activities and how does it differ from 3PL services?.
----------------------------------------------------------------------------------------------------------------
Mini Case 2.1: Transport Corporation of India
There has been a perceptible buoyancy and growth trend in the Indian economy. The
vibrancy in the economy got reflected in many sectors such as manufacturing, retail, and
infrastructure. This growth trend had its impact on the logistics sector as well.
Transportation Corporation of India (TCI) wanted to face the challenging environment and
develop a competitive advantage. The company built an integrated supply chain managed
solutions in order to face this challenge offered by the growing economy and convert it into a
competitive advantage for the company.
TCI is a leading integrated supply chain and logistics solution provider and it has developed a
good cargo transportation infrastructure in India. TCI with a fleet of 4 cargo ships operates in
6 countries. TCI has adopted latest IT systems and technologies for managing its operations.
TCI is expanding into global logistics business with its presence in countries like Singapore,
Hong Kong, China, etc. TCI is India’s leading multimodal integrated supply chain solution
provider. TCI operates with a network of 1200 branch offices, and employee strength of
6500, is entrenched in the logistics sector in India.
Transport Corporation of India has the following business divisions, including an associate
company and two joint ventures:

TCI Freight TCI Foundation

TCI XPS TCI Developers Ltd (Associate Company)
TCI Supply Chain Solutions Transystem (Joint Venture)
TCI Global Infinite (Joint Venture)
TCI Seaways

TCI has many years of experience and has grown to its present position from a single truck
company operating in a single route. TCI plans to invest in the state of the art and large scale
technologies on warehousing, ships, trucks, and trailers and establish as a complete supply
chain solution provider.
TCI ensures transport and delivers across countries in the world with the support of 240
offices, 10.5 million square feet of warehouse space, and dedicated 5000 workforce. The
company has a strong customer base of 150,000 which includes top 500 Indian companies.
The company achieved net sales revenue of Rs. 2753.65 crores and profit after tax of Rs.
145.29 crores
Every TCI employee should involve actively in a local safety program. This enables the
employees work safely in the working environment. TCI is committed to meet or exceed the
health and safety regulations. TCI continuously improves safety measures in order to ensure
an accident free working environment. The company operates in an environment friendly
manner and protects the environment through the three Rs, which are Reduce, Recycle, and
Reuse.

Questions:
1. Discuss the logistics capabilities of Transport Corporation of India.
2. What are the logistics solutions offered by this firm?
3. What initiatives have been taken by the company to protect environment and make
the company’s value chain green and environment friendly?

----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 2.2: ACC Limited
ACC is a company involved in manufacturing cement and ready mix concrete. The company
operates through 17 cement factories, 75 ready mix concrete plants, over 6,700 employees.
During the year 2018, the company achieved sales revenue of Rs. 14,939.85 crores and profit
after tax of Rs. 1,494.29 crores.
ACC claims that its processes exhibit vitality, teamwork and innovativeness. The company
has been experiencing improved overall performance, efficiency and productivity. In order to
sustain this trend, the company aims at focusing on capacity utilization, energy efficiency,
quality, cost competitiveness, safety and maintenance. The company wishes to raise the
manufacturing performance through continuous improvement in operation processes,
comprehensive maintenance and high safety standards.
ACC believes in providing superior value to customers through continuous improvements in
quality and service levels. A large and committed dealer network strengthens its supply chain
in servicing customers throughout the country. The company sold 28.4 million tones of
cement during the year 2018.
Further, ACC has introduced special application cements like F2R, Concrete+ and Coastal+,
and all these brands were well received in the market. ACC’s efficient distribution and
logistics management is a key differentiator in serving the customers. The company has a
strong distribution network with 50,000 plus distributors and retailers and sales office located
across India. ACC has earned the trust and goodwill of the market through a successful
product portfolio, ethical business practices, contribution to society, and sustainable growth
and development.
ACC is proud to be a trend-setter in sustainable development among cement companies. The
company always aims at reducing carbon dioxide emission by:
 a. Promoting blended cements
b. Implementing improvements in energy efficiency
c. Promoting the use of alternate fuels and raw materials (AFR)
d. Promoting clean green technologies

It is worth noting that 22% of ACC’s total income goes to power and fuel. The cost of power
and fuel for the year 2011 was Rs. 2,183 crores. Improvements in energy efficiency result in
increased savings and reduction in CO2 emission.

Questions:
1. What are the major products offered by ACC?
2. What are the capabilities of this firm in distribution of its products?
3. What are the initiatives taken by ACC regarding contribution to society and protection
of the environment?
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Company 2.3: ONGC
Oil and Natural Gas Corporation Limited (ONGC) has been ranked as the top energy
company in India and has been ranked 5th in Asia and 21st at global level. ONGC involved in
oil and gas exploration, has discovered 6 out of 7 producing basins. ONGC Videsh Limited
(OVL) is the biggest Indian multinational with 30 oil and gas projects (9 of them producing)
in 15 countries.
The approach of value chain integration has been demonstrated by purchase of equity in the
ailing Mangalore Refinery & Petrochemicals Limited (MRPL) with a capacity of 9.69 MMT,
in the year 2003. ONGC has been moving forward in effecting integration of the value chain
by involving in projects like refinery, LNG, petrochemicals, power, SEZ, etc., in order to
have presence in the entire hydrocarbon value chain. ONGC has a major presence in the
energy value chain and 70 percent of domestic crude production is by ONGC. ONGC
produces 1.26 million barrels of oil equivalent per day. The crude oil is the raw material to
the downstream members like IOC, BPCL, and HPC for production of petroleum products
like Petrol, Diesel, Kerosene, Naphtha, and Cooking Gas-LPG. . During the year 2017-18,
ONGC generated total revenues of Rs. 92,887.7 crores and the net profit was Rs. 19,945.3
crores.
ONGC was involved in community development and made difference in the lives of
vulnerable and disadvantaged. The company also is engaged in CSR activities related to
education, healthcare, entrepreneurship schemes, infrastructure development, environment
protection, promotion of culture, women empowerment, waste management, etc.
ONGC has implemented quality management systems with respect to ISO 9001, OHSAS
18001, and ISO 14001. The company employs 32,909 people as on 31-3-2012.
Questions:
1. What is the strategy adopted by ONGC regarding value chain integration in the
hydrocarbon business?
2. What are the initiatives taken by ONGC on the environment protection front?
----------------------------------------------------------------------------------------------------------------
CH03: SUPPLY CHAIN STRATEGY AND PLANNING
“Strategy refers to the determination of the purpose and the basic long-term objectives of an
enterprise; and the adoption of courses of action and allocation of resources to achieve these
aims” – Heinz Weihrich and Harold Koontz

Learning objectives:
1. Understand the three phases of decision making in supply chain management: Supply
chain strategy, supply chain planning, and supply chain operation
2. Optimal supply chain network planning - different aspects like number of facilities, their
location, and capacity, etc.
3. Alignment of supply chain strategy and customer service requirements
4. Achieving strategic fit of the supply chain: a tradeoff between efficiency and
responsiveness.
5. Understanding supply chain performance drivers
6. Learn concept of ‘leagile supply chain’ – lean and agile supply chain
7. Supply chain synchronization – its importance.

Supply chain strategy comprises of the action plan for creation and delivery of value to
customers in order to achieve the long-term objectives of the individual firm and the supply
chain as a whole.

Supply Chain Decision Phases

The three main decision stages in supply chain planning are: 1. Supply chain strategy or
design, 2. Supply chain tactical planning, and 3. Supply chain operation.

Supply chain strategy or design

Supply chain strategy or design involves decisions with regard to overall supply chain
configuration. The strategic supply chain decisions would have a long-term impact. The
strategic supply chain decision, in general, is related to:
1. Products and services
2. Manufacturing plant – number, capacity, and location
3. Technology to be adopted
4. Distribution channel configuration
5. Supplier network

Supply chain tactical decision

The tactical supply chain decisions will have medium term impact on the supply chain
performance. The tactical decisions to be made with respect to supply chain include: Market
decision promotion and advertisement, Inventory to be maintained, Number of shifts of
operation, Machinery and material handling equipment selection, Transportation modes,
Customer segments to be served, Supplier selection, Distributor selection, etc.

Supply chain operations planning

The supply chain operation planning is at the lowest level of planning and its impact on the
supply chain would be short term. Supply chain operation planning is to do with detailed
action plan which effectively converts the supply chain stagey and tactical plans into daily /
weekly activity schedules. The activities involved in this stage could include: order
management, schedule for meeting customers, promotion campaign, production schedule,
purchase plan, etc.

Drivers of supply chain performance

Sunil Chopra and Peter Meindl (2002) have identified the drivers of supply chain
performance as: 1. Facilities, 2. Inventory, 3.Transparation and 4. Information.
The supply chain management could be focused on the following aspects for making
improvement in supply chain performance:
1. Optimal supply chain network planning - facilities location, number, and size.
2. Building strategic partnership with suppliers, distributors, retailers and customers.
3. Establish an efficient communication network with supply chain member firms.
- Suppliers, distributors or dealers, and customers
- ICT infrastructure link with suppliers, as well as distributors and/or customers,
could significantly help in improving the supply chain performance.
4. Alignment of supply chain performance goals and customer expectations or demand
requirements.

Supply chain operations planning

Supply chain operations planning could be divided into, based on the physical and logical
sequence of the supply chain as: supplier network, internal operations, and distribution
network. We shall discuss about the operations planning in all the three phases supply chain
mentioned above.

Supplier network operations planning

Supply network operations planning comprises of: supplier selection, supplier development,
supplier evaluation, supplier certification, supplier audit, raw material warehousing, raw
material mixing, supply consolidation, milk run operations, and raw material movement to
the manufacturing plant facility.
The various aspects related to supplier selection, supplier development, supplier evaluation,
supplier certification and supplier audit will be covered in a subsequent chapter 8 titled
‘Sourcing and Procurement’.
The recent trend is towards building a long term relationship with the selected suppliers.
Companies like Ford, Hyundai, and Nokia have developed supplier parks and have suppliers
at arm’s length. Such a strategy has an additional advantage of implementing techniques like
just-in-time (JIT) made easy. There is a tendency on the part of OEM manufacturers to have a
single supplier for each component / system. This strategy is called ‘single sourcing’. There
are always pros and cons attached to this strategy. The leading firms in supply chain
management across the globe have been striving hard to have a narrower supplier base (a
fever number of suppliers) and build strong supplier relationships which are mutually
beneficial and long term based. Enhancing electronic linkage with suppliers for
implementing by developing Intranet / VPN or through ERP supplier relationship module
could improve supply performance phenomenally. Implementation of electronic ‘Kanban’ in
such an environment is easy and quite possible. This would eventually facilitate JIT
implementation with the firm’s suppliers.
The raw material warehousing activities comprises of temporary storage of raw material and
component parts, raw material preparation and mixing, etc. It may also be noted that the raw
material warehouse material handling equipment involve heavy duty equipment like gantry
crane, overhead cranes, and high capacity forklifts.
Supply consolidation and milk run operations are carried out in order to achieve full
truckload (FTL) operation in the inbound logistics. Transportation mode selection impacts the
supply chain performance significantly. For example, European inland raw material
transportation could be carried out in an efficient manner through inland waterways.
However, such an option is very less in India due to restricted inland waterways availability
for navigation. Use of rail and road are the major modes of raw material transport within
India. India with a coastline of 7516 kms offers a great promise for raw material movement
by coastal shipping. Cost of transport per tonne by shipping is the lowest of the available
modes of transportation. India has a good infrastructure with 12 major ports and 187 minor
ports, which could be a great boon for coastal shipping.

Internal operations planning:

Internal operations phase of the supply chain wherein maximum value addition occurs to the
product. The raw material gets converted into the finished product in this phase of the supply
chain. Also, there is ample scope for implementing cost cutting as well as quality
improvement measures in the internal operations. The focus of internal operations will be
towards keeping minimum inventory in the shop floor and reduce the throughput time.
Implementation of lean manufacturing and just-in-time approach helps achieving this goal.
Internal operation is a fertile ground for implementation of techniques like 5S, Kanban, lean
manufacturing, just-in-time, and six sigma. A detailed discussion of these techniques is
beyond the scope of this book and the reader is recommended to refer any standard book on
operations management for additional reading on these techniques.
Logistics in the internal operations is another area for implementation of performance
improvement techniques. The objectives in this connection are to design proper scheduling
and routing in order to minimize the total distance traveled by the work-in-progress (WIP) in
getting processed into finished products. Hi-tech, energy efficient material handling
equipment should be made use of along with proper scheduling and routing techniques.
Driver skill improvement for optimal material handling equipment operation also improves
the overall performance. Last, but not the least, the material handling equipment and
facilities in the internal operations should be maintained properly.
Distribution network operations planning have at its heart, an efficient and effective physical
distribution of products and services to customers. The distribution network comprises of
mainly distributors, retailers, and customers. The physical facilities in the distribution
network are warehouses and distribution centers.
The distribution channel management involves establishing, developing and maintaining a
strong network of the channel members. Information sharing among the member firms of the
supply chain helps in increased supply chain visibility. The supply chain visibility should be
maintained from the customer end with respect to demand information right up to the raw
material supplier. The increased supply chain visibility would help in reducing bullwhip
effect in the supply chain. Bullwhip effect is the amplification of variation in the customer
demand information as it moves upstream of the supply chain. The demand variation gets
amplified at every stage from customer, to retailer, to distributor, to manufacturer, to raw
material supplier. Collaborative planning forecasting and replenishment (CPFR) could be an
important tool in mitigating the effects of bullwhip effect and enhancing supply chain
information sharing and visibility. Information sharing reduces the inventory level
maintained at every stage of the supply chain thereby resulting in reduced cost to the firm and
the supply chain as a whole.
The warehouses in the distribution network are no longer used only for storage of products,
but are also used for carrying out activities like break bulk, merge-in-transit and value added
services like packaging and labeling.

Supply chain capabilities and customer requirements

The supply chain performance will depend upon the way it has been configured during its
design. It is very essential to make a good design for the overall supply chain performance.
The main aspects to be considered while carrying out the supply chain design are Facilities,
Inventory, Transportation and Information. The steps involved in designing a proper supply
chain configuration are:
1. Study the customer requirement / expectation
2. Analyze the supply chain capabilities
3. Fine tune / redesign the supply chain capabilities to match the customer
requirements.
The criterion for supply chain configuration decision is efficiency and flexibility of the
supply chain.
Customer requirements / Expectations
The supply chain manager should know what the customer wants from the supply chain in
terms of cost, delivery time, quality, and service level.

Product cost
The cost of the product determines the competiveness to a large extent. Any customer will
prefer to have the products offered to them at the lowest price. Cost leadership which is one
of the generic strategies propounded by Michael Porter (1998) in order to enhance the
competitive advantage of the firm / supply chain. Manufacturing strategies such as lean
manufacturing and just-in- time (JIT) implementation help achieving cost leadership.

Delivery time
Customers would want products and services be delivered to them at the shortest possible
time. The mode of transport mainly dictates the delivery time. The cost of transportation
varies across the various modes of transportation. Faster the mode of transportation, higher is
the cost. The mode of transportation should be decided based on need. Shipping is the
cheapest mode of transport followed by rail. While deciding on the mode of transport, we
should keep in mind the pipeline inventory which contributes to inventory cost: finished
goods at warehouse and the pipeline inventory in the various stages of the distribution
channel. Hence, the mode selection should be based on a consideration of total inventory
cost. However, customer requirements for quicker delivery should be taken into account.

Quality of the product / service

Quality is an essential dimension of the product, whatever the supply chain strategy. Quality
is a multi-dimensional concept. Quality of a product or service depends upon performance,
features, aesthetics, conformance to specification, reliability, durability, safety and perceived
quality. Quality needs to be built into the system and minds of people, as a culture in the
organization. Quality in all walks of life should be the goal and the organization should
follow the strategy of ‘Do it right the first time and every time’.

Service level offered to customer

Customer expectation with respect to service level relates to delivery time, product
availability, product variety, warranty claims etc.
Product flexibility: refers to the product variety that is made available to the customers.
Products involving modular design could be customized more easily to the needs of the
customers. The concept of postponement provides more product differentiation near the
demand point i.e. closer to the customer and consequently results in providing more product
variety to customers. The extreme case of product differentiation is providing personalized
products to every customer’s needs without losing the high volumes of production. This
strategy is called ‘mass customization’ and the mass customization strategy has been very
successfully implemented by Dell Computers.
Volume flexibility: a marginal increase in capacity over and above the normal capacity
provides significant increase in the ability of the firm or the supply chain to meet varied
customer needs in terms of product variety as well as product volume requirements. The
excess capacity in the production facilities is called ‘Buffer Capacity’ and the excess or
buffer capacity in the supply chain makes it very flexible in meeting the customer
requirements better.
Service level: could be measured based on performance indicators like stock out ratio, fill
rate, complete orders shipped, etc. The level of customization is another important
consideration with respect to service level.

Drivers of supply chain performance

The important aspect of the four drivers of supply chain performance, viz., facilities,
inventory, transportation, and information have been covered in the following section.

1. Facilities
The facilities in the supply chain refers to: manufacturing plants, raw material warehouses,
finished goods warehouses, distribution centers, and service centres (especially, in case of
automobile sector). The supply chain decision with respect facilities are related to:
i) Number of facilities
ii) Location of facilities
iii) Ownership of the facilities (responsibility for management and control)
The optimal supply chain network planning involves decisions with regard to the three items
just mentioned above and more. A detailed discussion of supply chain network planning and
design has been provided as a separate chapter in this book.
Manufacturing facility has such a propound impact on the supply chain performance since
maximum value addition happens at this stage of the supply chain. Performance improvement
techniques like 5S, lean manufacturing, six sigma, and TQM are implemented in the various
manufacturing facilities of the supply chain.
The warehouses could be either for raw material in the supply chain or for finished goods in
the distribution chain. The warehouses are meant for temporary storage of raw materials /
finished goods. Raw material warehouse, apart from acting as a place for raw material and
components storage, is also used for raw material ‘mixing’ in some cases. Certain chemicals
used as input for further processing in the manufacturing facility need to be mixed in specific
proportion in order to achieve optimal product quality. The activity of mixing different raw
material inputs according to the specification requirements is also carried out in the raw
material warehouse.
The raw material warehouse could be owned / maintained by supplier in case there is
deployment of vender managed inventory (VMI). Such warehouses are meant for storage of
material and components parts to be used by the supplier for carrying out VMI activities in
the shop floor / assembly line. Vendor managed inventory, as a concept, has been explained
in chapter 02 earlier.
The finished goods warehouse, number and location would have significant impact on the
level of service provided to the customer. An understanding of the customer requirements in
terms of product availability would go a long way in influencing the service level offered to
customers. The distribution network would be based on a tradeoff between cost and service
level to be offered to customers.
The warehouse is sometime used for value added service like packaging, labeling, etc. The
finished goods like coffee powder and tea could be transported using bulk containers. The
packaging could be done at warehouse based on the requirements of local retails customers.
Separate area could be allocated in the warehouse for carrying out such value added services.
The distribution center is another important facility in the distribution network. The
warehouses, both raw material warehouse as well as finished goods warehouse, are made use
of for temporary or short term storage of material / finished parts. But the distribution centers
are not meant for storage of material. The distribution centers facilitate activities like break
bulk and cross docking. The role of distribution center is to facilitate smooth flow of
materials to customer in the distribution chain in an efficient manner.

Break bulk
Dry bulk cargo could be transported using bulk tipper. Similarly, unitized cargo could be
transported in bulk using long haul heavy duty container trucks. The consignments which are
transported in bulk quantities by road could be handled at distribution centers for delivery to
customers. Break bulk operations could be carried out in the distribution center (DC) and the
specific smaller cargo consignments meant for different retailers could be sent from the DC
by small capacity trucks.
Bulk transportation could be done for soyabeans, cereals, corn, etc. Dry bulk transportation
using silo trailers has been done for transporting fly ash from thermal power stations in India
to cement plants for further use in the cement manufacturing process. Liquid bulk
transportation has been widely used for transporting chemicals and petroleum products.
Break bulk of dry cargo by road transport through trucks could be carried out in the
distribution centers. Generally, break bulk operation of long haul container trucks are done at
distribution centers so that the unit loads / palletized cartons could be sent to proper
customers.

Cross docking
Cross docking facilitates timely distribution of freight to the customers. The distribution
center acts as a through put sorting facility. This type of operation allows bulk transportation
using FTL by heavy duty container trucks up to distribution centers. Then, the last mile reach
to retail customers /from the distribution center, could be completed by small trucks or less
than truckload (LTL). The Figure 3.1 clearly demonstrates the concept of cross docking.

S1 S2 S3 S4 S1 S2 S3 S4

DC

R1 R2 R3 R1 R2 R3

After cross docking Before cross docking

Figure 3.1 Cross docking in distribution center

Freight consolidation: The shipments with the same destination are combined in order to
achieve transportation efficiency. This practice allows reduction in per unit shipping cost and
delivery time thereby resulting in quicker delivery at lower cost. Fright consolidation could
be implemented both in inbound as well as outbound logistics.
Milk run logistics operation is used for consolidating the items procured from a number of
suppliers into the same truck load. The advantages of milk run collection are improved
vehicle loading, and reduction in the total distance traveled.

Supplier1

Supplier2 Manufacturing
plant

Supplier3

Figure 3.2 Milk run operation

2. Inventory
The types of inventory maintained by the firms in the supply chain are: raw material, semi
finished and finished goods, spares and tools, consumables, etc. The supply chain strategies
generally implemented with respect to inventory management are: 1. Lean manufacturing and
just-in-time inventory management, and 2. Kanban system.
The level of inventory maintained, ordering policy, and desired service level are some of the
important decisions with respect to inventory management in the supply chain.

3. Transportation
The transportation mode selection for inbound and outbound logistics is a key decision in the
supply chain planning phase. The transport mode selection, hi-tech vehicle usage,
maintenance of vehicles, alternate fuel use, vehicle routing, optimized distance traveled, and
driver skill improvement are some aspects to be taken care of in order to make improvements
in transportation performance. The transportation cost in a major component of cost of goods
sold. Hence, any improvement in transportation would directly reflect on the profitability
and competitive advantage of the supply chain.

4. Information
Information flow upstream / downstream of the supply chain is vital for successful supply
chain performance. The information flow could be request for quote, purchase order,
invoice, bill of lading and shipping list, etc. Sharing of product design information in the
early stages of new product development enhances quality products supplied and result in
reduced defects.
The different ICT tools implemented with the members of the supply chain (suppliers and
distributers) include:
1. Internet linkage with suppliers and distribution channel partners (user name and
password protection). In case higher security level desired, fire wall protection
could be deployed (hardware firewall & software firewall or both simultaneously),
2. ERP implementation with modules for suppliers and customer relationship,
3. Electronic data interchange (EDI).
Detailed coverage ICT deployment in the supply chain has been provided in chapter 14
subsequently.

Matching the customer expectations with supply chain capabilities

Matching the customer expectations and the supply chain capabilities need to be achieved in
order to reach the goals of the supply chain. The objective of the supply chain is to offer
value to customers while maximizing the benefits to all the members of the supply chain.
The supply chain capability is related to facilities, inventory, transportation, information. The
capabilities of the supply chain get reflected into two forms: 1. Supply chain efficiency,
2.Supply chain flexibility. The value delivered to customers is related to product cost / price,
product/service quality, delivery time, and customer service. The Figure 3.3 shows a
conceptual model for matching supply chain capabilities with the customer expectations.
Supply chain efficiency
Supply chain efficiency mainly gets reflected in the product cost. An efficient supply chain
achieves cost reduction by strategies such as lean manufacturing and just-in-time
implementation. Supply chain is a fertile ground for achieving cost leadership and enhancing
competitive advantage.

Supply chain flexibility / Agility

An agile or flexible supply chain meets all the requirements of the customer in terms of
product variety and volume requirements. The flexibility or agility in the supply chain is
achieved by maintaining an excess capacity or buffer capacity in the supply chain. This
strategy would have its associated additional cost and consequent reduction in efficiency.
It may be noted that the focus of supply chain in 1980s was towards cost reduction. There
has been a paradigm shift in the supply chain strategy. In the 1990s and till now, the focus of
the supply chain is on providing better customer service and offering flexibility in meeting
customer requirements.
Generally, there is a tradeoff between cost versus supply chain flexibility. However,
companies like Dell have achieved both together by the concept called ‘mass customization’.
This strategy offers customized products to customers on a large scale by suitably designing
the supply chain configuration. The strategy adopts techniques like disintermediation, and
merge-in-transit in the distribution process. The Dell supply chain achieves this by leveraging
on information and communication technology, ICT capabilities.

Supply chain Customer

capabilities expectations
Match the supply chain capabilities with
Customer expectations
Facilities Cost / Price

Inventory Supply chain Quality

efficiency Value to
customers
Transportation Supply chain Delivery time
flexibility

Information Customer
service

Figure 3.3: Matching supply chain capabilities with customer expectations

==================================================================
Focus: WHAT IS A LEAGILE SUPPLY CHAIN?
Leagile supply chain, in simple terms, is lean and still flexible or agile in meeting the
customer expectations. It is combination of lean supply chain and agile supply chain.
Quality * service
Value = ----------------------
Cost * Time
(Source : Martin Christopher and Davis R.Towill, 2000)

Christopher and Towill (2000) have identified ‘market qualifiers’ and ‘market winners’ in a
supply chain. Four of the basic attributes which impact on the value delivered by a supply
chain viz quality, delivery time, cost, and customer service, are considered under this study
of the value chain. The researchers have established a relationship between the ‘market
qualifiers’ and ‘market winners’ and the ‘leanness’ and ‘agility’ of supply chains. Higher
level of product quality and minimum lead-time are essential requirements in ‘agile’ as well
as ‘lean’ supply chains. The difference in the two paradigms is with respect to cost and
service level. In a lean supply chain, service level is also a market qualifier along with quality
and lead-time, and the market winner is cost. Whereas, in case of an agile supply chains, cost
joins the market qualifiers list along with quality and lead-time, the market winner is service
level. Naylor et al (1999) as well as Christopher and Towill (2000) have indicated that the
agile supply chain is market sensitive and is capable of reading and responding to real
demand from the customer end. Agile supply chains carry inventory in the generic form of
components, and semi-finished products awaiting final assembly at the customer or
distribution end. This concept is called “postponement” and is based on modular design
employed during design stage of products that enables postponement of final assembly and
increases supply chain agility. Components are carried in generic form up to the ‘material
decoupling point’ and after which the product is custom assembled to meet specific customer
demand. This decoupling point separates that part of the supply chain geared towards directly
satisfying customer orders. The decoupling point while using postponement strategy should
lie as far downstream in the supply chain and as close to the final market place as possible.
The supply chain should adopt ‘lean’ approach upstream of material decoupling point and the
lower stream should be more ‘agile’ and responsive to customer demand. This approach,
according to Christopher and Towill (2000), gives birth to ‘leagile’ supply chains. It may
noted that up to the material decoupling point, the supply chain holds the material in generic
form as components and subsystems ready for assembly, and in finished product form after
the material decoupling point.
==================================================================
Summary
Supply chain strategy can be defined as creation and delivery of value to customers in order
to achieve the long-term objectives of the individual firm and the supply chain as a whole.
The main decision phases in a supply chain falls into three categories: Supply chain strategy
or design; Supply chain planning; and Supply chain operation.
The focus of supply chain strategy is planning for the supply chain capacity and other
resources keeping in mind two aspects that determine the supply chain performance viz.
efficiency and responsiveness. The drivers of supply chain performance which are: facilities,
inventory, transportation, and information, form the basis for supply chain planning.
The overall supply chain strategy could be focused on: optimal supply chain network
planning – facilities location, number, and size; building strategic partnership with suppliers,
distributors, retailers, and customers; creating communication channels for information
sharing; collaborative planning, forecasting, and replenishment (CPFR), planning ICT
infrastructure to support supply chain operations; supply chain operations planning – what
product to make, how much to make, where to make it, plan supply chain capacity and
outsourcing level; and alignment of supply chain performance goals – efficiency and
customer service. This results in achievement of supply chain strategic fit.
Optimal supply chain network planning: involves decisions like the number of tiers in the
supply chain. Each tier of refers to the supply chain member firms in the same stage of the
supply chain. The other decision to be made with respect to supply chain network planning is
the number of facilities that is required at each stage in the supply chain. The supply chain
operations should also be cost effective. The tradeoff is between supply chain capacity and
responsiveness. An understanding of the customer requirements and the supply chain
capacities leads to proper planning. This helps them building an optimal supply chain
network
Building strategic partnership in a supply chain is implemented through building
communication channels for information sharing, and collaborative planning, forecasting, and
replenishment (CPFR). CPFR as a concept in supply chain management aims at enhancing
the supply chain integration through joint practices between the various members of the
supply chain.
Information and communication technology (ICT) infrastructure could be deployed in the
three main supply chain segments viz. supplier network, focal firm, and distribution network.
The electronic linking of suppliers helps in sharing demand information, forecasts, and POS
data.
The attributes that are considered when attempting to design a supply chain network are:
Cost, Customer service, Time, Quality, Product flexibility, Volume flexibility, Technology,
and Location. Achieving a strategic fit for the supply chain depends on understanding the
customer requirements and understanding the supply chain capabilities. The supply chain
strategy most often is a tradeoff between cost and customer service.

End Chapter Questions

1. What is meant by supply chain strategy?
2. Bring out the major decisions to be made with respect t supply chain network planning.
3. What are the different information technologies which could be used as enablers of
communication in the supply chain?
4. List any four enabling electronic linking technologies for information sharing among
member firms in a supply chain
5. Write short note on:
a) Supplier network
b) Distribution network
6. What are the techniques that facilitate smooth internal operations within the focal firm?
7. What do you understand by the equation proposed by Johansson with respect to value
delivered in a business?
8. What are the steps to be followed for deploying ‘Lean Strategy’ in any firm?
9. Differentiate between an efficient supply chain and a responsive supply chain.
10. What are the major obstacles in achieving a strategic fit in a supply chain?
11. Discuss the need for supply chain synchronization and what the possible positive results
from the implementation of the same?
12. List out the essential prerequisites for implementation of successful supply chain
synchronization

Essay Questions
1. Explain the three decision phases in supply chain planning
2. What are the information technologies that could be used for enhancing the supply chain
collaboration effort?
3. How do you achieve alignment of supply chain strategy and customer service?
4. Explain the two alternative supply chain strategies available for deployment?
5. Explain the four drivers of supply chain performance
6. How do you achieve supply chain synchronization?
References
1. Chopra S. and Meindl P. (2002), Supply Chain Management: Strategy, Planning, and
Operation, Pearson Education (Singapore) Pte. Ltd., Indian Branch, 482 F.I.E.
Patparganj, Delhi, India, p.5
2. Christopher M. and Towill D. R. (2000), ‘Supply chain migration from lean and
functional to agile and customized’, Supply Chain Management: An International
Journal, Vol. 5, No. 4, pp. 206-213
3. Donald Waters, Logistics Management, MacMillan India
4. Fu Y. and Piplani R. (2004), ‘Supply-side collaboration and its value in supply
chains’ European Journal of Operational Research 152, pp.281-288
5. Garg D., Narahari Y. and Viswanadham N. (2004), ‘Design of Six Sigma Supply
Chains’, IEEE Transactions on Automation Science and Engineering, Vol.1, No.1,
pp.38-57
6. Mason S. J., Cole M. H., Ulrey B. T. and Yan L. (2002), ‘Improving electronics
manufacturing supply chain agility through outsourcing’, International Journal of
Physical Distribution and Logistics Management, Vol.32, No.7, pp.610-620
7. Naylor J. B., Naim M. M. and Berry D. (1999), ‘Leagility: Integrating the lean and
agile manufacturing paradigms in the total supply chain’, International Journal of
Production Economics 62, pp.107-118
8. Porter, M. E. The Competitive Advantage: Creating and Sustaining Superior
Performance. NY: Free Press, 1985
9. Sahay B. S. and Jain R. (2002), ‘Supply chain management in the Twenty-first
century’, Supply Chain Management: in the twenty-first century, Macmillan(India),
pp.5-22
10. Sahay B. S. and Mohan R. (2003), ‘Supply chain management practices in Indian
industry’, International Journal of Physical Distribution and Logistics Management,
Vol.33, No.7, pp.582-606
11. Tan et al (2002), ‘Supply chain management: a strategic perspective’, International
Journal of Operations and Production Management, Vol.22, No.6, pp.614-631
12. Watanabe R. (2002), ‘Supply chain management – The concept & Technology’,
Productivity, Vol.42, No.4, pp.525-530
----------------------------------------------------------------------------------------------------------------
Mini Case 3.1: Ashok Leyland
Materials cost accounted for 70% of its product cost.
In the late 1990s, there was a slump in the manufacturing sector which resulted in decrease of
freight operations from manufacturing, mining, and quarrying.
AL, which is dependent on moving material and people and this recession in the
manufacturing sector, affected AL’s operations very severely.
AL’s working capital has gone up from 33.34% of sales revenue in 1993-94 to 58.18% of
sales revenue in 1997-98.
AL conducted brainstorming session on cost cutting. Recession saw AL waging a war on
wastage and efficiency.
Tiering of suppliers and supplier consolidation was effected. System sourcing from one of its
tier-1 vendor for the front end structure in trucks and buses, resulted in reduction of cost &
time.
AL implemented two methods in the supply chain for cost reduction:
First, single window system resulted in ‘pull’ system of materials procurement. This resulted
in single point contact for suppliers for sharing drawings, negotiating prices, long-term
business volumes, and for assistance and consultancy on quality to management issues.
Second, supplier tiering and system buying resulted in AL directly dealing with tier-1
suppliers. Tier-1 suppliers were supported by tier-2 and tier-3 suppliers. Further, system
buying resulted in cost and time savings to the company.
After revamping inbound supply chain, AL implemented OSCARS-II programme for the
outbound supply chain with an objective of improving customer satisfaction and reducing
finished goods inventories, and reaching improved service levels with optimum pipeline
inventory levels.
AL’s supply chain initiatives resulted in AL’s comeback storey: profit of Rs. 1.9 crores on
sales of Rs. 1,092.8 crores in the first half of 1999-2000 against a loss for the corresponding
period in 1998-99.
The sales revenue for the year 2017-18 was Rs 26247.91 crores and profit for the same period
was 1562.59 crores.
Questions:
1. How AL implemented cost reduction measures?
2. Write steps taken by AL to improve its supply chain performance.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 3.2: Castrol India
Castrol India manufacturer of premium lubricating oil, greases, and provides related services
to industries , marine, aviation, oil exploration, and production customers. Castrol India is
headquartered at Mumbai and operates a Global Lubricant Technology Centere at Wadala
(Mumbai). The company has manufacturing facilities at Patalganga (Maharashtra), Silvassa
(Dadra & Nagar Haveli), and Paharpur (Kolkata). The company offers its products for cars,
motor cycles & scooters, trucks & buses, and off-road vehicles. Castrol offers additional
services like ‘Castrol Bike Point’, ‘Castrol Pitstop’.
The sales revenue for the year 2018 was 3988.9 crores of rupees and profit after tax was
708.3 crores of rupees. The Castrol delivery network extends throughout 140 countries,
covering 800 ports, and partnering over 2000 distributors and agents. Castrol operates
directly in 40 countries across the world.
The CSR activities of Castrol India spans over Eklavya- training for two wheeler mechanics,
relief and rehabilitation of communities affected by natural disasters, community
development, and road safety measures.
Questions:
1. Explain the Castrol supply chain.
2. Why CSR activities carried out by a company like Castrol?
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 3.3: Dr.Reddy’s Laboratories
The company has its goal ‘Good Health’, and with a commitment of ‘Can’t Wait’ attitude
aims at providing innovative solution towards healthcare. Principles of empathy and
dynamism form the basis for all its actions at Dr.Reddy’s Laboratories. Dr.K.Anji Reddyy’s
passion for drug discovery and pioneering contribution for making available affordable
medicines is legendary.
The company has the following API manufacturing facilities: unit 1,2, &3 has been setup at
Bollaram, Hyderabad; unit 4 is located at Jeedimetla, Hyderabad; unit 5 has been setup at
Miriyalaguda (150 kms from Hyderabad); unit 6 is located at Pydibheemavaram (800 kms
from Hyderabad); unit 7 is located in Mexico and provides niche steroidal API capabilities;
unit 8 provides Chiral and biocatalysis technology at the Cambridge facility and the scale up
capability in Mirfield adds significant value to the CPS business offerings.
The company aims at providing sustained value for all stakeholders. The sales revenue of the
company during the year 2017-18 was Rs. 14,202.8 crores and profit after tax was Rs. 980.6
crores. Dr. Redy’s Laboratories believes in innovation and new product development through
its R&D efforts. Sustainable business practices forms the basis for company’s operations in
terms of providing health for the society and compliance to norms and regulations.
Questions:
1. What are the pharmaceutical products offered by Dr.Reddy’s Labs?
2. What are the locations of the company’s plant facilities? Comment on the locations.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 3.4: Rural Market - Mother Dairy
Adi Godrej in one of his remarks stressed the need for an efficient supply chain with the rural
market. He felt and expressed that we need a strong rural supply chain not for distribution of
finished goods to rural markets, but it is required to transport the fresh products from the rural
markets to the place of consumption.

Table 1: Milk production level in India

Year Milk Production Per-capita availability
(in million tons) (gms/day)
1991-92 55.6 178
1992-93 58.0 182
1993-94 60.6 186
1994-95 63.8 192
1995-96 66.2 195
1996-97 69.1 200
1997-98 72.1 205
1998-99 75.4 210
1999-00 78.3 214
2000-01 80.6 217
2001-02 84.4 222
2002-03 86.2 224
2003-04 88.1 225
2004-05 92.5 233
2005-06 97.1 241
 2006-07 102.6 251
2007-08 107.9 260
2008-09 112.2 266
2009-10 116.4 273
2010-11 121.8 281
2011-12 127.9 290
2012-13 132.4 299
2013-14 137.7 307
2014-15 146.3 322
2015-16 155.5 337
2016-17 165.4 355
2017-18 176.3 375

Source: Ministry of Agriculture web site

Mother Dairy – Delhi was setup in the year 1974 as part of operation flood programme. It is a
fully owned company of NDDB (National Dairy Development Board). Mother Dairy sells
dairy products under the mother dairy brand (like liquid milk, Dahi, Ice creams, etc.). Mother
Dairy sources fruits and vegetables under its brand name ‘SAFAL’ through a chain of 400
plus own fruits and vegetable shops and 20,000 retail outlets. Mother Dairy has established
facilities at Delhi for handling fruits and a state-of-the art fruit processing facility at
Bangalore. Mother Dairy has also been involved in marketing Dhara brand of oil by
procuring and processing oil seeds from farmers and farmer co-operatives. Thus, it is evident
that through Mother Dairy’s core business as part of operation flood was mainly intended for
milk and milk based products. The company has exploited its well knit network for the
benefit of farmers and itself by entering into related businesses like farm fresh produce (fruits
and vegetables) and oils seeds.

Table 2: Fruits and Vegetables production level in India

Fruits and Vegetables Production (in million tons)
Year Fruits Vegetables Total
1991-92 29 59 88
2001-02 43 89 132
2002-03 45 85 130
2003-04 46 88 134
2004-05 51 101 152
2005-06 55 111 166
2007-08 66 128 194
2008-09 68 129 197
 2009-10 71 134 205
2010-11 75 147 222
2011-12 76 156 232
2012-13 81 162 243
2013-14 89 163 252
2014-15 87 169 256
2015-16 90 169 259
2016-17 93 175 268

Source: Ministry of Agriculture web site

The economic situation in India augur well for this company since India is the largest
producer of milk and second largest producer of fruits and vegetables in the world. The tables
shown in this case study indicates the production level of milk, fruits and vegetables and it
also indicates the trend in the production levels.
Questions:
1. Is it a sound strategy on the part of Mother Dairy, with its core business as milk, to have
entered into fresh farm produce and oil seeds? Is it like biting too much on the part of
‘Mother Dairy’ than what it can chew?
2. What are the economic factors which are favourable to this company’s performance?
----------------------------------------------------------------------------------------------------------------
CH 04: FORECASTING IN A SUPPLY CHAIN

Learning objectives:
1. Understand the importance of forecasting and its impact on supply chain in reducing the
bullwhip effect.
2. Recognize the importance of time horizons in forecast estimation.
3. Understand the different types of forecasts made.
4. Learn the forecasting methods: Qualitative and Quantitative.
5. Understand linear regression and casual forecasting technique
6. Learn forecasting model for seasonality and cycling.

Forecasting is one of the main functions of the supply chain management and customer
demand is the basis for all the supply chain activities. An accurate estimation of customer
demand will enable better planning and smooth flow of materials through the supply chain.
The customer demand forecast by the members of the supply chain is influenced by the
availability of information. The information on the actual customer demand gets distorted at
every stage of the supply chain when it flows upstream to the supplier and to the supplier’s
supplier. This leads to higher inventory buildup at the upstream end of the supply chain and
this phenomenon is called “Bullwhip Effect”. The concept of Bullwhip Effect will be
discussed in detail later in the chapter on inventory management. Now, let us discuss
forecasting in general and the various methods of forecasting techniques.
Forecasting attempts to predict a future event in terms of the event’s occurrence, timing of the
event, and the magnitude or the impact of the event. Forecasting is a very important planning
activity and it helps us to predict the future events with relatively a higher degree of accuracy.
Use of forecast, as inputs for decision making is definitely a better than to base our decision
on intuition, guesswork or simply decision by tossing a coin! Forecasting has been practiced
by men and women from time immemorial for decision making in various forms based on
their native intelligence. But now, with the advent of computers, laptops and an array of
statistical tools, the forecasting of product demand has been enabled.
Before embarking into the various methods of forecasting, let us see the difference between
forecasting and planning. Forecasting is the methodology by which we predict what will
happen in the future. Whereas, planning is to do with what should happen in the future.
Through planning, we consciously and through concerted effort attempt to alter the future
events. Forecasting simply predicts the future event. In fact, planning process makes use of
the forecast, for better decision making.
Forecasts are made use of in the different functions of any organization. Marketing makes use
of forecast to plan the products distribution channel requirement, and marketing effort. Based
on market forecasts on products, weaker products might require either increase in the
promotion and advertisement to develop its sales (or) if the product has no scope for market
improvement, phase it out of the product mix. Inputs from the forecasts on market conditions
could be made use of in pricing decisions. Sales forecast may be useful to the Regional
Marketing Manager in planning for his sales force. Finance makes use of forecasts for
planning the working capital requirements as well as planning for capital investment
decisions. The personnel department might use forecasts for proper planning of the workforce
requirements of the various functions of the organization. However, while making use of
forecast information for decision making the managers should keep in their mind the main
objective of the supply chain which is to provide the best value to customers and maximize
the total value of the supply chain.
The purpose for which the forecast is used could be different in various business situations.
The forecasts for medium (or) long range will be used for process design (or) technology to
be adopted by the organization. If the forecast demand is less, then the organization may use
batch production system with little amount of automation. On the other hand, if the demand is
expected to be very much on the higher side, then the organization might decide to put up a
sophisticated product line (or) use advanced productions system such as CIMS (Computer
Integrated Manufacturing System) or FMS (Flexible Manufacturing System).

Subjective views,
other information,
Historical data discussion, etc.

Parameter Forecasting Initial Final

values method forecast forecasts
s

Accuracy
required

Figure 4.1 Forecasting – steps involved

The aggregate planning of the production process as well as capacity planning decisions will
be greatly influenced by the demand forecast for the product.
Forecast requirements: The forecasting cannot be done in isolation, with some statistical
tools alone. The Figure 4.1 shows clearly as to how an initial forecast is made using either
qualitative or quantitative forecasting techniques. Then, this forecast is refined in the light of
views of the decision maker himself as well as views of other related personnel through
discussions.
The type of forecast to be made will vary depending upon the needs of the decision maker.
The type of forecast required by India cements, CEO, for decision making in putting up a
new cement plant will be entirely different from that of a Glaxo distributor in town in Tamil
Nadu. The CEO of India Cements, may have to take decision on:
 i) location of the plant
ii) plant capacity
iii) technology / process
iv) financing decisions
v) contractors to be employed for constructing the plant
vi) man-power planning for the new plant, etc.
All the above decisions require some sort of forecast into the future. The location of the plant
may require prediction into the future government policies, or even predicting into the
behaviour of the local earth strata regarding earth quake and other similar events at the
location where the plant is planned for installation. The capacity decision may require a long
range forecast (may be for the next two decades) on demand for the cement. It may be noted
that the Glaxo distributor might require a short range and medium range forecast for planning
his business activities possibly for the current year and next two to three years.
The forecasts can be clarified into the following categories based on the time horizon
considered while the forecast is made:
i) short-range (less than 1 year)
ii) medium-range (1 to 3 years)
iii) long-range (more than 3 years; generally long range forecast into future which
is beyond 5 years).
Short range forecast serve as a reference for current operation and day-to-day factory
operation. This might be used to carry out the aggregate planning or the master production
schedule. Short range forecast could also be used in making subcontracting decision as well
as in make or buy decision. Capacity decisions may require a medium range forecast where
as plant location, putting up an assembly line will require long-range forecast into the future.
It should be noted that forecast needs are could not be restricted to customer demand forecast
alone. As there are other factors which also have an impact on the Supply Chain
performance. Consequently, forecasts are to be made on other aspects of business such as
technology, environment, etc. The forecast could be classified into the following three
categories based on the focus of the forecast and the outcome:
Product demand forecasts: are made use of for production planning, scheduling, manpower
planning and other related decision making activities by production manager. The
management of an organization would require the product demand forecast for capacity
planning as well.
Technology forecasts: forecast of technological changes are very essential in high technology
industries to keep in pace with the developments for innovation in production process, and
new product development. Technology forecasts are equally relevant for decision making in
product purchases where the technology is fast changing. Technology forecasts are crucial
before putting up large factories or plants because the very survival and the profitability of
the plant will depend upon the type of technology used or the process adopted.
Environment forecasts: focus on predicting the future events in socio, political, and
economical spheres. Large organizations use some econometric model or the other
forecasting models for enabling better insight into the future, for successful planning. The
factors considered for analysis in environmental forecasting are gross domestic product
(GDP), consumer price index, unemployment level, etc.

FORECASTING METHODS
The forecasting methods could be classified into qualitative or quantitative based on the
methodology used for making the forecast. The Figure 4.2 shows the different forecasting
methods based on the nature of methodology used.

QUALITATIVE METHODS:
These techniques rely on the judgmental capacities of the individual / individuals involved in
using them. It requires higher skill level and experience for better forecasting, by using the
qualitative techniques. Qualitative methods are useful when there is lack of data for detailed
forecasting. Further, the qualitative forecasting methods are simple to understand and easy to
use. The following are the qualitative forecasting techniques:
Judgmental forecasting: methods are subjective views, often based on the opinions of experts
in the particular domain area on which the forecast is made.
Personal insight: This technique makes use of a single person who is very much familiar
with the situation to produce a forecast based on his/her own judgment. The main
disadvantages of this method are: it is solely based on the judgment of the individual, his/her
opinions, prejudices as well as their ignorance. This method could possibly be considered to
be the most subjective of the qualitative methods. However, it should also be noted that it
involves less cost and easy to understand and implement in concept.
Forecasting

Qualitative or judgmental: Quantitative or

Judgemental forecasting Statistical

Personal insight

Panel consensus
Projective: Causal:
Market survey
Simple average Simple regression
Historical analogy
Moving average
Delphi method
Figure 4.2 QualitativeExponential
and quantitative forecasting methods.
smoothing
Panel Consensus: a single person could easily make mistake, but when we take the
collective opinion of a group of people then there should be a consensus on the forecast
which will be more reliable. If there is no secrecy in administering the panel consensus
method then the panel members talk freely and openly. Such an approach would produce a
genuine consensus in the forecasting process. Panel consensus which is based on the
collective opinion provided by a group of specialists is an improvement over personal insight
method which bases its forecast on the expert opinion of a single person. However, there
could be difficulties in implementing panel consensus method, when there is disagreement
between the members of the panel. Another important problem in making use of panel
consensus for forecasting is that the dominant member of the panel may influence the
forecast unduly. This might work as a hindrance in reaching a pure consensus by the panel
members in making a good forecast.
Market survey: sometimes, it could so happen that even groups of experts do not have enough
knowledge to give a reasonable forecast. This could happen, for example, when the product
launched is new and sufficient knowledge is not available on such new products. In fact more
than the views of experts, the information collected from potential customers in the market
could be more valuable and accurate. Market surveys collect data from a sample of
customers, and then predict about the product demand of the population based on the sample
data. It is necessary that the sample size is judiciously selected considering the desired
accuracy of the forecast and the cost involved in collecting such sample data through market
survey. Market surveys would yield useful information relevant for predicting into the
product demand, but the following should be ensured for accuracy of market survey:
1. sample should be representative of the population
2. questionnaire should be effective, reliable, and valid
3. respondents should cooperate in giving fair and honest replies
4. analysis of the data collected should be done properly using relevant statistical
tools
5. analysis should yield correct inferences and valid conclusions
However, it should also be noted that market survey method involves more time and effort;
and hence relatively more costly.
Historical analogy: Life cycle of an old product with stages introduction, growth, maturity,
decline and withdrawal whose past performance data (recently introduced product of similar
nature) is available could be made use of for forecasting demand for a new product. This
method aims at finding out an old product for which the past performance is available, whose
product life cycle (introduction stage, growth stage, maturity stage, decline, and withdrawal)
similar to the new product for which we want to make the forecast. The past historical data of
the old product could be related to our new product and an analogy could be established,
based on which forecasts for the new product is made. It should also be noted that the old
product based on which the analogy is made, should have been introduced in the market not
in the distant past and there should be relevance in making use of the product life cycle of the
old products historical data, for forecasting new products demand.
Delphi method: This is the most formal of the judgmental methods and has a well defined
procedure that is followed in administering this method. A number of experts are contacted
by post and each expert is given a questionnaire to complete. The replies from these
questionnaires are collected, and analyzed; and summaries are passed on back to the experts.
Each expert is then asked to reconsider their original reply in the light of the summarized
report of the replies from other experts. The anonymity of the reply provided by the experts is
maintained so that undue influences of status of the experts and the pressure of face-to-face
discussions are avoided. This process is repeated a number of times to get a convergence on
the forecast provided by the experts.

QUANTITATIVE METHODS:
The data collected for further analysis could be cross sectional data or time series data. The
data points collected at the same time for different variables, when collated and put together
possibly in a tabular form, is called cross sectional data. The data collected on a particular
variable at regular intervals across a time frame, is called time series data. The example for
cross sectional data could be temperature and rainfall data collected at the various cities in
India (Delhi, Mumbai, Kolkotta, and Chennai) at one point in time (say, 12:00hours on a
particular day). The time series data accumulates data points for a particular variable at
regular intervals in time. Examples for time series data could be gross domestic data, GDP
(for a series of years, say, 1960, 61, ……2019) or consumer price index (for a series of years,
say, 1960, 61, …., 2019).

I. Time series analysis (Projective techniques): depending upon the behavior or the trend
exhibited by the time series data, it could be classified into:
a) Constant series
b) Series with trend
c) Seasonal series
Actual value = underlying pattern + random noise
Error in forecasts Et = Dt - Ft
t = time period
Dt = demand in time period “t”
Ft = forecast for time “t”
Mean error =  Et / n =  (Dt - Ft) / n
Mean squared error =  E t2 / n =  (Dt - Ft)2 / n
Time series analysis bases its forecast on the past history of demand for the product. The past
trend (or) the history of data is analyzed for trends, seasonality or cycling, and the resulting
trend pattern are projected into the future. It should be noted that trend patterns do not hold
for long term, and hence this technique may be used for making short-term forecasts. The
various techniques used for analyzing time-series data are:
a) Simple average
b) Moving average (refer Schroeder).
c) Exponential smoothing.
d) Mathematical models for seasonality and cycling.
Projective forecasting: Time series data gives observations taken at regular intervals. A time
series data can be plotted on a graph, to see any underlying pattern. The general pattern of
time series data are shown below.
1. Constant series: In this case, as shown in Figure 4.3, the time data series data is almost
constant over time. Examples of products with constant demand are daily demand of:
milk, news paper, etc.

demand

Time
Figure 4.3 Constant time series data

2. Series with trend: The time series data either shows a constant uptrend or a constant
down trend over time. The Figure 4.4(a) shows a time series data with uptrend and Figure
4.4(b) shows a time series data with down trend.
Example of time series with uptrend: Gross Domestic Product (GDP), electricity
generation year wise, etc.
Example of time series with downtrend: infant mortality rate (IMR)

demand

Time

Figure 4.4(a) Time series data with up-trend

 demand

Figure 4.4(b) Time series Time

data with down trend

3. Seasonal series: A time series data which fluctuates in a constant pattern over the four
seasons of the year, are called seasonal data. Examples of seasonal data are: ice cream
sales, fertilizer, umbrella. It should be noted that these products are very much seasonal in
nature. The demand for some products varies with almost the same pattern across the four
seasons of the year and the pattern of the demand repeats over years.

demand

Time

Figure 4.5(a) Seasonal time series data with a constant underlying trend

The Figure 4.5(a) shows a seasonal time series with a constant underlying trend. The daily
electricity demand for a period of one quarter year seasonal behavior on a daily basis and
the basic daily demand would be constant trend provided the planning time horizon is
small.
The Figure 4.5 (b) shows a seasonal time series with an underlying uptrend. The demand
data for airlines ticket has been observed to follow seasonal variation with uptrend.
 demand

Time

Figure 4.5(b) Seasonal time series data with an underlying up-trend

4. Cyclical time series data: In a cycling time series data, as shown in Figure 4.6, the series
follows repetition not on every year basis showing a particular behavior for the four seasons,
but it follows a cycle time that is more than 1 year. The cycling may follow the economic
cycle of boom and recession.

demand

Time
Figure 4.6 Cyclical time series data

Projective forecasting is intrinsic, as it examines historical values for demand and uses these
to forecast the future. Projective forecasting ignores any external influences and only looks
at past values of demand to predict future values.
i) Simple averages ii) Moving averages
iii) Exponential smoothing

Simple average
Simple average technique takes the average of the past data, as a forecast value for future. Let
us consider the number of cartons of tasty biscuits distributed by two distributors of this
company over the past one week.
 Day 1 2 3 4 5 6
Distributer 1 120 132 144 112 132 110
Distributer 2 136 116 168 96 118 116

For distributor 1, F7 = ∑ Dt / n = 750 / 6 = 125

For distributor 2, F7 = ∑ Dt / n = 750 / 6 = 125
Though the forecast for the seventh day (1st day of the next week) is same, the individual
demand values are different for the two distributors. Hence, simple average should be used
with care, when use it as a forecasting tool.

Moving average
The data given below indicates the sugar cane production in million tonnes for the past eight
years.
Year 1 2 3 4 5 6 7 8 9
Sugar cane 281 356 348 285 292 342 361 339
Forecast 328 330 308 306 332 347

The formula to be used for finding the forecast by moving average method is given below:
Ft+1 = (Dt + Dt-1 +...........+Dt-k+1)/k
In simple terms, the moving average method considers the past data for a specific number of
periods and calculates the average as forecast for the next immediate period.
The sensitivity of moving averages can be adjusted by altering the value of n. Higher the
value of k, forecast is less responsive.
Note: If k is equal to the number of periods in a cycle, then the forecast completely gets
deseasonalised.

Exponential smoothing
Exponential smoothing technique assigns exponentially decaying weights for the past data
with highest weight for the most recent data and exponentially decaying weights for the
subsequent order data points. The formula for exponential smoothing technique is given
below:
Ft = Ft-1 + α (Dt-1 - Ft-1)

Table 4.1 Exponential Smoothing Technique

α = 0.1 α = 0.3 α = 0.5
Month Price
Forecast Error Forecast Error Forecast Error
1 0.98 0.980 0.000 0.980 0.000 0.980 0.000
2 0.96 0.980 0.020 0.980 0.020 0.980 0.020
3 0.92 0.978 0.058 0.974 0.054 0.970 0.050
 4 0.96 0.972 0.012 0.958 0.002 0.945 0.015
5 0.93 0.971 0.041 0.958 0.028 0.953 0.023
6 0.98 0.967 0.013 0.950 0.030 0.941 0.039
7 0.95 0.968 0.018 0.959 0.009 0.961 0.011
8 0.94 0.966 0.026 0.956 0.016 0.955 0.015
Total Absolute 0.024 0.02 0.022
Mean Deviation
α = 0.03 is preferred because lowest MAD value.

The smoothing constant α is assumed and it takes a value between 0 and 1. The exponential
smoothing of the dataset is carried out for different values of α and the optimal value of the
smoothing constant is obtained. Initial forecast is also given in the problem or else suitably
assumed.
The price in thousands of rupees per quintal of wheat is given below. Make a forecast of
wheat price for the 9th period using exponential smoothing method with α = 0.1, 0.3, and 0.5
Assume initial forecast F1 = 0.98
Month 1 2 3 4 5 6 7 8
Price 0.98 0.96 0.92 0.96 0.93 0.98 0.95 0.94
The Table 4.1 shows the data values, forecast, and forecast error for exponential smoothing
coefficient values of 0.1, 0.3, and 0.5 and the optimal exponential smoothing coefficient
value that minimizes the total forecast error could be selected for estimating the forecast into
the future.
The Figure 4.7 depicts the difference between the moving average method and exponential
smoothing technique. The moving average method uses a fixed weight for the ‘k’ data points
which are taken into account for the moving average calculation. The number of data ‘k’
considered depends upon the period chosen for the calculation of moving average. This
method actually takes into account the ‘k’ immediate previous data for the calculation. The
exponential smoothing technique, in contrast to this, takes into account all the previous data
for calculation giving varying weights for the previous data. It actually assigns highest weight
to the most immediate data and a lesser weight to the older data in an exponentially
decreasing manner and hence the name for the method.
 Exponential smoothing

Moving averages

Weight given to data

Figure 4.7 Comparison of weights in moving average versus exponential smoothing

technique

II. Causal forecasting method:

This technique relates one or more intrinsic or extrinsic variables to the demand for the
product. For example, the demand for, say, Ford Ikon passenger car may be related to:
a) Intrinsic variables such as product quality, service, image of the product etc.
b) Extrinsic variables such as disposal income, GDP, or government policy on excise duty.
It should, however, be noted that causal forecasting techniques are more accurate than time
series analysis. Causal methods of forecasting methods are: Regression, Econometric models,
and Simulation. We will discuss regression analysis in detail. Causal forecasting looks for a
cause or relationship that can be used to forecasts.

Dependent

variable
y = a + bx

gradient, b

Intercept, a

Independent variable, x

Figure 4.8 Linear regression method

 Y = a+bx
X = value of independent variable
Y = Value of dependent variable
a = point at which the line crosses the if axis
b = gradient of the line
Y = a+ b*X
b = {n  xy - x  y} / {n  x 2 - (  x) 2}
a = { y} / n - {b *  x} / n = y - b x
Where, x , y are the mean values of x and y
n = the number of observations

Worked out Example - Causal forecasting method

Problem:
Month 1 2 3 4 5 6 7 8
Maintenance calls 48 39 28 21 14 16 15 13
Regression coefficient: a = 46.107 b = – 4.857
Correlation coefficient, r = – 0.9119
∑x = 36 ∑y = 194 ∑xy = 669 ∑x2 = 204
b = [n ∑xy – ∑x ∑y] / [n ∑x2 – [∑x]**2]
b = (8*669 – 36*194) / (8*204 – 36*36) = – 4.857

a = ∑y/n – b * ∑x = 194/8 + 4.857*36/8 = 46.107

Line of best fit: y = 46.107 – 4.857 (x)
Maintenance calls = 46.107 - 4.857 (month)

The general coefficient of determination is r2, and the coefficient of correlation is r. The
coefficient of correlation takes a value between +1 and –1. A positive +1 value means a
perfect correlation and the regression line will show a perfect uptrend. When the coefficient
correlation r = -1 indicates that there is perfect negative relationship between the variables X
& Y and the regression line will show a perfect down trend. There is no correlation between
the variable X & Y when the correlation coefficient value is equal to zero. The Figure .4.9
clearly depicts the various regression situations.
i) value of r=1 indicates that the two variables have a perfect linear relationship; and the
value of one variable increases as the other variable increases.
ii) a low positive value indicates that there is a weak linear relationship
iii) When r=0, there is no correlation at all between the two variables and they are randomly
dispersed.
iv) low negative value of r, indicates that there is a weak relationship; and that the value of
one variable decreases as the other increases.
v) r = -1 indicates that there is a strong negative relationship between the variables.
 *
* * *
*
* * *
*
* * *
*

Figure 4.9(a) r = +1, strong +ve correlation Figure 4.9(b) r is positive, low value

*
* *
*
* * *
*
* *
* *

Figure 4.9(c) Strong -ve correlation Figure 4.9(d) r is negative, low value

* * *
* * *
* * * *
* * * *
* * *
* * *

Figure 4.9(e) r = 0, no correlation

MODEL FOR SEASONALITY AND TREND
Seasonal index = Seasonal value / Deseasonalised value
In this section, we shall develop a model for data that has both “seasonality” and “trend”
Underlying value (u): is the basic demand that must be adjusted for seasonality and trend.
Trend (t): is the long term direction of a time series. It is typically a steady upward or
downward movement.
Seasonal index (S): is the regular variation around the trend. Typically this shows the
variation in demand over a year.
Noise (N) = is the random noise whose effects cannot be explained.
Then, Demand D = (u+t) S+N
For calculations, it is easier to combine the underlying value and trend into a single figure, T,
the underlying trend. As we do not have knowledge on the noise, N, our forecast is:
F = T * S

Worked out example: Fit a model for seasonality and trend for the following data for 3
years.

Month 1 2 3 4 5 6 7 8 9 10 11 12

Demand 18 28 21 26 24 35 29 34 32 40 36 44

Use simple linear regression for trend calculation.

Answer: A = 17.955 B = 1.969 r = 0.903

Demand = 17.955 + 1.969 (month)
Index
Period Demand Trend
Dt/Tt
1 18 19.923 0.90
2 28 21.892 1.28
3 21 23.860 0.88
4 26 25.829 1.01
5 24 27.797 0.86
6 35 29.766 1.18
7 29 31.734 0.91
8 34 33.703 1.01
 9 32 35.671 0.90
10 40 37.640 1.06
11 38 39.608 0.96
12 44 41.577 1.06
13 43.552

For finding average index, for a particular season, take periods

1,5,9 as one group. Similarly,
2, 6,10 another group
3,7,11 third group
4,8,12 fourth group index
Average seasonal index for first period = {0.90 + 0.86 + 0.90} / 3 = 0.8867
Average seasonal index for second period = {1.28 + 1.18 + 1.06} / 3 = 1.1733
Average seasonal index for third period = {0.88+ 0.91 + 0.96} / 3 = 0.9167
Average seasonal index for fourth period = {1.01 + 1.01 + 1.06} / 3 = 1.0267
Now, let us find Forecasts for period 13 to 17.
F13: F13 = T13 *(0.8867)
Deseasonalised trend = 17.95 + 1.969 x 13 = 43.552
seasonal index = 0.8867 (first period in season)
Forecast = 43.552 x 0.8867 = 38.62

Demand
Deseasonalised

value

Actual demand

Period

Fig. 4.10 Model for seasonal data with an underlying trend

F14: Deseasonalised trend = 17.95 + 1.969 x 14 = 45.521

Seasonal index = 1.1733 ( second period in season)
 Forecast = 45.521 x 1.1733 = 53.41
F15: Deseasonalised trend = 17.95 + 1.969 x 15 = 47.49
Seasonal index = 0.9167 (third period in season)
Forecast = 47.49 x 0.9167 = 43.53
F16: Deseasonalised trend = 17.95 + 1.969 x 15 = 49.459
Seasonal index = 1.0267 (fourth period in season)
Forecast = 49.459 x 1.0267 = 50.78

Conclusion: It may be noted that no single method will be able to give the best forecast
demand for the product (or) organization. The individual (or) panel responsible for forecast
may arrive at an initial forecast. Then, this forecast gets refined by taking into consideration
the subjective opinions given by experts and also by possibly use of brainstorming (or)
discussions with all those concerned with the forecast.

Summary
Forecasting is one of the main functions of the supply chain management, and an important
planning activity. Forecasting has enormous uses in business. Marketing makes use of
forecast to plan the products distribution channel requirement, planning .sales force and
marketing effort; finance makes use of forecasts for planning the working capital
requirements as well as planning for capital investment decisions. Forecasting influences
capacity planning and aggregate planning activities.
Forecasts could be grouped into three categories based on the time horizon considered while
the forecast is made: short-range (less than 1 year), medium-range (1 to 3 years), and long-
range (more than 3 years; generally long range forecast into future which is beyond 5 years).
The forecast could also be classified into the following three categories based on the focus of
the forecast and the outcome: Product demand forecasts, Technology forecasts, and
Environment forecasts.
Forecasting techniques can be qualitative or quantitative. Qualitative forecasting methods are:
Judgmental forecasting, Personal insight, Panel Consensus, Market survey, and Historical
analogy. Quantitative forecasting techniques are: projective techniques (Simple averages,
Moving averages, Exponential smoothing, and Model for seasonality and trend; and causal
forecasting (linear regression, multiple regression, etc.).
It may be noted that no single method will be able to give the best forecast demand for the
product (or) organization; in real life business scenarios more than one technique is used for
forecasting and a consensus forecasts is arrived at taking into account other business realities
as well.
End Chapter Questions
Short answers:
1. Distinguish between forecasting and planning
2. What are the different types of forecasts?
3. What are the different uses of forecasting in the various functional areas of an
organization?
4. Classify the type of forecast based on the time horizon considered for forecasting
5. What are the different areas in which product demand forecasts are used?
6. List the qualitative and quantitative techniques used for making a forecast of customer
demand.
7. Explain personal insight as a forecasting method.
8. What is panel consensus? Give a note on this method of forecasting.
9. Explain market survey as a method of forecasting.
10. Explain historical analogy, in short, as a forecasting tool.
11. What is moving average method?
12. Explain exponential smoothing technique, in short.

Essay questions:
13. Briefly explain the qualitative methods of forecasting. Discuss one of the techniques
in detail
14. List and explain the different methods for forecasting using time series data?
15. Explain the four techniques of projective forecasting using time series data?
16. Explain the basis of casual forecasting model in detail
Problems for practice:
Problem 1: The month wise price (in US $ per tonne) for cold rolled steel coil from July 2013
to Dec 2013 in given below.
Month 1 2 3 4 5 6
Price 713 730 733 744 739 742
Make a forecast for the 7th month by using simple average method.

2. Problem for moving average method.

Year Rice Qty Year Rice Qty
(Mn tones) (Mn tones)
1 27.56 7 63.83
2 34.58 8 74.29
3 30.50 9 76.98
4 42.22 10 84.98
5 48.74 11 91.79
6 53.63 12 95.98

Use moving average method (Period, K=3) for making a forecast for the rice production for
the year 13 & 14.

3. Problem for exponential smoothing method:

Year Groundnut Forecast Year Groundnut Forecast
(Mn Tonnes) (Mn Tonnes)
2001-02 7.03 2007-08 9.18
2002-03 4.12 2008-09 7.17
2003-04 8.13 2009-10 5.43
2004-05 6.77 2010-11 8.27
2005-06 7.99 2011-12 6.96
2006-07 4.86 2012-13 4.75

Make a forecast for the year 2013-14 using exponential smoothing technique. Use α = 0.1 to
05 with 0.1 as increment. Assume F1 = 7.03.
4. Problem for exponential smoothing method:

Year Rapseed Year Rapseed

Mustard Mustard
(Mn tones) (Mn tones)
1 5.08 7 5.83
2 3.88 8 7.2
3 6.29 9 6.61
4 7.59 10 8.18
5 8.13 11 6.6
6 7.44 12 7.82

Make a forecast for the year 13 using exponential technique with α = 0.1, 0.3, 0.5, 0.7.
Assume initial forecast F1 = 5.08

5. Wheat production in million tonnes for 12 years has been given below. Make a forecast
for the 13th year. Use simple linear regression.
Year Wheat Year Wheat
(Mn tones) (Mn tones)
1 8.76 7 47.05
2 11.00 8 55.14
3 10.40 9 62.10
4 23.83 10 69.68
5 28.84 11 69.35
6 36.31 12 86.87

6. Simple linear regression - Infant mortality (per 1000 births)

Year Infant Mortality
Rate (IMR)
1 140
2 114
3 97
4 80
5 74
6 68
7 58
8 47

Make a forecast for the year 9.

7. The year wise gross domestic product in trillion rupees is given below. Use simple linear
regression method for finding a forecast for the 9th year.

Year 1 2 3 4 5 6 7 8

GDP (in 36.9 42.9 49.9 56.3 64.8 78.0 89.7 100.2
trillion
rupees
----------------------------------------------------------------------------------------------------------------
Mini Case 4.1: Dabur India
Dabur has been started by the Burman family in 1884 and has grown over 135 years of
experience. Dabur has successfully transformed from being a family owned company to a
professionally managed enterprise. Dabur India Limited is one of the leading FMCG
companies in India. The company has earned total sales revenue Rs. 8829.22 crores and
profit after tax of Rs. 1446.25 crores. The company has developed a legacy of quality and
experience over a period of 135 years. Dabur is one of the trusted bonds in India offering
Ayurvedic and Natural Health Care products. The company has over 250 Herbal / Ayurvedic
products. The company’s top brands are: Dabur (natural health care), Vatika (premium
personal care), Hajmola (digestives), Real (fruit juices and beverages), and Fem (fairness
bleaches and skin care). Dabur operates through 20 world class manufacturing facilities.
The company operates in the following consumer product categories: Hair Care, Oral Care,
Health Care, Skin Care, Home Care, and Foods. The company has a strong distribution
network of 6.7 million retail outlets with high penetration into both rural and urban markets
in India and the company reaches 1.1 million retail outlets directly. Dabur products have a
major global presence as well and its products are available in over 120 countries across the
globe. Dabur products are highly popular in Middle East, SAARC countries, Africa, USA,
Europe and Russia. Dabur has about 28% of its revenue from the overseas markets.
The company has initiated an innovative distribution channel management approach
christened ‘Buniyaad’. The company makes use of information technology in order to track
and improve sales and distribution performance. The sales & distribution process has been
automated through the use of information technology.
Questions:
1. What is the product portfolio of Dabur India?
2. Describe & discuss the distribution network capabilities of Dabur India.
3. What are the initiatives taken by Dabur in order to improve the distribution channel
performance?
4. What is the importance of product demand forecasting in a company like Daur India?
5. How do you plan to collect data and what tools will you use for demand forecasting?
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 4.2: Cipla
Cipla is a global pharmaceutical company with an objective of providing quality & affordable
medicine to the patients. The company believes in continuous innovation through R&D.
Cipla with over 1500 products, has a presence in 150 countries across the globe. The
company has 25,000 plus employees.
The total income of the company was Rs. 12,951.53 crores and profit after tax was Rs
1,888.41 crores for the year 2018-19. Cipla was started in the year 1935 by its founder
Dr.K.A.Hamied. This company was started to make India self sufficient in healthcare. Cipla
has manufacturing facilities at Goa (8 units), Bengaluru, Baddi, Indore, Kurkumbh,
Patalganga, and Sikkim. Cipla has over 44 state-of-the-art manufacturing facilities for API
and formulations.
The company’s product range comprises of: Active Pharmaceutical Ingredients 144 (32 in
pipeline), Formulations and veterinary medicines. Cipla has made strategic alliances for
product development, registration, and distribution of its products. The company’s sales
revenue comprises of a significant portion (53%) from overseas sales. The company in an
attempt to meet the increasing demand for its products, continuously expand and modernize
its manufacturing plants and research facilities. Cipla ensures product quality through its
quality control (QC) team.
The company has a strong distribution network with more than 3,000 stockists, reaching
7,00,000 chemists. The marketing and distribution activities are being carried out by 10,000
colleagues of the company.
Cipla ensures Health, Safety, and Environment measures in its operations. The CSR activities
include support provided to terminally ill patients.
Questions:
1. List out the products offered by Cipla in its pharmaceuticals supply chain in an
attempt to make India self sufficient in healthcare.
2. Delineate on the distribution network capabilities of Cipla.
3. Explain the need for forecasting healthcare requirements for the nation and Cipla’s
contribution.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 4.3: The Hindu
The Hindu was started in 1878 as a weekly, became a daily in the year 1889. Since then the
circulation of this daily news paper has been growing to 15,58,379 copies and a readership of
about 22.58 lakhs. The Hindu with its independent editorial standard, reliable, and balanced
presentation of the news has earned serious attention and regard for this daily from its
readers.
The Hindu has modern facilities for news gathering, page composition, and printing. The
Hindu is printed in seventeen centres: Chennai, Coimbatore, Bengaluru, Hyderabad, Madurai,
Noida, Visakhapatnam, Thiruvanathapuram, Kochi, Vijayawada, Mangalore, Tiruchirapalli,
Kolkata, Hubli, Mohali, Allahabad, and Kozhikode. The printing centres are connected with
high speed data lines for news transmission.
The Hindu brings out many supplements along with the daily.. Apart from the daily English
news paper , the firm publishes:
 The Hindu Tamil (a Tamil daily)
 The Hindu Business Line (Business Daily)
 Sportstar (Fortnightly Sports Magazine)
 Frontline (Fortnightly Magazine)
The publisher also prints & issues the following surveys, on an annual basis:
 Survey of Indian Industry,
 Survey of Indian Agriculture,
 Survey of the Environment.
Questions:
1. What are the products published and distributed by ‘The Hindu’?
2. Discuss the strategic locations of the printing centres across India for ‘The Hindu’
3. Delineate on the importance of the demand for the daily, as the product returns
percentage is considered high in this industry.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 4.4: Fortis Healthcare
Fortis Healthcare is leading integrated healthcare delivery service provider in India, Dubai,
and Sri Lanka with 43 healthcare facilities (including projects under development),
approximately 9000 potential beds and over 400 diagnostics centres. The total revenue of the
company was Rs. 4700.54 crores and profit after tax was Rs. (987.58) crores. Fortis
Healthcare facilities are located at: Delhi – six facilities, Gurgaon, Noida, Faridabad, Mohali,
Ludhiana, Amristar, Kangra, Jaipur, and Dehradun.
Questions:
1. Discuss about the location decisions of the health care service delivery system of
Fortis.
2. How will you carry out demand forecasting for Fortis Health Care? Explain data
collection and tools to be used for analysis.
----------------------------------------------------------------------------------------------------------------
05. LOGISTICS NETWORK: PLANNING AND DESIGN

Learning objectives:
1. Understand logistics network planning decisions at the strategic, tactical, and
operational levels.
2. Learn the role of intermediaries in the distribution network.
3. Know the main considerations that should be taken into account while planning the
logistics network.
4. Understand logistics tradeoff cost versus service
5. Know the distribution network design options.
6. Learn the steps involved in distribution network planning
7. Know distribution network design tools

Logistics network comprises of suppliers, raw material warehouses, manufacturing facility,

finished goods warehouse(s), and distribution centers. The logistics network is concerned not
only with the physical facilities listed above, but also with the three flows involved in any
supply chain. Especially, the material flow in the form of raw material, work-in-progress,
and finished goods need to be considered carefully. The other two flows in the supply chain
shall be discussed in later chapters.

Logistics network design

The major decisions to be made with respect to logistics network are:
 Learn about the number of manufacturing plant facility, their capacity, and location
 Understand the different tiers of suppliers in the supply chain.
 Determine the number of raw material warehouses, their capacity, and location
 Identify the number of finished goods warehouse (s), capacity, and location.
 Learn the importance of distribution centers in the modern supply chain.

The network of a typical supply chain is shown in Figure 5.1. The supply chain network has
one manufacturing facility supported by two raw martial warehouses (WHI & WH2). The
first raw material warehouse (WH1) handles materials from supplies S11 & S12 in tier 1. The
raw material warehouse WH2 supports the tier 1 suppliers S13 & S14. The tier 2 has seven
suppliers. The supplier S21 supplies materials to tier 1 supplier S11. The supplier S22 supplies
input material to S12. Similarly, S13 is serviced by tier 2 supplier S23 & S24; the supplier S14 is
serviced by S25, S26, S27.
The distribution network comprises of two dealer / distributors and one distribution center.
The dealers D1 & D2 are part of tier 1 in the distribution chain. The distributor D1 supplies
to tier2 retailers R1, R2, and R3 and the distributor D2 supplies to retailers R5, R6, and R7. The
distribution center DC1 supplies finished products to retailer R4 and also sends finished
products directly to large customers, as shown in the network.
 Customer

R1
S21 S11

D1 R2
S22 S12
WH1

R3
S23 Plant
S13

S24
R4
WH2 FGWH

S25 DC1

S26 S14 R5

D2
S27 R6

R7

Figure 5.1 Typical supply chain network

The logistics network design should also take into account the various aspects of
transportation. The considerations with respect to transportation are the modes of transport,
type of vehicles used, etc. Equally important is the flow of information upstream and
downstream in the logistics / supply chain network. The strategic, tactical and operational
planning aspect of the supply chain network has already been covered under ‘supply chain
strategy’ in chapter 3.

Distribution logistics
The main attributes to be considered while attempting to make a channel design and select
channel members are:
 Customers
 Products
  Intermediaries characteristics
 Competitors
 Facilities
 Environmental factors

Producer Consumer

Producer Retailer Consumer

Producer Wholesaler Retailer Consumer

Producer Distributor Wholesaler Retailer Consumer

Figure 5.4 Channel structures for consumer markets

The different channel alternatives for a consumer market are given in Figure 5.4. The
distribution network logistics planning might involve not only the identification of channel
intermediaries like wholesalers distributors and retailers but it also involves planning for
warehouses and distribution centers. The location, capacity and the number of such facilities
are very crucial in order to build an efficient and effective distribution network. The main
function of logistics network is to transport, store and deliver the products to the customers.

The distribution network has a direct bearing on the logistics cost and the customer service
level or customer satisfaction. In fact, there will be a tradeoff between logistics cost and
customer service level; higher the service level, higher will be the logistics cost. The
logistics network could be configured to be cost efficient or it could also be designed to be
more responsive to the requirements of customer and it could be more customer oriented.
The choice made regarding the logistics configuration would directly impact the total
logistics cost which eventually impact the performance of the supply chain as a whole. The
successful companies have also had an efficient and effective logistics and distribution
network. The best known examples are: Wal-Mart, Dell computers, P&G, Hindustan
Unilever, and Maruti Suzuki.
Sunil Chopra and Peter Meindl (2007) have identified the elements of customer service and
the supply chain costs, as given below:

Customer Service Supply chain costs

Delivery time Inventory
Product range Transportation
Product availability Facilities & material handling
Customer service Information Infrastructure
Demand visibility
Product returns

A detailed analysis of the logistics network could be carried out by considering a tradeoff
between total logistics cost and service level. The service level offered could be determined
by the performance measure like fill rate, stock out ratio and complete orders filled (Bower
Sox et al, 2002). Optimization techniques, heuristics, and simulation could be employed for
arriving at an optimal network. When heuristic methods are used, we arrive at a ‘good’
solution, if not the best or optimal solution. The heuristics techniques provide a good or near
optional solution to the problem on hand.
Similarly facilities location in the logistics network could be arrived at using location
decision methods like: plant location BEP (breakeven point) analysis, point rating method,
center of gravity method, and transportation model.

Factors influencing logistics network design

The main two factors influencing the logistics network design are logistics cost and supply
chain responsiveness. The supply chain responsiveness is its ability to meet the expectations
of customers with regard to: delivery lead time, product range, product availability, order
visibility and product returnability. The logistics cost consists of inventory cost,
transportation cost, storage and handling costs, etc.

Customer service
The customer service, as mentioned earlier, depends on lead time, product range, product
availability, order visibility, and product returnability. Let us discuss each component of
customer service briefly.

Delivery lead time: The delivery lead time or response time is the time taken from the day
order was placed and the time at which the customer receives the product ordered. The
delivery time gets shortened and the ability of the supply chain to respond to customer
expectations gets enhanced as we increase the number of facilities in the logistics network.
The delivery time could be reduced by making use of the power of information technology
and computers in the activities like order placement, order processing etc. Implementation of
enterprise resource planning (ERP) in the firm could speed up the order processing and
reduce delivery time. The graph shown in Figure 5.5 clearly shows the relationship between
number of facilities and delivery time.

Delivery
time

Number of facilities

Figure 5.5 Delivery time versus number of facilities

Product range and availability:

Providing the customers with a variety or range of products and product availability enhances
customer satisfaction. Product range or product variety could be improved by leveraging on
the use of technology in new product development, and ability to customize on large scale.
This could be achieved by implementation of the concept called ‘mass customization. The
concept of mass customization has already been covered in chapter 02.
Product availability could be achieved either by having safety stock or by having buffer
capacity in the plant. However, both the options adds up cost; the first option will increase
the working capital and the second option will require more long term investment in plant
facilities . Hence, a product decision is required in terms of either keeping higher inventory
level or maintaining buffer stock in the plant capacity.
Product availability is the probability that the product is in stock when a customer order is
received. Measures like fill rate, stock-out ratio, and complete orders shipped are used to
measure product availability. Product availability is an important performance criterion in the
supply chain with respect to customer service. The customer may bear with the unavailability
of the product occasionally but definitely not very frequently. The firm may have to face the
loss of sales, loss of customers’ goodwill, and / or loss of customer altogether. Loss of
customer being the most severe outcome and has greater repercussions on the financial
performance of the firm. Good customer experience is the ease with which customers can
place an order for the products and receive it in a seamless manner.

Time to market:
Time to market is the time taken for introducing new products into the market. Firms will
have to be responsive to the needs and wants of the customers. Introducing newer products to
meet customer needs is an essential feature of any successful company. In this respect time to
market is one of the crucial measures of performance and should be as low as possible. Here,
comes in handy the product development technologies like rapid prototyping and concurrent
engineering.

Order visibility:
Order visibility is the ability of the system to provide customers with information regarding
the order status. The customers should be able to continuously monitor and track the order
status. Single point contact and accurate order status information are important features of
customer order management which will reflect on the customer service provided. ERP
(Enterprise Resource Planning) platform when implemented in an organization helps in
giving the correct order information and also results in better order management.

Product returnability:
Product returnability is to do with the facility provided for customers to return unsatisfactory
and/or defective merchandise / products. There should be a proper system for returns
management. Reverse logistics which takes care of product returns as one of its function, is
discussed in a later chapter.

Total Logistics Cost

The major cost components of total logistics cost are: inventory cost, transportation cost, and
facilities cost. We should discuss the components of logistics cost individually. The Figure
5.6 indicates the pattern of total logistics cost behaviour with respect to number of facilities.
Hence, it is important to select an optional number of facilities in order to minimize total
logistics cost. The total logistics cost decreases initially as we increase the number of
facilities, but as we increase the number of facilities beyond a certain level, the total logistics
costs starts rising. Hence, we increase the number of facilities as long as the criterion of
minimum total logistics cost is satisfied. It may be noted that increase in the number of
facilities offers customers with a higher service level.

Inventory cost:
Inventory cost increases with larger safety stock. The supply chain in order to keep the total
cost low, implements lean manufacturing approach. In such cases, the supply chain would
always attempt to keep the inventory low. This would increase the probability of product
non-availability and stock-out. Hence, an optimum level of inventory should be maintained
with an objective of not to allow stock-out situation and at the same time keep inventory costs
low.

Transportations cost:
The mode of transportation is the main consideration in order to minimize transportation cost.
Transportation cost could be kept low by using hi-tech heavy duty trucks for long haul
operation. The last mile reach in the distribution end could be catered to by smaller capacity
trucks. In the inbound / out logistics last mile reach could be served through ‘milk runs’ by
LTL (less than truckload) operation.

Total
logistics cost

Optimal number of
facilities

Number of facilities

Figure 5.6: Pattern of total logistics cost behavior

Facilities cost:
The facilities cost in the logistics network comprises of the cost of warehouses and
distribution centers. The facilities cost comprises of administrative cost, labour cot, material
handling cost, cost of lighting, ventilation and air conditioning. The cost of facilities
increases as the number of facilities is increased. When the number of facilities is decreased,
the capacity of each facility needs to go up. This would result in economies of scale.
However, the level of service offered would come down as we decrease the number of
facilities in the logistics network with its geographical distribution.
DISTRIBUTION NETWORK - DESIGN OPTIONS

Direct shipping: the benefits of direct shipping, from the manufacturer to the customers, are
more in case of high value and low demand items. Examples: mainframe computers and
computer service, heavy duty printing machinery, special purpose machines, etc.
Direct shipping provides scope for postponement and inventory at the manufacturers’ works
could be kept in generic form and the product could be assembled / customized to the
requirement of individual customers on order placement. Direct shipping avoids
warehousing and associated material handling. However, response time tends to be longer in
direct shipping since the delivery time comprises of assembly time and transportation time,
after the receipt of the purchase order. The Figure 5.7 indicates a supply chain configuration
wherein there is direct shipping to customer with retailer facilitation. In this case, retailer acts
as a facilitator in receiving order from customer, and carries out other such activities in
completing the customer order. However, the product consignment is shipped directly to
customer, of course, with due involvement of the retailer.

Manufacturer

Retaile
r

Customer 1 Customer 2 Customer 3

Figure 5.7 Direct shipping – with retailer facilitation

Direct shipping with in-transit merge at 3PL’s facilities:

Companies like Dell Computers have effectively implemented this type of distribution and
channel configuration. Dell has in fact used the power of information technology to integrate
the logistics provider and the supplier network with its manufacturing operations and has
developed a supply chain network that is efficient (lean) and flexible enough to provide
personalized computers to individual customers. Dell is an example of successful
implementation of mass customization and the concept of postponement. A simple pictorial
representation of the distribution system enabled by 3PL and deployment of the power of
information technology is shown in Figure 5.8.
 Manufacturing
Supplier 1 Supplier 2
plant

Warehouse Firms’ order

management
3PL
system
Inventory

Customer 1 Customer 2 Customer 3

Figure 5.8 Direct shipping with in-transit merge at 3PL’s facilities

Distribution to retailers – through company owned facilities:

Companies like FACT (INDIA) distribute the fertilizers through their company owned
regional warehouses to the distributors / retailers who in turn sell it to the final customer
(farmers). Indian Oil and other petroleum companies in India also adopt a similar approach in
their distribution operations. The Figure 5.9 indicates an abstracted logistics network for this
type of distribution system.

Manufacturing
plant/ Refinery

Regional
RW1 RW2
warehouses/Depots

R1 R2 R3 R4 R5 R6 Retailers

Figure 5.9 Distribution to retailers – through company owned facilities

Distribution through dealer network
The automobiles sectors like two wheelers, passenger cars, bus / truck chassis, etc., are some
of the products which are distributed through a strong dealer network. The dealers should
also have enough facilities and trained personnel to take care of warranty period maintenance
and other after sales services including customer paid services during the useful life of the
vehicle. This type of distribution channel network arrangement is shown in Figure 5.10a.

Manufacturing facility

D1 D2 D3 Distributors

Customers

Figure 5.10a Distribution through dealer network with direct supply (Examples: automobile
like passenger car, trucks/ bus chassis etc.).

The distribution network in Figure 5.10b, supply to dealers is made from regional warehouses
also apart from direct supply from plant facility.

Plant
Storage
yard

Regional warehouse

Distributors

D1 D2 D3 Customers

Figure 5.10b Distribution through dealer network with direct supply and through regional
warehouse
In transit merge by carrier
In-transit-merge by carrier is shown pictorially in Figure 5.11. The carrier receives products
from more than one source like plant / warehouse, and/or supplier works. The different items
so received and meant for a particular customer are identified and put together in preplanned
points in the distribution network (warehouse / distribution center) and delivered as a single
consignment to the customer. In fact, the customer will not know that the different items
constituting the consignment meant for him / her have come from various sources. The item
code, origin, and also the merge locations are decided centrally and computerized information
passed on to the various facilities and the logistics carrier for proper and smoother execution
of the merge-in-transit of the product / consignment customer wise.

Plant 1 Plant 2 Plant 3 Plant 4

Warehouse Retailer

Customer 1
Customer 2 Customer 3

Figure 5.11 In-transit-merge by carrier

Distributor storage with carrier delivery:

The distributor storage with carrier delivery is shown in Figure 5.12 and the products like
cement and fertilizers are distributed to retailers using this channel strategy. In the case of
cement, the storage time will have to be shorter because of the inherent product property. The
cement could not be stored more a short period as otherwise it will become useless.
 Plant 1 Plant 2 Plant 3

Warehouse Distributor storage

(Dealer owned)

Customer 1 Customer 2 Customer 3

Figure 5.12 Distributor storage with carrier delivery

In this type of distribution, each of the dealers would maintain their own smaller size
warehouse for storage of goods. On receipt of customer order, the dealer / distributor will
make deliveries of goods against each order.

Distributors’ storage with last mile delivery:

Distributor storage with last mile delivery is being adopted in case of products like biscuits,
chocolates, tea, coffee, etc. Companies like Britannia, ITC, HUL, and Tata Global Beverages
adopt this strategy.

Plant 1 Plant 2 Plant 3 Plant 4

Distributor / Retailer
WH1 WH2
Warehouse

Customers
C1 C2 C3 C4 C5 C6

Figure 5.13 Distributor storage with last mile delivery

The dealer / distributor maintain the warehouse and distribute the products to retailers and
customers, in the milk-run mode of last mile delivery.

TRENDS IN DISTRIBUTION NETWORK

There are some clear trends in the strategic positioning of facilities and also logistics
operations involving the different facilities in the logistics network.
1. Strategic positioning of inventory in the distribution channel is very critical in terms of
physical and financial performance of the firm and the supply chain. In case of fast moving
consumer goods, the products inventory is generally located near the market in ‘market-
facing’ logistics facilities.
2. Dis-intermediation is being practiced by many firms in their supply chains, and involves
direct shipping of the products to the customers by the manufacturer. This allows
centralization of inventory with the manufacturer and this type of distribution works well for
medium / high value and low / medium demand items. In fact, companies like Dell
Computers have adopted the strategy and achieved mass customization by using online
ordering efficiently integrating the flow of materials in the supply chain by synchronizing the
logistics operations through third party logistics service providers.
3. Cross-docking: there is a clear change from the traditional role of warehouses being used
for storage. Now the trend is towards using warehouse to facilitate the flow of materials
through logistics network using cross-docking approach.
4. Third party Logistics 3PL: The use of third party logistics operators is gaining momentum
and more of distribution activities are being outsourced to 3PL service providers. The role of
third party logistics providers is very significant in the supply chain operations of leading
firms like Dell Computers, HUL, ITC, and others.

STEPS INVOLVED IN DISTRIBUTION NETWORK PLANNING

The following are the major steps involved carrying out the distribution network planning. A
careful approach in getting the necessary data and detailed analysis is needed for better
distribution network planning results.
1. Assess / evaluate the current network.
2. Collect data necessary for the network design.
3. Develop network design alternatives: This necessitates giving due consideration to the
number of tiers in the channel, product flows, market clusters (geographically or
otherwise). Further, the logistics network planning activity needs to take into account
logistics methods and consideration of techniques like merge-in-transit, cross-
docking, and supply chain flow optimization by proper routing, etc.
4. Develop network model for the alternate designs.
5. Choose a network planning tool for analysis. Generally used tools are:
 Optimization model
 Heuristics model
  Simulation model
6. Evaluate the alternate network designs using the decision criteria.
7. Select a network design for implementation after giving due considerations to the
practical limitations.
8. Implement the new / revised logistics network design.

Distribution network design tools

The main tools used for planning and design of logistics networks are: mapping,
optimization, heuristics and simulation.

Mapping – the logistics network

Mapping allows you to visualize the supply chain and the solutions. Mapping allows you to
understand the scenarios better and arrive at the solutions in a facilitated manner. Color
coding, sizing and utilization of indicators allow for detailed analysis of the logistics
network. The development of computer, visual tools and geographic information system
(GIS) allows ‘geo-mapping’ of the logistics network. The geographical location of
warehouses and distribution centers along with data on allocation of customers could be
represented visually through ‘geo-mapping’. The effects of altering the location and the
number of facilities could be better analyzed with the help of ‘geo-mapping’ technologies.
Customer clusters could be identified in the ‘geo-mapping’ platform and the distribution
centers could be located in the cluster center.

Figure 5.14 Logistics network planning – warehouse / distribution centre

The Figure 5.14 clearly depicts the customer clusters and shows how we can locate
warehouses / distribution centers taking into account the geographical dispersion of
customers.

Data for network design

The data on the various components comprising logistics cost needs to be collected in order
to develop a realistic logistics network mapping. The data to be collected are transportation
cost, facilities cost, and inventory cost. The intermediaries and their responsibilities with
respect to logistics network need to be clearly defined keeping in mind the cost of logistics.
A precise logistics network mapping, on successful development allows for ‘what if’
analysis and permits visualizing the various logistics network scenarios and the associated
logistics cost.

Planning and design tools – optimization and simulation.

The logistics network planning and design is carried out using the following techniques or
tools.
1. Optimization Techniques: the mathematical optimization techniques used in network
design are:
i. Optimization models (linear Programming, integer programming, dynamic
programming, etc.)
ii. Heuristics: find “good” solutions, not necessarily optimal
2. Simulation models: provide a mechanism to evaluate specified design alternatives created
by the designer.

OPTIMIZATION MODELS – NETWORK PLANNING

Optimization models are based on precise mathematical modeling of the logistics network.
The simplest form of optimization model for inventory costs is the economic order quantity
(EOQ) model. The different optimization techniques that could be made use of for analyzing
the logistics network are: linear programming, integer programming, and dynamic
programming.
The advantages of using optimization techniques are:
 A guaranteed best or optimal solution for a given set of data input describing the
logistics network.
 Easiness with which even complex problems could be handled using optimization
models. In fact, many readymade software programs are available for obtaining the
solutions for most of the optimization techniques.
 Analyzing the various alternate network configurations is easier when optimization
techniques are used; and carrying out ‘what-if’ or sensitivity analysis is facilitated by
optimization modeling.
  The benefits of optimization could be significant because of the assured ‘optimal’
solution. However, cost of optimization model development and software programs
used could be significant.

A very often used optimization technique for analysis of logistics network is a linear
programming model. Linear programming could easily be used for modeling your logistics
network because it involves a certain number of supply sources (manufacturing units) and
destinations (demand centers). The supply sources or the manufacturing units have
limitations of supply or supply constraints. The customers or demand centers have minimum
demand requirements or demand constraints. The decision variables are the amount of
products to be shipped from the various supply sources (manufacturing units) to the different
destinations (demand centers). The input parameters which are to be provided into the model
are the number of sources and their capacities, number of destinations and their demand
requirements, and the unit costs of transportation between the different sources and
destinations. The objective of the model is to minimize the total transportation cost. A sample
problem involving transportation of products from manufacturing units to warehouses or
distribution centers is given below for demonstration purposes.

Problem 1: Hypothetical Concretes Company (HCC) has orders for 80 tons of cement bricks
at three demand locations as follows: Tuticorin -- 30 tons, Chennai -- 40 tons, and Cochin --
10 tons. The company has two plants (Kallakudi and Mathur), each of which can produce 50
tons per week. Delivery cost in thousands of rupees per ton from each plant to each demand
location is given below:
Tuticorin Chennai Cochin Plant capacity (in tons)
Kallakudi 0.24 0.32 0.40 50
Mathur 0.28 0.40 0.42 50
Demand (in tons) 30 40 10
How should the shipments be made to fill the above orders?

Solution:
HCC transportation problem optimum solution, in terms of the quantity in tons to be
transported from the two plants to the three demand locations has been obtained as follows.
Since the transportation problem is not balanced (total plant capacity is not equal to the total
demand). A dummy demand location with a demand capacity equal to the difference between
the source capacity and the demand capacity 20 tons (100 minus 80) is added to make the
transportation problem balanced. The optimum solution obtained by using Tora Software
with initial solution by Vogel’s Approximation, is given below:
 Tuticorin Chennai Cochin Dummy
destination
Kallakudi 10 40 0 0
Mathur 20 0 10 20
The total cost of transportation is Rs. 25,000/-
(Which is equal to 10 * 240 + 20 * 280 + 40 * 320 + 10 * 420)

HEURISTICS – NETWORK PLANNING

Heuristics models help in solving very complicated problems by providing a ‘rule of thumb’
approach. The heuristics model generally provides you a good solution and not necessarily
the optimal solution.
A widely used heuristics application in logistics management is the vehicle routing problem
which is an extension of the traveling salesman problem. The additional requirements of the
vehicle routing problem over the traveling salesman problem, is the inclusion of different
service requirements at each node and different capacities of the vehicles in the fleet. The
basic principle of the vehicle routing problem, however, is same as that of traveling salesman
problem i.e. to minimize the distance traveled and touch all the nodes. The detailed
discussion on the vehicle routing problem is considered beyond the scope of this book and
interested readers may refer any good book on ‘operations research’ for further study.

SIMULATION MODEL – NETWORK PLANNING

Simulation model attempts to develop a computerized presentation of the logistics network
for the purpose of analyzing the cost structures and performance of the logistics network
taking into account the different constraints or limitations of the envisaged logistics network.
The logistics network parameters could be changed and a ‘what-if’ analysis on the logistics
network design could be carried out. Simulation, generally, leads to a good solution if not the
best or optimal solution. In fact simulation technique generates solutions for varying
conditions of the network and the performance of the network could be studied at various
input conditions. The simulation modeling requires extensive data collection with respect to
inventory, transportation, and facilities and material handling.

Summary
The logistics network consists of facilities, suppliers, manufacturing centers, warehouse/
distribution Centers, and Customers. The raw materials, work-in-progress, finished products;
and associated information flow between the different facilities in the logistics network are to
be considered while designing the logistics network. The major decisions to be made with
respect logistics network design are: number of warehouses / distribution centers; location of
each warehouse / distribution centers; size of each warehouse; space for products in each
warehouse; and which products customers will receive from which warehouse. The logistics
network planning also should make decisions with respect to the customers’ coverage by
each of the facilities like warehouse or the distribution center.
The logistics network design is a tradeoff between the total logistics cost and the customer
service level. The logistics network design eventually attempts to find a logistics network
configuration that will minimize the total logistics system cost and at the same time provide a
certain required level of service. The overall logistics planning in a multi-plant supply chain
environment might require not only manufacturing facilities planning; but also planning
facilities required in the supplier network as well as in the distribution network. The number,
capacity and the location of the manufacturing facilities will depend on considerations like
market location, raw material supply, product attributes, etc.
Channel intermediaries are those member firms in the supply chain that facilitate the
distribution of goods to the ultimate customer; and reduce the complexity of the distribution
network. The main attributes to be considered while attempting to select a channel design and
channel members are: Customer characteristics, Product characteristics, Intermediary
characteristics, Competitor characteristics, Company characteristics, and Environmental
characteristics.
The main decision variables in the logistics network planning are: number of tiers, number of
facilities in each tier. The different tiers in the supply / distribution network may be:
plants/vendors, regional warehouses, field warehouses and customers or demand centers. The
decision in a logistics network planning problem is a tradeoff between the total logistics cost
and the service level. The total logistics cost consists of inventory cost, transportation cost
and facilities cost. Customer service comprises of components such as: Response time,
Product variety, Product availability, Customer experience, Order visibility, and
Returnability.
The major supply chain network designs are: 1. Direct shipping, 2. Direct shipping with in-
transit merge at 3PL’s facilities, 3. Distribution to retailers – through company owned
facilities, 4. Distribution through dealer network, 5. In transit merge by carrier, 6. Distributor
storage with carrier delivery, 7. Distributors’ storage with last mile delivery
The trends in the distribution network are: strategic positioning of inventory in the
distribution channel, dis-intermediation, cross-docking, and third party logistics.
The optimized distribution network planning and design involves data collection relevant to
the distribution network design. It involves use of distribution network mapping techniques
and use of optimization, heuristics, and simulation models.
End Chapter Questions
1. What are the major elements that constitute a logistics network?
2. List the major decisions to be made with respect to logistics network design.
3. Describe the key issues that are to be taken care of while designing the logistics
network.
4. What are all the factors to be considered in planning for inbound logistics?
5. What are the other factors taken into account in supplier network design?
6. Explain briefly the role of intermediaries in the distribution network.
7. Explain as to how intermediaries help in reducing the complexity in the distribution
network.
8. List the different types of intermediaries who facilitate the distribution logistics
operation.
9. What are the main attributes to be considered while attempting to select the channel
design and channel members?
10. Explain the categories of distribution channel in marketing parlance with examples.
11. List the elements of customer service and supply chain costs that are influenced by
network design.
12. What are the components of logistics cost?
13. The service level offered by the distribution network depends upon what factors?
14. Define response time in a supply chain.
15. Explain the concept of order visibility and returnability.
16. How does the total logistics cost vary with number of facilities?
17. What are the advantages of direct shipping to customer? What is the disadvantage?
18. What are the recent trends followed in logistics operations?
19. List the various tools used for planning and design of logistics network.
20. Explain briefly how ‘mapping’ could be used in logistics network.
21. What are the detailed data required for distribution network planning and design?
22. List the optimization techniques used in network design.
23. Enumerate the advantages of using the optimization techniques.

Essay questions
1. What are the basic considerations to be taken into account in network planning?
2. Explain briefly the cost components constituting the total logistics cost.
3. What are the steps involved in network planning?
4. Explain the use of LP as an optimization technique for analysis of logistics network.
5. Explain how the vehicle routing problem could be solved, using heuristics.
6. What is the role of simulation model in network planning?
----------------------------------------------------------------------------------------------------------------
Mini Case 5.1: Rashtriya Chemicals & Fertilizers Limited
Rashtriya Chemicals & Fertilizers Limited (RCF), a government of India undertaking is
involved in manufacturing fertilizers and chemicals. The company has two operating units
located in Trombay in Mumbai and Thal (Raigad district) and is a Mini-Ratna company. RCF
produces 23 lac MT of Urea, 6.5 lac MT of complex fertilizers, and 1.6 lac MT of industrial
chemicals every year. The company is a household name in rural India with brands ‘Ujjwala’
(Urea) and ‘Suphala’ (complex fertilizers). The company offers fertilizer brands such as
Suphala, Ujwala, Urea, Biola, Sujala, and Microla.
RCF has a country wide marketing network in all major states. The company is also involved
in marketing of SSP (Single Super Phosphate) and imported fertilizer inputs like DAP (Di
Ammonium Phosphate), MOP (Muriate of Potash) & NPK fertilizers (Complex fertilizers of
nitrogen phosphorous potash). Apart from fertilizers, RCF also produces around 20 industrial
chemicals that are used for manufacture of dyes, solvents, leather, pharmaceuticals, and other
products.
The sales revenue of the company was Rs. 7252 crores and profit after tax was Rs 78.8 crores
for the year 2017-18. The company involves in many CSR activities including education,
water supply to nearby villages, road repairs in nearby villages, etc.
RCF has established 13 Soil Testing Laboratories (STL) strategically located in the country.
The locations are: Mumbai, Kolhapur, Nagpur, Ahmednagar, Hassan, Vijayawada, Lucknow,
Latur (Lodga), Kolar, Suryapet, Raipur, Nanded, and Satara. In addition the company offers
STL activities through six mobile soil testing laboratories at Mumbai, Kolhapur,
Ahmednagar, Nagpur, Vijayawada, and Hassn.
Questions:
1. Discuss the supply chain basic concepts in light of RCF as an example?
2. Why should RCF offer STL services to farmers?
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 5.2: Blue Star
Blue Star is India’s leading air conditioning and commercial refrigeration company. The
company has achieved total revenue of Rs. 5,259.53 crores and profit after tax of Rs. 190.06
crores for the year 2018-19. Blue Star operates through a network of 32 offices, 5 modern
manufacturing facilities, 2800 employees, and 2900 channel partners. The company has 5000
stores for room ACs, packaged air conditioners, Chillers, Cold rooms as well as refrigeration
products and systems. The company offers its services in over 800 towns and has 765 service
associates to meet the requirements of the customers. The company adopts an integrated
business model of a manufacturer, contractor and after sales service provider. This approach
enables Blue Star in providing an end-to-end solution to its customers. The company fulfills
the cooling requirements of corporate, commercial, and residential customers. Blue Star has
entered into water purifier, air purifier, and air coolers business.
The manufacturing facilities are located at Dadra (Dadra & Nagar Haveli), Kala Amb Plant 1
(Himachal Pradesh), Kala Amb Plant 2 (Himachal Pradesh), Wada (Near Mumbai),
Ahmedabad (Gujarat).
Questions:
1. Delineate on the distribution and after sales service capabilities of Blue Star.
2. Comment on the plant locations of an enginnering products manufacturing company
like Blue Star.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 5.3: Britannia Industries Limited
Britannia has achieved total sales revenue of Rs. 11,261.12 crores and profit after tax was Rs.
1,155.46 crores for the year 2018-19. The eight biscuits manufacturing plants are located
across the width and breadth of India. The plants are located at Kolkata, Mumbai, Chennai,
Delhi, Bangalore, Kichha (utranhal), Hajipur (Bihar), Khurda (Orissa).
Britannia demands the best of ingredients and quality of the product is ensured without any
compromise. Britannia is one of India’s leading food products manufacturing company with a
legacy of over 100 years. The brands of this company like Good Day, Tiger, Nutrichoice,
Milk Bikis, and Marie Gold are household names in India. Britannia has its presence in more
than 60 countries across the globe.
The company offers product categories such as biscuits, breads, dairy, cakes & Rusk, Crème
Wafers, and Croissant.
Biscuits: The various brands offered in biscuits category are Good Day, 50-50 Crackers,
Nutrichoice.
Dairy: The brands offered are Cheese Slices, Cheese Cubes, Cheese Block, Cheezza, Cheese
Spreadz, Milk based beverages, fresh dairy (dahi), and flavoured Yoghurt products.
Cakes & Rusk: The various brands offered under Cakes and Rusks are Fruit Bar Cake,
Pineapple Bar Cake, Milk Bar Cake, Orange Bar Cake, Chunk Cake, Nut and Raisin
Romance.
Other Brands: The other brands are Choco Muffills, Strawberry Muffills, Premium Bake
Rusk, Multigrain Rusk, and Milk Rusk.
Crème Wafers: The brands under the wafers category are Treat Crème Wafers (Chocolate,
Vanilla, Straberry, and Orange flavours).
Croissant: The brands of Croissants offered are Cocoa Crème Roll, and Vanilla Crème Roll.

The products are available across India in close to 5 million retail outlets and reaches over
50% of Indian homes. The company’s dairy business contributes close to 5% of revenue for
the company and reaches close to 100,000 retail outlets directly. Britannia Bread is the largest
brand in the organized bread market. The annual turnover of bread is 1 lac tones (in quantity)
and Rs 450 crores by revenue. The bread business operates through 13 factories and 4
franchises. The company sells over 1 million loaves of bread daily across more than 100
cities and towns in India.
The company has setup the Britannia Nutrition Foundation in 2009. The Foundation works
on public private partnership to take care of malnutrition amongst under-privileged children
and women.
Questions:
1. What are the products offered by Britannia to its customers.
2. Discuss the distribution chain capabilities of Britannia
3. Refer to the Figure 5.15 shown in the Annexure to this case and briefly discuss the
total supply chain members of Britannia.

----------------------------------------------------------------------------------------------------------------
Annexure to case 3:
Biscuits
Wheat Wheat Flour manufacturing
supplie supplier plant
r
P2

Yeast P2
Retail store
Customer
P3
Distributor-1
Sugar

P4

Distributor-2
Ghee
P5

Distributor-3
Milk powder P6

P7
Salt

P8

Edible colours

Flavours

Packaging

Figure 5.15: Britannia Industries Limited – manufacturing plant

The supply chain of Britannia is shown in an abstracted form. The Figure 5.15 shows the
eight biscuit manufacturing facilities. The supply chain shows the raw materials (suppliers)
that go into making the biscuits. The Tier-1 suppliers on the supply side are: Wheat Flour,
Yeast, Sugar, Ghee, Milk Powder, Salt, Edible Colours, Flavours, Packaging. The Tier-2
comprises of wheat supplier. The distribution side of the supply chain consists of distributors,
retailers, and finally it reaches the consumer.
----------------------------------------------------------------------------------------------------------------
CH06: Facilities location

Learning objectives:
1. Learn the major considerations in location of plant facility (country, region, and site)
2. Location selection focus: manufacturing and services
3. Methods for evaluation of location alternatives: Factor rating, BEP method, Center of
Gravity method, transportation model.

Facilities location is such a key decision that in many cases the location decision of facilities
decides the success or failure of firms and it’s supply chain. The facilities location is critical
to the performance of the supply chain. The location decision of the facilities should be in
line with the formulated supply chain strategies with respect to level of customer service and
estimated cost of products and services. Generally, service firms tend to be located closer to
the market and are called ‘market facing’. The focus in such location decisions is mainly
focused on the ‘revenue’ that could be generated by such locations. On the other hand, the
location of manufacturing firms gives more importance to the cost of inputs like: labor,
transportation, etc. and the focus in such location decisions is on ‘cost’ of delivering products
and services. In such cases the supply chain focus is on cost.
The major considerations while making a plant / facility location are:
1. Political & economic climate
2. Regional regulation
3. Water supply
4. Environmental laws & waste disposal
5. Availability of labour
6. Availability of suppliers
7. Transportation costs
8. Availability power / fuel
9. Tax laws of subsidies offered by the government
10. Community and the environment

In facilities location decision, avoiding a poor site selection is much more critical than
selecting a good location. The steps involved in facility location decision process are:
1. Define the objectives in facilities location decision
2. Identify the location decision criterion and the relevant constraints.
3. Develop location decision models based on the criterion selected for location
decision. Use methods like breakeven analysis, Transportation model, linear
programming, and other qualitative models.
4. Carry out detailed field survey and collect relevant data for plant location.
 5. Evaluate the alternative site locations based on the criterion selected.
6. Select the location that best satisfies the criteria.

Location decision variables

Location decision variables: The following are the main decision variables to be considered
while making a decision on the facility location.
1. Labor (eg. Silicon Valley or Bangalore, etc.)
2. Materials
 Raw material supplies
Utilities (electric power, water supply, fuel costs)
3. Site considerations
 Soil conditions
 Strata in the earth (nuclear power plant etc.)
 Seismic zone classification
4. Environmental considerations

Foreign location considerations: The following considerations are to be given due

importance when deciding on the location of manufacturing / service facilities in foreign
country or territory.
1. Political
2. Social aspects
3. Economic aspects
4. Joint ventures; “if you can’t beat ‘em join ‘em!”
5. Space factories / offshore locations
Location of facilities in a foreign location are generally governed by treaties like WTO or by
mutual MOUs signed between nations. We should also take into account other factors like
wealth drain considerations and may be that a good percentage of the profits are to be
ploughed back into the country, where the profit was made. This will enhance the overall
interest and performance of the Supply Chain.

Factors that affect location decisions: The following factors are mainly considered before
making a decision on the location of a facility, and they are:
 Labor Productivity
 Exchange Rates and Currency Risks
 Costs
 Attitudes of the local public
 Proximity to Markets
 Proximity to Suppliers
 Proximity to Competitors
LOCATION SELECTION FOCUS
Manufacturing Plant Location Decisions: A ‘cost focus’ approach is, generally adopted for
manufacturing plant location decisions. In fact, revenue varies little between the possible
different locations. Plant location is mainly based on cost factor in manufacturing industry.
The location decision affects shipping and production costs. In case of manufacturing
facilities costs vary greatly between locations; and the thrust or focus in the facility location
decision will be minimizing cost.
Service Location Decisions: ‘Revenue focus’ will be the corner stone in service facilities
location decisions. Costs vary little between the different market areas that could possibly be
served. Location is a major revenue factor in case of service industry. The location decision,
in case of service facilities, affects amount of customer contact and volume of business which
will get reflected in the profitability.
In general facility location decisions have a long-term impact on the capability of the supply
chain. Decisions on facility locations are difficult to reverse and they affect fixed and variable
costs. Transportation cost which is as much as 25% of product price in some cases also gets
affected due to plant location decisions. Other costs that are affected by facility location
decisions are: Taxes, wages, rent etc. It should be clear for the planners that the objective of
facility location decision is to maximize benefit of location to firm.

Factors Affecting Country selection: the factors to be considered for facility location
decision with respect to country in which to locate the facility are as follows:
 Government rules, public attitudes, political risk, incentives
 Culture & economy
 Market location
 Labor availability, labour attitudes, productivity, and cost
 Availability of supplies, communications, energy
 Exchange rates and currency risks
Factors Affecting Region selection: the factors to be considered for facility location
decision with respect to region of the plant location are as follows
 Corporate desires
 Attractiveness of region (culture, taxes, climate, etc.)
 Labor availability, costs, attitudes towards unions
 Costs and availability of utilities
 Environmental regulations of state and town (local bodies)
 Government incentives
 Proximity to raw materials & customers
 Land/construction costs
Factors Affecting Site selection: the factors to be considered for facility location decision
with respect to the site for facility location are as follows
 Site size and cost
  Air, rail, highway, and waterway systems
 Zoning restrictions
 Nearness of services/supplies needed
 Environmental impact issues
METHODS OF EVALUATING LOCATION ALTERNATIVES
Facility location decisions can have a profound impact on supply chain performance and a
firms’ competitive advantage. The type of facility and its location affects the supply chain
structure. Location decisions in the supply chain are based on both economic factors (facility
costs, operating costs, and transportation costs) and non-economic factors (labor availability,
legal and political situation, and community environment). There are four techniques that are
generally used for making facility location decisions, and they are:
 Factor-rating method
 Locational break-even analysis
 Center of gravity method
 Transportation model

FACTOR-RATING METHOD
Factor Rating is widely used in deciding facility location or plant location. In this method a
number of factors impacting the facility location are listed. Each of these qualitative factors is
given a weights based on its importance. Then, the individual factors are given points out of
maximum possible point of 100 (say). The total cumulative points for each location is found
out using the steps given below and facility location decision is made in favour of the
location which obtains maximum points. The main features of factor rating method are as
given below:
 Most widely used location technique
 Useful for service & manufacturing locations
 Rates locations using factors of importance
 Tangible (quantitative) factors…Example: Short-run & long-run costs
 Intangible (qualitative) factors…Example: Education quality, labor skills

Factor Rating Method steps: The following are the steps to be followed for carrying out the
factor rating method of location selection:
1. List relevant factors
2. Assign importance weight to each factor (such as 0 – 1)
3. Develop scale for each factor (such as 1 – 100)
4. Score each location using factor scale
5. Multiply scores by weights for each factor & total
6. Select location with maximum total score
Table 6.1 Sample data for factor rating method
--------------------------------------------------------------------------------------------------
Mumbai Chennai Trichy
----------------- ------------------- -------------------
Weight Max Score Max Score Max Score
--------------------------------------------------------------------------------------------------
Production cost 0.33 50 16.50 40 13.20 30 9.90
Raw material supply 0.25 75 18.75 75 18.75 75 18.75
Labor availability 0.20 55 11.00 70 14.00 45 9.00
Cost of living 0.05 80 4.00 70 3.50 50 2.50
Environment 0.02 60 1.20 60 1.20 90 1.80
Markets 0.15 80 12.00 90 13.50 50 7.50
--------------------------------------------------------------------------------------------------
Total location score 1.00 62.60 65.40 50.70
--------------------------------------------------------------------------------------------------

In the above example, Chennai has scored maximum and hence is the site selected for
locating the facility. The factor rating method calculations are given in Table 6.1 and Factor
rating method is easy to understand and simple to use.

BEP FOR LOCATION DECISION

Economic analysis: Let us consider the following example for demonstrating how economic
considerations could be accounted for in making a decision on facility location, using BEP
(breakeven point) analysis. The fixed cost and variable cost details for three different plants
A, B, and C are given below:
Fixed cost Variable cost
( Rs.) ( Rs.)
Plant A 800,000 55
Plant B 400,000 120
Plant C 200,000 210

The market demand and related probabilities are given below:

Demand Probability
4,000 0.2
5,000 0.5
6,000 0.3

Selling price per unit = Rs. 380/ -

Problem Solution:
Expected demand = ∑ Di * Pi = 5100 units
Where, Di is demand, and Pi is associated probability

Table 6.2 BEP Analysis for plant location decision

Total cost (Rs.)
Production Plant A Plant B Plant C Sales
0 800000 400000 200000 0
1000 855000 520000 410000 380000
2000 910000 640000 620000 760000
3000 965000 760000 830000 1140000
4000 1020000 880000 1040000 1520000
5000 1075000 1000000 1250000 1900000
6000 1130000 1120000 1460000 2280000
7000 1185000 1240000 1670000 2660000
8000 1240000 1360000 1880000 3040000
9000 1295000 1480000 2090000 3420000

The Table 6.2 gives the total cost details for the three plants A, B, and C and also the sales
revenue. The graph shown in Figure 6.1 clearly indicates that Plant C should be selected for
demand requirements that are less than 2,500 units. The plant B is preferable for demand
requirements between 2500 units and 6,667 units. For any demand 6,667 units and above
plant A is the most suitable one based on cost minimization considerations. The production
level of 2,500 units and 6,667 units are shown by dotted arrows.

4000000
3500000
3000000
2500000
sales / cost
in Rs.

2000000 Plant A

1500000 Plant B
Plant C
1000000
Sales (Rs)
500000
0

Production in units

Figure 6.1 BEP Analysis for plant selection decision

BEP Chart: The BEP chart which is the outcome of BEP analysis for location selection
decision is given in Figure 6.1.

CENTER OF GRAVITY METHOD

This method is used for finding an optimal location of a single distribution center serving
several destinations. It considers location of existing destinations, volume to be shipped, and
shipping distance (or cost). The method assumes that the shipping cost/unit/mile is constant
Center of Gravity Method Steps: The following are the steps in arriving at the center of
gravity location analysis:
 Place existing locations on a coordinate grid
Grid has arbitrary origin & scale
Maintains relative distances
 Calculate X & Y coordinates for ‘center of gravity’
Gives location of distribution center
Minimizes transportation cost

The transportation distance is a major factor in influencing the total transportation cost. The
other factors influencing the transportation costs are the weight of the product that is
transported as well as the transportation time. In order to minimize the total transportation
cost the center of gravity or weight center is used for locations of facilities like warehouse.
Center of gravity method arrives at the X and Y coordinates (location) for a single facility
and this method take into account locations of facilities, demand, and transportation costs to
arrive at the best location.
The center of gravity method for location of facilities like a factory, warehouse or a
distribution center could be used as given below. Now, let us try to demonstrate how this
technique could be used to locate a warehouse, given the various demand points (in this case,
a demand points are assumed) for the product. The first step in this technique is to plot the
different demand points in a XY graph.
Xi, Yi are the X and Y coordinates of the ith demand points for the product
(i = 1, 2, ….n).
X, Y are the coordinates of the location of warehouse
Qi is the annual quantity (weight of the product transported from the warehouse to the ith
demand point).
Then, location of warehouse can be calculated using the formulae given below:
X = ∑ Xi Qi / ∑ Qi for i = 1 to n
Y = ∑ Yi Qi / ∑ Qi for i = 1 to n

Problem: Hypothetical Company located in Kerala State manufacturers and distributes

fertilizers. The location details and the amount of fertilizers demanded by five of its
distributors in Tamil Nadu State, are as given Figure 6.2 for reference. The company wants to
locate a warehouse for storing fertilizers in order to meet the demand of five distributors (A,
B, C, D, E) in Tamil Nadu. The quantity of fertilizers demanded by the five distributors is
given in tons per annum. Use center of gravity technique to solve this problem.

500
Km B(3000) C(3800)
400
E(1200)

300 A(4000)

200
D(2500)
100

0
0 100 200 300 400 500 600 700

Km
Figure 6.2 Centre of gravity method – Dealer locations and fertilizer demand

Solution:
Demand Points
A B C D E
X coordinate (xi) 100 200 500 500 600
Y coordinate (yi) 200 400 400 100 300
Quantity demanded in tones (Qi) 4000 3000 3800 2500 1200

X = ∑ Xi Qi / ∑ Qi for i = 1 to n
Y = ∑ Yi Qi / ∑ Qi for i = 1 to n

(100)(4000) + (200)(3000) + (500)(3800) + (500)(2500) + (600)(1200)

X= = 335.86
4000 + 3000 + 3800 + 2500 + 1200

(200)(4000) + (400)(3000) + (400)(3800) + (100)(2500) + (300)(1200)

Y= = 284.83
4000 + 3000 + 3800 + 2500 + 1200
Now, the decision is to locate the warehouse at the coordinates X = 335.86 & Y = 284.83
TRANSPORTATION MODEL
The transportation model finds amount to be shipped from several sources to several
destinations. This method is used primarily for industrial locations. The method determines
lowest-cost of distributing goods from supply points (origins) to demand locations
(destinations). The transportation model is a special case of linear programming. The
objective of the transportation model is to minimize total shipping costs. The constraints
considered in the transportation model are:
1. Production capacity at source (factory) 2. Demand requirement at destination

Transportation model:
Transportation of goods from three plants to four demand centres indicating the cost of
transportation (in rupees per unit) from a particular plant to any particular demand centre.
The supply capacities of the three plants and the demand requirements of the four demand
centres are given below.
Lucknow Gwalior Nagpur Rohtak Supply
Plant1 9.0 18.0 4.0 9.0 9000
Plant2 3.0 12.0 8.0 24.0 3000
Plant3 2.0 16.0 6.0 12.0 6000
Demand 6000 2000 6000 4000 18000

Solution: The transportation problem has been solved using Tora software with initial
solution by Vogel’s Approximation.
Lucknow Gwalior Nagpur Rohtak
Plant1 0 0 5000 4000
Plant2 1000 2000 0 0
Plant3 5000 0 1000 0
The optimal total shipping cost is Rs. 99,000

Sensitivity Analysis:
Let us see the effect on the optimal solution if a decision is made to close down the
warehouse facility at Gwalior. The revised solution in the light of the new decision is shown
below.
Lucknow Gwalior Nagpur Rohtak Dummy
Plant1 0 0 5000 4000 0
Plant2 1000 2000 0 0 2000
Plant3 5000 0 1000 0 0
Total shipping cost is Rs. 75,000
It may be noted that the closure of facility at Gwalior results in a considerable cost reduction.
The total shipping cost gets reduced from Rs.99, 000 to Rs.75, 000.
FINAL THOUGHT

According to Heizer and Render (2011), a final

thought is that the ideal location for many
companies in the future will be a floating
factory ship that will go from port to port, from
country to country – wherever cost per unit is
lowest.

[Ref: Operations Management by Jay Heizer and Barry Render (2011), Pearson]

Summary
Facilities location is a major question that remains to be answered after deciding on the
capacity of plant facility to be installed. The following could be noted against facility location
decision:
no method of analysis assures a firm that it has selected an optimal location
there are many potentially “satisfactory” locations
on the other hand , some locations would be exceptionally poor.
There can arise any number problems in deciding facility location, from a multitude of issues.
The following factors are mainly considered before making a decision on the location of a
facility, and they are: Labor Productivity, Exchange Rates and Currency Risks, Costs,
Attitudes, Proximity to Markets, Proximity to Suppliers, and Competition.
There are four techniques that are generally used in making facility location decisions, and
they are: Factor-rating method, Locational break-even analysis, Center of gravity method,
and Transportation model.
A final thought is that the ideal location for many companies in the future will be a floating
factory ship that will go from port to port, from country to country – wherever cost per unit is
lowest.
End Chapter Questions
1. What are the requirements that have to be considered before selecting a facility
location?
2. Explain in brief the steps involved in the facility location decision process.
3. List the main decision variables to be taken into account while making a decision on
facility location. What are the additional requirements that are to be looked into while
deciding a foreign location?
4. Distinguish between a manufacturing facility and a service facility with respect to
location selection focus.
5. Discuss the factors affecting the following with respect to location decisions:
a) Country selection
b) Region selection
c) Site selection
6. List the four techniques employed in making facility location decisions.
7. What are the main features of ‘factor rating method’?
8. Enumerate the steps to be followed in factor rating method for location selection.
9. Explain center of gravity method for facilities location decision?
10. List the factors taken into consideration in center of gravity method.
11. Demonstrate the transportation model in location decisions using a real life example.

----------------------------------------------------------------------------------------------------------------
Mini Case 6.1: Exide Industries
The company was started in India in 1916 and since then Exide has remained a leading brand
in India. The company has seven manufacturing facilities located across India at: Hosur,
Chinchwad, Ahmed Nagar, Taloja, Bawal, Shamnagar, and Haldia. Exide focuses on
Automotive, Industrial, and Submarine businesses. The company also is involved in exports.
The total revenue was Rs. 9,518.21 crores and profit after tax was Rs. 668.35 crores for the
financial year 2017-18.
The product range of Exide batteries comprises of the applications like four wheeler, two
wheeler, inverter, gensets, solar, and home UPS. Exide manufacturing facilities are located
at: Hosur, Chinchwad, Ahmed Nagar, Taloja, Bawal, Shamnagar, and Haldia.
Exide is the only company in India which produces batteries for submarine applications. The
plants at Haldia, Hosur, Shamnagar, Taloja, and Chinchwad are in compliance with ISO
9001, TS-16949 and ISO 14001. Hosur plant, in addition has compliance to OHSAS 18001
also. The manufacturing facility at Bawal meets the requirements of TS-16949.
Exide remains the first and foremost brand in India since its inception in 1880. Exide
successfully combines value for shareholders with environment and social goals. The
company is committed to running the business in a responsible and ethical manner so that a
positive impact is made on the society and all its stakeholders.
Exide Industries involves in CSR activities in areas such as children & Education, Health &
Sanitation, Environment, Women Empowerment, and Rural / Community Development.
Exide Industries involves in commendable community development activities.
Questions:
1. Explain the Exide Industries supply chain and its businesses.
2. Comment on the plant location of Exide Industries. Use, if necessary, India map for
identifying the plant location.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 6.2: Eicher Motors Limited
Eicher Motors is a company involved in manufacturing trucks, buses, and trucks for special
applications. The company also makes ‘Royal Enfield’ motor cycles. The company is
involved in manufacturing Volvo range of trucks as well. Eicher Motors also manufactures
engineering components for automotive applications. During the year 2017-18, the total
income of the company was Rs.8,964.96 crores and profit (EBITDA) was RS. 2807.63
crores.
Eicher Trucks and Buses is involved in manufacturing trucks with low operating cost and
high reliability leading to higher profits. The bus range manufactured by Eicher is designed to
offer superior vehicle performance with safety features, superior comfort, and fuel economy.
The company makes special purpose trucks for ambulance, trucks with mild steel container,
troop carrier, and water tanker applications. Volvo truck ranges are manufactured for mining
operations, over-dimensional and over-weight operations. Volvo trucks range is provided
with high reliability and high efficiency.
Royal Enfield produced its first motor cycle in 1901, offers mid-size motor cycles in the
Indian market, Royal Enfield is now a division of Eicher Motors Limited. Royal Enfield has
its manufacturing facilities at Thiruvottiyur and Oragadam.
VE Commercial Vehicles Limited is a joint venture between Volvo Group and Eicher
Motors. This joint venture is in operation since 2008. The operation include Eicher branded
Trucks and Buses, VE power train, Eicher components and engineering design service,
businesses, the sale and distribution of Volvo Trucks, and aftermarket support to Volvo buses
in India. VECV has its manufacturing facilities at Pithampur Indutrial area, Madhya Pradesh.
Eicher Polaris Private Ltd., is a joint venture formed in 2012 between Eicher Motors Limited
and US based Polaris Industries Inc., to design, develop, manufacture, and sell a full new
range of personal vehicles suitable for Indian and other emerging markets. This joint venture
has set up its manufacturing facility in Jaipur, Rajasthan.
Questions:
1. What are different vehicle types produced and offered by Eicher to its customers?
2. List the manufacturing facilities under Eicher. Comment on the location of facilities
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 6.3: Mittal Steel - Plant Location
Lakshmi Mittal, Chairman, Arcelor Mittal Ltd., expressed that the positive support and
commitment of Karnataka government had enabled the proposed steel plant at Bellary to
make progress in the right direction. These were the observations made by Mr.Mittal after
signing a memorandum of understanding (MOU) for establishing six million tonnes per
annum capacity integrated steel plant and a 750MW power generation plant at an investment
of Rs. 30,000 Cr in Bellary district of Karnataka. This MOU was signed by AMIPL with the
Karnataka Government in the Global Investors’ Meet in 2010.
It may be noted that Jharkand and Orissa plants had issues related to land and forest
clearances. Protests by local bodies have compounded to the existing hurdles and problems
for plant location.
Karnataka government is ensuring land allocation and government has assured the steel major
of all clearances in a speedy manner. Water has been allocated; mining lease is in progress
for finalization. The chief of Mittal group replied in negative to the press when a query was
raised as to whether there was a trade off in ore quality or mining costs in locating the steel
plant in Karnataka. However it is important to note that the chief secretary of Karnataka has
indicated that mining licenses could not be issued for high grade ore as Karnataka is
inundated with steel plants and licenses could be issued for low grade ore and businesses are
welcome to operate in this sector. It is quite interesting to note that both the news items have
appeared in one of the leading English daily on the same date.
The Hindu, 11-03-2019 reported that Arcelor Mittal India Private Limited (AMIPL) had
sought extension up to 2013 for establishment of steel plant at Kuditini-I near Ballari. This
project is expected to create employment for educated and qualified youth.
The state government had to allot captive mining and the required land. The state government
had allotted the land required for the project. In its letter dated in June 2018, AMIPL
indicated that it had taken possession of 2,659 acres of land and was awaiting allotment of
136 more acres.
The government had approved AMIPL to draw 40 million gallons of water per day from
Tungabhadra. The company had obtained preliminary reports on the hydrological study and a
feasibility report. AMIPL had also obtained the terms and reference from Ministry of
Environment.
AMIPL indicated that the changes in the global supply of steel from 2012 had seriously
affected the steel market. This caused delay in the execution of the project. Countries such as
China, Russia, and CIS countries, among others have been exporting steel at lower prices and
this adversely impacted the steel industry in India till recently. The Indian government and
other trade blocks took action on dumping of steel. This action resulted in improvement of
the situation after 2016Q4 onwards.
Meanwhile, the farmers who had lost their lands resorted to a series of agitations and wanted
government to direct the company to put up the plant or withdraw from the land.
Arcelor Mittal, in between, wanted the government to permit establishment of solar plant
instead of steel one. This proposal was turned down by the government. The government
sources indicated that AMIPL had planned to start with production of 2 million tones per
annum and expand the capacity in a phased manner. The matter of extension of time is
awaiting the decision by State High-level Committee headed by the Chief Minister.

Questions:
1. What are the factors to be considered before deciding on the plant location?
2. Do you think that AMIPL signed the MOU in a hasty manner at the Global Summit,
without going into the details of the project?
3. Is it a good strategy on the part of AMIPL to shift from steel to solar project? Give
your comments.
-------------------------------------------------------------------------------------------------------------
07. SUPPLY CHAIN CAPACITY PLANNING
Learning objectives
1. Understand capacity planning in terms of capacity utilization versus responsiveness.
2. Define designed capacity, system capacity, actual output, system efficiency, utilization.
3. Learn capacity planning strategies: capacity lead, capacity lag, capacity match
4. Understand managing capacity in the short term
5. Learn and understand the concept of learning curve.
6. Learn how to do aggregate planning and the aggregate planning tools.

The implementation of the supply chain strategy starts with planning and then execution. A
holistic view of the planning process is schematically shown in the Figure 7.1 clearly. The
planning will have to be carried out at the different levels: strategic, tactical, and operational.

Operation

Strategy

Forecasts of

Demand

Master
Capacity Aggregate Short-term
Production Schedules
Planning Planning
Schedule

Strategic Tactical plans Operational

plans plans

Figure 7.1 planning activities for a typical firm

Strategic planning activities: include decision with respect to type of product, facility
location, etc., and it starts with capacity planning activity. Capacity planning takes into
account the overall operations strategy envisaged for the firm and the supply chain and also
takes inputs from the demand forecasts made for the firm. Facility location decisions have
been covered in chapter 6 in a lucid manner. In this chapter, we will discuss capacity
planning as well as aggregate planning. Capacity planning is a strategic planning activity and
has a long-term impact on the firms’ plant capacity as well as the supply chain capabilities.
Aggregate planning is done at the medium planning horizon (carried out annually; gives
monthly details of production and sourcing activities – shop production, overtime,
outsourcing). The next planning activity in operations planning is the preparation of Master
production schedule and short term schedules for the shop floor. We will restrict our
discussion to the capacity planning and aggregate planning in this chapter.
Capacity planning: capacity of a plant / facility could be defined as the maximum throughput
in a specific time frame. Every operation has a capacity associated with it and is of limited
nature. For example, the capacity of a bus, airplane, or a train could be explicitly expressed in
terms of the number of seats available for passengers to travel. The capacity of a truck could
be expressed in terms of tons of goods it can transport (say ten tons or twenty tons) and that
of a tanker could be expressed in terms of volume (10,000 litres). The capacity of a hotel
could be expressed in terms of the number of guests it can accommodate. The capacity of a
hospital could be indicated in terms of the number of inpatients (number of beds) and number
of outpatients (per day) it can accommodate. These are all examples of facilities where the
capacity could be clearly and explicitly stated. However, not all situations are straight
forward like this. There are operations for which indication of capacity could not be done
clearly and it may be difficult. For example, it is difficult to precisely specify the capacity of
a train network, airport, or a super market. Situations of this nature necessitate development
of other measures like: number of customers per square meter of supermarket (mall) area,
passenger-kms and tonne-kms for a rail network.
It is sufficient and necessary, at this stage, to understand that capacity is an important concept
for logistics and supply chain management and it could be defined as the maximum flow
through the supply chain at any particular time.
In fact, most organizations do not operate at the maximum capacity. Operating at maximum
capacity could impose a lot of pressure or stress on the equipment and/or people. Hence,
there is generally an excess capacity available in the various facilities of the supply chain.
The excess capacity of facilities in the supply chain is one of the basic determinants of
‘supply chain agility / flexibility’. Without going further into supply chain agility / flexibility,
let us get introduced to some basic terminologies regarding plant capacity.
Capacity planning is a long-term decision bearing a good amount of importance on the future
fortunes or otherwise of an organization. Capacity decisions have a direct impact on the
operating cost, product lead time, and the responsiveness to the customer demand. Proper
capacity planning also puts an organization at a strategic advantage position with respect to
facing the competition. It is important to note that customer service level required in the
modern global and liberalized economy is high. The supply chain has to be flexible enough to
cater to the specific needs and requirements of customers.
The basic questions that need to be answered in any long range capacity planning activity are:
1. Nature of capacity addition
2. Quantum of the capacity addition, and
3. Timing of the capacity addition
Capacity could be measured in different terms based on the organization type. Hospitals, for
example, measure the capacity by the number of patients who could be treated. An airline
measures its capacity in terms of available seat-miles (ASMs). The capacity of a cement plant
is measured in tonnes per day of cement production, etc.

Market

considerations Capacity Decision

Decision outcome
Resources

available
Figure 7.2 Factors influencing capacity decision.

Capacity can be defined as a measure of the ability to produce, or serve and eventually it
amounts to having enough worker or equipment time to do the job. Capacity planning is
concerned with defining the long term and short term capacity needs of the organization
and determining how these needs will be satisfied. As indicated in Figure 7.2, capacity
decision is influenced by market considerations and the available resources.

Plant Capacity and utilization:

Capacity planning requires knowledge of the current capacity, and utilization level of the
various plants and facilities. Let us say that the design capacity of a particular plant is
2400 tonnes per day. The system capacity indicates the production that is possible to be
achieved after taking into account long range less controllable factors which have reduced
the capacity. The actual system capacity is only 2000 tons in this case, let us say. The
actual output that has been achieved is a further reduction from the system capacity due to
short term factors, is only 1900 tonnes per day. Given below is the calculation of system
efficiency and utilization for the example under consideration. The concept of design
capacity, system capacity, and actual output, system efficiency, and utilization has been
shown schematically in Figure 7.3 for better clarity.
Actual output 1900
System efficiency = --------------------- = ----------- = 0.95 (or) 95%
System capacity 2000

Actual output 1900

Utilization = ------------------------ = ----------- = 0.79 (or) 79%
Designed capacity 2400

Designed capacity: is the maximum throughput under ideal or design conditions. For
example the design capacity of a cement plant is 2400 tonnes per day.
 Design capacity Reduced by long range less controllable factors:

(eg. 2,400 tons) - product mix and long run market conditions

- tight quality specifications

- inherent imbalance of equipment and labour

System capacity

(eg. 2,000 tons) Reduced by short-range effects:

- actual demand

System - managerial performance (scheduling, staffing,

efficiency strategy and control)

- worker inefficiencies (skill and effort level)

Actual output - machine inefficiencies (wear, scrap loss, breakdown)

(eg. 1,900 tons)

Figure 7.3 Plant capacity concepts

System capacity / Effective capacity: is the maximum throughput that is possible in the
normal or realistic conditions. Designed capacity is reduced by long range less controllable
factors like product mix, long run market conditions, tight quality specifications, inherent
imbalance of equipment and labour. For the cement plant example that is being considered
for demonstration of the concepts, the system capacity is 2000 tonnes per day. This reduction
of 400 tonnes per day could be due to any one or more of the long-term factors listed in
Figure 7.3.

Actual output: is the actual throughput achieved. The effective or system capacity is further
reduced due to short-range factors like: actual demand, managerial performance (scheduling,
staffing, strategy and control), worker inefficiencies (skill and effort level), machine
inefficiencies (wear, scrap loss, breakdown). The effective capacity reduced due to short
range factors and the balance is called the ‘actual output’. The actual output of the cement
plant example could be 1900 tonnes per day and this further reduction in the plant capacity by
100 tonnes per day is due to short-term factors.
Capacity bottlenecks:
The supply chain, if it could be equated to a pipeline, is limited by capacity corresponding to
the stage in the pipeline (i.e. supply chain) that has the lowest diameter (i.e. capacity). This is
demonstrated pictorially in Figure 7.4 for better understanding.

Figure 7.4 Logistics pipeline – capacity bottlenecks

Ryoichi Watanabe (2002 has highlighted the applicability of theory of constraints (TOC) to
supply chain management, and has pointed out that the Supply Chain is as strong as the
weakest link. Hence, every link in the supply chain should be strong and capable in order to
achieve higher performance of the supply chain as a whole.

CAPACITY PLANNING STRATEGIES

The system efficiency and utilization will have to be kept in mind while deciding on the total
capacity of the plant (or) service facility. The following steps may be followed for proper
capacity planning decision:
 Examine forecast demand and translate this into a capacity requirements
 Calculate the available capacity of the present facilities
 Identify mismatches between capacity needs and availability
 Generate alternative plans for overcoming any mismatch
 Compare alternative plans and choose the best

The analysis of capacity addition versus customer demand gives rise to three types of
capacity addition strategies and they are:
Capacity Lead
Capacity Lag
Capacity Match

Capacity Lead Strategy: The capacity is added in anticipation of growth in demand. This
strategy is followed in a market where the competition is high and many a times the available
capacity is made use of as a strategic tool to attract customers from the competitors. The
capacity lead strategy is depicted in Figure7.5 clearly.

Capacity
Units

Demand

Amount of additional capacity

Time between capacity increases

Time
Figure 7.5 Capacity always greater than demand

Capacity Lag Strategy: This strategy is more conservative in approach and is pictorially
shown in Figure 7.6 for ready reference. The capacity is increased only after having
registered an increase in the market demand. This approach might ensure a higher ROI
(Return on Investment) for the firm, but may run the risk of losing customer or lost sales.
This strategy may be adopted only when there is weak competition in the market in which
your firm operates. Customers may have to either bear with delayed supply or adopt a policy
of back ordering.

Demand
Units

Capacity

Time
Figure 7.6 Capacity always lags behind demand
Capacity Match Strategy: The third strategy is to match the capacity with the demand as
closely as possible and is graphically depicted in Figure 7.7 given below.

Units
Demand

Capacity

Time

Figure 7.7 Capacity more or less matches demand

Each of these strategies could be the best for a particular operations situation; but there is
seldom an ideal solution adopting which all resources reach 100% utilization. Another
important question in capacity planning is concerned with the size of any planned expansion.
Any change in capacity is likely to disrupt operations, so it might be better to have a few
large increases than more number of smaller ones. The increments in plant size (or) service
facility size may be influenced by the type of technology adopted as well. Let us say that you
are operating a sugar plant in one delta area of an Indian river like Cauvery in Tamil Nadu,
India. Now, you find that there is a need to increase the plant capacity as there are more sugar
cane growers who are prepared to supply raw material for your plant. The market for sugar is
also demanding after the liberalization process of the economy and the encouragement given
by Indian government for exports. Now, the question is to increase the plant capacity by what
size? The available standard capacity of sugar plant design could be 500 tonnes per day (tpd),
1,000 tpd or 2000 tpd of sugar cane crushing capacity. You definitely do not have a provision
to add your sugar plant capacity by an additional 10 tonnes per day. Here, the deciding factor
becomes the technology available or the standard plant size. In such a situation the firm may
decide to add capacity in a quantum jump; either an addition of 500 tonnes per day or 1,000
tonnes per day of sugar cane crushing.
On the other hand, a Fast food retailer will have choices to increase his operations capacity
by smaller increments by adding probably additional labour and capital.
 Units One-step
addition

Demand

Addition in small
increments

Time

Figure 7.8 More smaller increases versus One large increase in capacity

The main advantage of large increases is that the excess capacity available could be used to
attract new customers. Large increases might also provide economies of scale due to large
scale operation, and thereby result in reduced cost. Available excess capacity might be an
advantage over competitors. The disadvantage of large scale increase is that the initial cost is
high. Disruptions in large capacity plants could seriously affect the flow of products and
materials in the supply chain. There is also a risk of low utilization in the event of low market
demand for the product. The comparison between small capacity additions frequently versus
large capacity additions less frequently is shown in Figure 7.8 for clarity of understanding.

ECONOMICS OF SCALE
Larger increases in capacity can provide economics of scale. The cost per unit or the total
average cost reduces as the plant size is increased. This concept is called economies of scale
and is shown in Figure 7.9. The plants operating at a larger scale of operation are able to
produce individual units more cheaply than smaller ones. For example mass produced cars
are much cheaper to make than custom made Rolls-Royce cars. Lower cost per unit occurs
when we increase the plant size or the level of operation due to the following three reasons:
- fixed costs are spread over a large number of units
- more efficient process can be used; using larger batches and higher level of automation
- more experience with the product, increases the efficiency (learning)
 unit
cost

output

Figure 7.9 Economics of scale giving lower unit costs.

However, the benefit of economies of scale reverses after a certain plant size. After this
level of operation, the unit cost starts going up due to diseconomies of scale and the same
has been shown in Figure 7.10 for clarity of understanding. Hence, it is an imperative that
the manager should make a decision to operate at a certain optimum level of operation.
This design should be in congruence with the objectives of the supply chain as a whole.
Total average cost

Economies of scale Diseconomies of scale

Optimum Plant size

level

Figure 7.10 Economies of scale – in capacity planning

Capacity change over time: Capacity planning aims to match available capacity as closely as
possible to forecast demand. We know that this is made more difficult by discrete capacity
change requirements and economies of scale. There will be short-term variations due to
operator illness, interruptions, machine breakdowns, and so on. There are also long-term
changes in capacity, which we shall illustrate though the learning curve. As learning takes
place due to repeated performance of an operation or activity, the time required to perform
the particular activity gets reduced.

We all know that the more often we repeat a particular activity, the easier it becomes. This is
the process of learning and this principle is depicted as learning curve in Figure 7.11. A
common shape for learning curves has the time taken to do an operation falling by some fixed
proportion every time the number of repetitions doubled. Typically this proportion is about
10%. So, the first time an operation is done it takes time T, the second time it takes only 90%
of this time, the fourth time it takes 90% of the time needed for second operation etc. In this
case, the learning rate = 0.9.
Time need for
one operation

Number of repetitions

Figure 7.11 Learning curve

The equation for learning curve is, Y =T N b

Where, N = number of repetitions
Y = Time taken for the Nth repetition
T = time taken for the first unit
b = log R / Log 2
R = learning rate

Capacity maintenance: One of the major factors to be considered in capacity planning is

maintenance policy of equipment. The Figure 7.12 shown below depicts the optimum level of
maintenance in order to minimize the total maintenance cost.
 Cost
Total cost
(Rs.)
curve

Expected cost of
failures

Maintenance cost

Optimal time Time between successive

maintenance

Figure 7.12 Finding the best time interval between maintenance periods

The other important aspect associated with this is the equipment replacement policy. There
are two criteria based on which replacement decision could be made and they are:
i. minimum acceptable performance level
ii. operating cost (ceiling)
In the first approach, the equipment is replaced when the performance level of the equipment
falls below an acceptable limit. The second approach bases its decision on the operating cost
and when the operating cost of the equipment goes beyond a certain limit, the equipment is
replaced with a new one. Maintenance program of the equipments and replacement policy
have a profound impact on the reliability of the equipment. The availability of the equipment,
in effect, could be considered directly related to reliability. It should also be noted that the
system availability could be enhanced by proper system design of the manufacturing or
service facility.

SUPPLY CHAIN AGILITY AND CAPACITY PLANNING

We have to consider two Supply chain concepts related to capacity planning, and they are
leanness and agility. The concept of leanness aims at doing more with less. This means that
there should be only a minimum level of work-in-progress (WIP) inventory, less pipeline
inventory logistics network, and raw material procurement should follow just-in-time. The
capacity will be just sufficient to meet the customer demand and leanness aims at maximum
capacity utilization. On the other hand, agility in Supply Chain aims at maximizing customer
service level even by maintaining a higher level of inventory and/or by having a
manufacturing or service capacity higher than the current requirement. This is called ‘excess
capacity’ or ‘buffer capacity’ in the Supply Chain in order to provide a higher level of service
to the customer.
A different approach has been suggested by Ben Naylor.J (1999) in his article on ‘Leagile
Supply Chain’ in which he suggests a combination strategy for supply chain management by
combining the advantages of both leanness and agility.

AGGREGATE PLANNING IN A SUPPLY CHAIN

Aggregate planning gives the total production plan for one year ‘plan period’ for product
families. Typically aggregate plan shows, in the form of monthly schedule, the amount of
production, quantum of subcontracting, and the amount of outsourcing. The aggregate plan is
made use of for formulating the master production schedule. Short term production schedules
are framed subsequent to master production schedule preparation. Aggregate production plan
is an essential component of planning process in order to have the organization’s supply
chain synchronized internally. This ensures that the effect of internal operational disturbances
is not passed on to the other supply chain links which are outside the boundaries of the
organization. The aggregate planning process has been shown in Figure 7.13 very clearly.

Objectives and
policies Workforce size
Demand
forecast
Production plan
Capacity Aggregate
constraints Planning
Inventory

Financial level
constraints
Level of
subcontracting

Figure 7.13 Input-Output model for Aggregate planning

Aggregate planning aims at determining the resource capacity a firm will need in order to
meet its demand over a time horizon of six months to one year. During such a planning
period, it may not be possible to increase the capacity by building a new plant or putting up
new equipment. However, it is possible to hire additional workforce or it may be possible to
reduce the workforce temporarily by laying off a part of the workforce. It is also possible to
alter the capacity to suit demand by altering the number of shifts in the factory or by resorting
to subcontracting.
The forecast demand is translated into capacity requirements. Then, the required capacity to
meet the customer demand is compared with the available capacity and any gap between the
two is identified. After having found out the shortfall in capacity, if any, we have to bridge
the gap in capacity requirements. The difference in capacity requirements with the demand
could be met by any one or a combination of the following: 1. Subcontracting, 2. Increasing
the workforce, 3. Altering the shift structure.
The production planning manager has to evaluate the various alternatives available for
making the aggregate plan. The various considerations to be kept in mind while carrying out
aggregate plans are:
 Maintain constant production level or change the production level to suit demand
 Should we use stocks to meet the change in the demand i.e produce during low
demand period and use the stock for high demand season?
 Should we resort to making changes in operation shifts or work overtime?
 Should we use ‘hire and fire’ policy in tune with variations in the customer
demand?
 Should changes in price be allowed to alter the customer demand?
 Should we allow stock out? Lost sales may create a bad reputation for the firm.
Now, an important decision is how much variation should be allowed in production levels.
Essentially, we should decide on whether to have a constant production level or chase the
demand.
Chase demand: The main advantage with “chase demand” strategy is that there is no
inventory buildup. Difficulty arises in changing the production level every now and then.
Hiring and firing of manpower in order to meet the changing demand may result in poor
human resource management and may result in poor industrial relations. However, chasing
the demand is the only alternative available in case of service industry. The Figure 7.14
shows the chase the demand aggregate planning policy.

Demand / demand
production

production

1 2 3 4 5 6 7 8 9 10 11 12 period

Figure 17.14 Chase the demand aggregate planning policy

Produce at Constant rate: The production level is kept at the average demand requirement.
The difference between the capacity and the demand is met by building up of stocks. In this
strategy both inventory cost and shortage cost will occur. There will be excess inventory
during lean season and shortage during peak season of the demand. The Figure 7.15 shows
the constant production rate aggregate planning policy

Demand / demand
production

production

1 2 3 4 5 6 7 8 9 10 11 12 period

Figure 17.15 Constant production - aggregate planning policy

Mixed strategy: is a combination of first two capacity change policies. In this case, there are
some changes in production rate, but not every period. The policy tries to compromise by
having a fairly stable production, but reduces the inventory costs by allowing some changes
at intervals. In practice, this is the most commonly used plan for meeting the demand
variations. The Figure 7.16 shows the mixed strategy aggregate planning policy pictorially.

Demand / demand
production

production

1 2 3 4 5 6 7 8 9 10 11 12 period

Figure 17.16 Mixed strategy - aggregate planning policy

METHODS OF AGGREGATE PLAN

The following are the mainly used methods for aggregate planning.
 1) Intuitive approaches
2) Graphical methods
3) Matrix arithmetic
Intuitive approach: Simplest approach to aggregate planning is to get an experienced planner
to review the current situation and, in light of experiences with similar plants, he designs
updated plans for the next period. In practice, this is the most widely used method of planning
for its easiness and simplicity. Intuitive approach gives results that have variable and
uncertain quality of plan. The benefits of this approach are that it is convenient and easy to
use.

Graphical method: The most popular format for this approach has a graph of cumulative
demand over some time period. Then aggregate plan is drawn as a line of cumulative supply.
The aim of the planners is to get the cumulative supply line nearly straight, giving constant
production, and as close as possible to the cumulative demand line. The difference between
the two lines gives the mismatch.
 If the cumulative demand line is below the cumulative supply line, production has
been too high and the excess production has accumulated as stock.
 If the cumulative demand line is above the cumulative supply line, production has
been too low and some demand has not been met or there has been shortage.

Matrix calculation: The demand requirements can be met by making use of regular time,
over time and by sub-contracting in each period. The aggregate production problem could be
carried out by formulating it as a transportation problem with available capacities as sources,
and the monthly demand as destinations. Each month will have three operating categories viz.
regular production, over-time, sub-contracting. The cost associated with each category of
operation could be used as cost matrix for the formulated transportation problem. It should be
noted that the cost of inventory holding will get added to the cost figure in the matrix when
the demand is met from previous month’s production. There is also an assumption, in line
with reality, that the demand of a previous month could not be satisfied or met in the current
month. Hence, the lower off diagonal matrix of the transportation tableau is blanked and
shown in red color. The methodology of aggregate planning using transportation method is
demonstrated below:
Problem and solution:
Regular production cost per unit Rs. 8
Over-time production cost per unit Rs. 10
Subcontracting cost per unit Rs. 12
Inventory holding cost per unit per period Rs. 1
 Period Demand Regular Over-time Subcontract
Production
1 140 100 20 40
2 90 100 20 40
3 160 100 20 40
4 150 100 20 40

Table 7.1 Supply – Demand Matrix

1 2 3 4 Capacity

Normal 100
Production 8 9 10 11
1 Over-time 20
10 11 12 13
Subcontract 40
12 13 14 15
Normal 100
Production 8 9 10
2 Over-time 20
10 11 12
Subcontract 40
12 13 14
Normal 100
Production 8 9
3 Over-time 20
10 11
Subcontract 40
12 13
Normal 100
Production 8
4 Over-time 20
10
Subcontract 40
12
Demand
140 90 160 150
The aggregate planning has been shown as a transportation tableau with capacities as sources
and demand as destinations. For every period the production could be carried out either by
regular production, over-time, and subcontracting. The cost of production has been indicated
in the left hand bottom corner of each cell in the transportation tableau (Refer Table 7.1).

Table 7.2 Optimum solution

1 2 3 4 Capacity

Normal 100 100

Production 8 9 10 11
1 Over-time 20 20
10 11 12 13
Subcontract 20 40
12 13 14 15
Normal 90 10 100
Production 8 9 10
2 Over-time 20 20
10 11 12
Subcontract 40
12 13 14
Normal 100 100
Production 8 9
3 Over-time 20 20
10 11
Subcontract 10 40
12 13
Normal 100 100
Production 8
4 Over-time 20 20
10
Subcontract 30 40
12
Demand
140 90 160 150

Steps for solving the formulated problem:

1) Take the next time period.
2) Find the lowest cost in this column
 3) Assign as much production as possible to the cell with lowest cost, without exceeding
either the supply of resources or demand for products.
4) Subtract the amount assigned from the total capacity, and calculate the unmet demand.
5) If there is unmet demand go to step (2); if all demand has been met, move on to the
next period and go to step (1).

Optimal tableau: The optimal solution for the problem is shown in Table 7.2 for ready
reference. The allocation, if any, for a particular type of operation for each of the periods are
shown in the right hand top corner of each cell. The aggregate production problem that has
been formulated as a transportation tableau, once solved indicates the optimum production
plan for each period in terms of amount of regular production, amount of over-time to be
used, and the amount of subcontracting to be employed. Then, with the associated cost
figures, it should not be difficult to calculate the total cost for the envisaged aggregate
production plan.

Summary
The supply chain planning starts with logistics strategy. Capacity planning is a strategic
planning activity and has a long-term impact on the firms’ as well as the supply chain
capacity. Capacity decisions have a direct impact on the operating cost, product lead time,
and the responsiveness to the customer demand. The basic questions that need to be answered
in any long range capacity planning activity are: nature of capacity addition, quantum of the
capacity addition, and timing of the capacity addition. The analysis of capacity addition
versus customer demand gives rise to three types of capacity addition strategies and they are:
capacity Lead, capacity lag, and capacity match.
Short term capacity decisions: as a strategic function, capacity planning could be used for an
integrated management of supply chain capacity by taking into account the market demand,
customer needs, and the available capacity of the supply chain. There are two methods of
achieving short term adjustments in the capacity, and they are: capacity management, and
demand management.
Economies of scale may influence the capacity decisions in the long-run.
The supply chain strategy could be to build and operate a lean or flexible supply chain.
Accordingly the decisions with respect to capacity and utilization will differ. In fact, a
marginal increase in the supply chain capacity could significantly improve its flexibility.
Aggregate planning: gives the total production plan for product families. Typically it shows,
in the form of monthly schedule, the amount of production, quantum of subcontracting, and
the amount of outsourcing.
The methods adopted for aggregate planning are: Intuitive approaches, Graphical methods,
and Matrix arithmetic, and linear programming. The aggregate planning using linear
programming has not been demonstrated in this chapter.

End Chapter Questions

1. Schematically represent the different levels of planning activities in a supply chain.
2. What are the key issues to be taken into consideration in any long range capacity
planning activity?
3. Explain the different ways in which capacity can be defined.
4. Differentiate: designed capacity, effective capacity, and actual output.
5. Bring out the relevance of theory of constraints in supply chain management.
6. List the steps that may be followed in proper capacity planning.
7. Describe with neat diagrams the approach followed in the following capacity planning
strategies:
a) Capacity lead
b) Capacity lag, and
c) Capacity match
8. State the advantages of having excess capacity. Bring out the disadvantages of excess
capacity as well.
9. Define economies of scale in brief.
10. What is the significance of equipment replacement policy?
11. Explain the need for aggregate planning in the supply chain.
12. Explain learning curve and its relevance to capacity planning.
13. What are the strategies employed in meeting uneven demand requirements in a supply
chain?

Essay questions
1. Discuss in detail the two methods of achieving short term adjustments in the capacity
2. Discuss in brief the following methods used for aggregate planning:
a) Intuitive approach
b) Graphical method
c) Matrix calculation.
----------------------------------------------------------------------------------------------------------------
Mini Case 7.1: Tata Steel
Tata Steel Group has a global presence with its manufacturing facilities located in 26
countries and commercial presence in over 50 countries. Tata Steel was the first integrated
steel plant in Asia which got established in the year 1907. Tata Steel made a global presence
with its acquisition of Corus in the European Continent. It has an annual crude steel
production of 30 million tonnes; employs more than 74,000 persons. During the year 2017-
18, Tata Steel has achieved a turnover of Rs 133,016 crores and the profit after tax was Rs
17,763 crores.
The company proposes to build three green projects in the states of Jharkhand, Orissa, and
Chattisgarh in India with additional capacity of 23 MTPA. Tata steel has a consolidated crude
steel production capacity of 18.6 million tonnes per annum (MnTPA). The manufacturing
facilities are located at Jamshedpur in Jharkhand, Kalinganagar and Dhenkanal in Odisha,
Sahibabad in Uttar Pradesh, and Khopoli in Maharashtra. In addition, the company has many
downstream product extensions with manufacturing facilities for Wires, Tubes, Bearings,
Agriculture Equipment, and Industrial By-Products.
Tata Steel has successfully delivered 11 MnTPA of steel to the Indian market and 1.15
MnTPA to International market during the year 2017-18. Tata Steel is involved in operating
an end-to-end value chain that spans from mining to finished steel products. The company
caters to market segments such as automotive, construction, general engineering, etc.
Captive iron ore mines in Jharkhand and Odisha ensures 100% captive iron ore supply. Coal
mines in Bokaro & Jharia supply approximate 30% of coal requirements. The company is
also self sufficient 60% for coking coal requirements; balance being met through imports.
Tata Steel additionally has a dolomite mine, a chromite mine, and management mines ensure
steady and cost-effective supply of raw materials for the company’s ferro alloy plants. Tata
Steel operates through a robust value chain ensuring cost effectiveness, economic
efficiencies, and customer satisfaction. The Corus operation needs sourcing of raw materials
in UK and Netherlands.
Tata Steel’s Jamshedpur plant produces hot and cold rolled coils and sheets, galvanized
sheets, tubes, wire rods, construction re-bars, and bearings. Tata Steel also has introduced the
following brands in the steel sector:
Steelium (the world’s first branded cold rolled steel)
Tata Shaktee (galvanized corrugated sheets)
Tata Tiscon (re-bars)
Tata bearings
Tata Agrico (hand tools and implements)
Tata Wiron (galvanized wire products)
Tata pipes (pipes for construction), and
Tata Structura (contemporary construction material)
Tata Steel is the only company in India which has attempted branding of a product like steel;
and has successfully implemented it. Tata steel has developed strong brands in construction
steel products, the most famous being Tata Tiscon. Tata Steel has also introduced the world’s
largest retail market place for steel in the form of service brand named ‘Steeljunction’.
The company produced total saleable steel of 12.237 million tones and the company
manufactures a wide range of products:
a) Flat Products: Hot rolled, cold rolled, metallic coated, direct rolled, tubes, pre-finished
steels, packaging steels, electro plated steels, electrical steels, and narrow strip.
b) Long Products: Sections, special profiles, rail, wires, wire rods, specialty steels and bar,
plates, and rebars.
c) Construction Products: Structural steel, floors, walls, roofs, modular, and building
components.
d) Agricultural implements.
e) Bearings.

Mining Operations:
1. Coal:
a) Jharia Coalfields: with an estimated reserves of 287 million tonnes, is situated along
Domodar River Valley.
b) West Bokaro Division: covers a leasehold area of 4300 acres and operates three fully-
mechanised opencast coal mines to produce raw coal to the tune of 6 MTPA. West Bokaro
meets 40% of coking coal requirements of Tata Steel Works and is located 200 km NW of
Jamshedpur.

2. Iron ore:
a) Noamundi: is located in Jharkhand around 126 km from Jamshedpur.
b) Joad: is located in Keonjhar district of Odisha, and has one of the richest deposits of iron
ore.
c) Khondbond: is also located in Keonjhar district of Odisha. Located at 18 km from Joda
East Iron Mine, has deposits of sponge grade iron.
d) Katamati: is located in Keonjhar district of Odisha, and is the southern extension of
Noamundi Iron Mine.

Steel Manufacturing:
Indian steel manufacturing operations by Tata Steel is located at Jamshedpur. Further, Tata
Steel has operations in Europe and Singapore (South East Asia).

CSR activities: Tata Steel engages in CSR activities related to health, education, livelihoods,
infrastructure, sports, and environment.
Questions:
 1. Explain the Tata steel supply chain which is a major player in the Indian steel
industry.
2. What are the products offered by Tata Steel and how the company achieved branding
of steel?
3. What are the complexities involved in transporting, storing, handling steel as a
product to be distributed across Indian subcontinent?
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 7.2: Emami
Emami has stated in its annual report 2013-14: “Our key to success has been understanding
the latent needs of our customers”. In line with the above statement, Emami has been offering
personal care & healthcare products for more than 35 years spanning across various income
and age groups. The company provides products like Borplus, Navratna, Fair and Handsome,
Zandu Balm, Mentho Plus, and Fast Relief which are all well known household brand names.
Emami employs 3200 people and offers its products to customers through 45 lakh retail
outlets (Direct retail reach 6.25 lakh outlets) supported by 3200 direct distributors. The
company has 30 distribution centres located across India and has four regional offices.
Emami has eight manufacturing plants in India and one overseas unit.
The plants are located at Kolkata (West Bengal), Amingaon (Assam), Pantnagar
(Uttarakhand), Massat (Dadra & Nagar Haveli), Abhoypur (Assam), Vapi (Gujarat), Dongari
(Maharashtra), and Pacharia (Assam). The overseas unit is located at Gazipur Village,
Bangladesh.
The key businesses of Emami Group comprises of FMCG, Newsprint, Ball pen tip
manufacturing, retail, pharmacy, infrastructure development, art, edible oil, healthcare,
cement, and biodiesel. The total revenue of the company was Rs.2823.4 cores and profit after
tax was Rs. 307.14 crores during the year 2017-18. Cost of goods sold at 32.3%
Questions:
1. What are the products and services offered by Emami?
2. Explain the Emami distribution chain network capabilities.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 7.3: Nalco
Nalco is a navratna company involved in metals and energy sectors. Nalco is an integrated
aluminum producing company comprising of activities from mining ore to metal. The
company has operations at Angul and Damanjodi and also has port facilities at
Visakhapatnam.
The company achieved a gross sales turnover of Rs. 9,505 crores and profit after tax was Rs.
1,342 crores for the year 2017-18. The company has achieved bauxite mining of 70,25,109
MT during the year 2017-18 and alumina production during the same period was 21,05,500
MT. Aluminum metal production achieved was 4,25,515 MT during the year 2017-18. The
installed production capacity of Nalco is 1200 MW and the company has wind power
capacity of 98 MW. The quantum of power generation during 2017-18 was 6547 million
units.
The company involves in community development activities like promotion of education,
health and sanitation, building community infrastructure, environment stability, relief
measures, enhancing vocational skills, promoting cultural activities of local community,
reaching out to marginalised and disabled persons in society. The operation of the company is
mainly concentrated in Odisha.
Questions:
1. What are the products offered by NALCO in its value chain?
2. Explain the production levels achieved by Nalco? Comment on plant capacity.
3. Delineate on the CSR activities carried out by NALCO in greening the aluminium
value chain..
----------------------------------------------------------------------------------------------------------------
08. SOURCING AND PROCUREMENT

Learning objectives
1. Understand the importance of sourcing and procurement.
2. Learn the reasons for outsourcing.
3. Understand different supplier buyer relationships.
4. Learn about supplier selection, development, and integration.
5. Know how to carry out supplier performance appraisal.
6. Learn importance of product design: integral versus modular.
7. Learn about system sourcing.
8. Get to know E-procurement and E-Reverse Auction.

In the global economy with the increased competition both domestically and abroad, the
organizations had to quickly respond by making improvements in the internal processes to
stay competitive [Monczka, 2002]. The supply chain comprises of the supplier network, focal
enterprise, distribution network. The main supply chain activities which an enterprise has to
concentrate are: sourcing, logistics, and operations.
Monczka (2002) has clearly indicated the importance of purchasing in the supply chain
management as given below:
“ …..supply chain includes systems management, operations and assembly, purchasing,
production scheduling, order processing, inventory management, transportation,
warehousing, and customer service. Supply chains are essentially a series of linked suppliers
and customers; every customer is in turn a supplier to the next downstream organization until
a finished product reaches the ultimate customer.”
A thoughtful approach to selecting suppliers, and making proper purchase decisions could
ensure timely delivery of materials / parts / components from suppliers. This could help in
keeping down production and inventory costs. Suppliers focus should be on cost, delivery,
and the quality in order to improve supply chain performance. Purchasing as a function has a
clearly defined role in supply chain and supply chain performance.
A simple supply chain receives materials directly from their source, process it to make
finished products, package the finished product, and then ship them to consumers. For
example, the manufacturing of baby food like Ceralac by Nestle, involves procurement of
grains from farmers, process it to make the baby food; package it; and distribute the product
to customers through the distribution network. On the other hand, the supply chain for
automobile car manufacturers could be highly complex involving multiple products,
processes and technologies.
The supplier network consists of all organizations that provide inputs, either directly or
indirectly, to the focal firm (i.e., the buyer). According to Monczka (2002), the material
constitutes 55 percent of the cost of goods sold in a typical manufacturing firm and this
indicates the importance of sourcing and procurement. Purchasing, as a function in an
organization has advanced far from the traditional perspective that the role of purchasing is to
obtain goods and services in response to internal needs. We have already learnt that supply
chain involves three flows viz. products/materials, information, and cash. The purchasing or
procurement is the activity which initiates flow of materials in the supply chain. Purchasing
as a function is responsible for obtaining the materials/components required by an
organization for further value addition make finished goods and distribute the products to
customers through the distribution network. Supply chain aims at synchronizing the upstream
flow of incoming materials, parts, subassemblies, and the supplier services with
manufacturing and downstream distribution so that it can respond to uncertainty in customer
demand without excess building up of inventory in the supply chain. ‘Procurement’ and
‘Sourcing’ are terminologies used for the purchasing activity with the same connotations and
we will use them interchangeably in our discussions throughout this book. The
products/materials that are procured by the focal firm could be categorized into:
1. Direct or strategic materials that are needed for making the products that the company
sells to customers.
2. Indirect or MRO (maintenance, repair, and operation) materials that the company
consumes as part of the operations.
3. Corporate services - warehousing, distribution, and information systems - which are
required for efficient and effective operation of the supply chain.

The cost of materials being procured also will have to be considered while making a
purchasing decision. For example, an adhoc procurement of stationeries may not require
rigorous formalities and procedures to be followed in an organization. For example, the
section-in-charge may have powers to procure such items from the contingency account. On
the other hand, procurement of an equipment worth 5 million rupees may have to be formally
and duly processed following the rules and standard procedures of the organization. Such a
large procurement action may require the approval of the Vice President or Managing
Director of the company. In terms of importance, the materials purchased by an organization
could be grouped into the following categories: Non-critical items, Bottleneck items,
Strategic materials / components. The strategy to be adopted for material procurement will
have to take into account the importance and critical nature of the materials.

REASONS FOR OUTSOURCING

The process of outsourcing is not new to business. Organizations have been outsourcing
products and services for various reasons depending upon the business requirements. The
reasons for outsourcing could be grouped into two categories: short term reasons for
outsourcing (tactical), and Long-term reasons (strategic).
Short term reasons for outsourcing (tactical): is the first set of reasons which necessitate
outsourcing and are short-term in nature and implemented as part of tactical strategies of the
supply chain:
 Unexpected increase in demand for the products
 Plant and machinery breakdown
 Temporary shortage of plant capacity (power cut, worker illness, flash strike, etc.,)
 Testing products
Long-term reasons (strategic): These belong to the second set of reasons which are long-term
oriented in nature. Companies are moving more of production, service, and inventory
functions to suppliers. The long term reasons for outsourcing are:
1. Outsourcing enables firms focus on their core competencies which are activities that the
firm is best at doing.
2. Suppliers are required to do what the buyer firm is not good at and/or what the supplier
firm is good at doing.
3. Technology availability with the suppliers.
Traditionally, large companies attempted to integrate vertically in order to ensure that there is
better control over the supplies required for the firm’s operations; but now the trend is
towards building a strategic relationship with the supplier so that the firm can concentrate on
other and more valuable activities in the supply chain.

Single-sourcing: is the approach to have a less number of suppliers; and mostly one supplier.
Generally followed traditional practices with respect to supplier base had been to limit the
amount of purchases from a single supplier to say, something like 10 to 20%. This was to
ensure that the impact on the buyer is not enormous in the event of the supplier is not able to
meet the delivery schedules, unable to ensure product quality, or goes out of the business due
to any unforeseen reason.
The advantage of single-sourcing and dealing with a single supplier is that there could be
better control. The supply chain could be synchronized using logistics practices like
Collaborative Planning Forecasting and Replenishment (CPFR), and electronic integration
over EDI or Internet. In such an environment, the supplier network is built based on a long-
term relationship between the supplier and the buyer. Implementation of just-in-time
purchasing (JITP) could be easily implemented in a single supplier or narrow supplier base
environment. The mutual benefit of the supplier and the buyer should be the cornerstone of
such a relationship.
Automotive and computer industries are the forerunners in implementation of supply chain
management concepts. The US automotive industry, for example, has steadily increased the
number of parts outsourced, while decreasing number of supplier. Their Indian counterparts
in automotive field are no inferior to US automakers in outsourcing. The automotive
organizations like Ford, Hyundai have extensively outsourced the components that go into
making the final passenger car. Hyundai and Ford have developed a network of suppliers at
arm’s length closer to their factory at Chennai, India. The level of outsourcing even in heavy
vehicle manufacturing, in India, is considerable and the best examples are Tata Motors,
Ashok Leyland, etc.

SUPPLIER-BUYER RELATIONSHIPS
The nature of Supplier-Buyer relationships could be classified into three broad categories
given below:
1. Competitive bidding: The Supplier-Buyer relationship is short-term oriented and
generally a “one-off” affair.
Example: services provided by a civil contractor for building school class rooms in one of the
municipalities.
2. Ongoing relationship: This type of Supplier-Buyer relationship occurs in a medium term
scenario.
Example: Supplier with whom there is agreed price contract for supply of electrical items for
further use by an organization like BHEL. The electrical items so procured might be used for
assembling control panels to be supplied to thermal utilities.
3. Business Partnership: In this type of relationship, the anticipated tenure is long or
continuous. Such business partnerships benefit both the parties. There is generally a high
level of integration between the two firms involved in such partnership type of business
arrangement. The firms with high level of business coordination are linked up through EDI
(Electronic Data Interchange) or Internet (Extranet), for better information sharing which
results in cost reduction for both the parties and less stock out. Such higher level of
integration with suppliers would result in better supply chain performance and eventually
increase the customer satisfaction.
Example: The relationship between Dell computers and UPS, the logistics service provider
for Dell is a good example of this type of relationship. The logistics services provided by
UPS for DELL is more of Supply Chain partnership in nature than that of a regular transport
service provider.
The Supplier-Customer relationship should be one of partnership. This has been clearly
demonstrated by Monozka as “spectrum of Buyer-supplier Relationships”. Monczka has
categorized the buyer-supplier relationships into the following four categories:

i. Antagonistic iii. Cooperative

ii. Adversarial iv. Collaborative

The supplier-customer relationship should belong, preferably, to the third and fourth category
and it should be partnership type of relationship in the supply chain.
a) Antagonistic: Parties involved in this type of business scenario work actively against the
interest of the other. Neither party takes any responsibility for what happens in the
relationship. Such a business relation would bring out negative impact on one or both parties.
b) Adversarial: Parties are engaged in a competitive environment and each party attempts to
win maximum gain / value to his side.
c) Cooperative: Parties understand the benefits of working together. Closer relations are
maintained and both the parties benefit.
d) Collaborative: Supplier – buyer act as partners in the total supply chain. Parties work
together and take care of the needs of each other.

Figure 8.1 Continuum of buyer – supplier relationship

Courtesy: Purchasing and Supply Chain Management 2e, by Monczka/Trent/Handfield

SUPPLIER SELECTION, DEVELOPMENT, AND INTEGRATION

Suppliers are the best intangible assets of any organization. Hence, selection of the right
supplier is a very important aspect of outsourcing. The supplier should ensure timely supply
of raw material inputs to the customer organization downstream in the supply chain, and
ensure quality keeping in mind the overall performance of the supply chain. The cost of the
suppliers should be low. We will discuss the procurement function in the following sequence:
1. Importance of procurement
2. Objectives of procurement
3. Procurement responsibility (functional responsibility)
 4. Supplier selection
5. Supplier development (Training, Continuous Supplier Involvement, and
supplier certification)
6. Supplier performance evaluation
7. Supplier integration
8. Procurement cycle
9. e-procurement
10. Any other important considerations in outsourcing

Importance of procurement: procurement acts as linking mechanism between the

organizations in the supply chain. The needs of the customer, in fact, are communicated to
suppliers through procurement function. According to Monczka (2002), manufacturers spend
55 cents out of every dollar on purchases (material and services). This indicates the important
role sourcing has to play in an organization and its supply chain. Companies which keep on
improving the level of customer service, continuously strive hard to reduce cost. This
necessitates organizations to concentrate more on sourcing function in order to achieve this
goal while concentrating, in parallel, on other activities like logistics, and internal operations.
The purchasing or procurement function should build an efficient and effective supplier
network. We should recall and remember the theory of constraints which postulates that the
chain (supply chain) could as strong as the weakest link. It is important to build a strong
supply chain having in it, the links which are supply network, internal operation, logistics
(inbound and outbound), and distribution network. The benefits of improved supplier
network management are: Cost reduction, improved material delivery, short of lead times,
access to latest product and process technology, and quality improvement.

Objectives of procurement: should be clearly defined and understood for its effective
functioning. The objectives of procurement function in an organization are to:
 Organize reliable source of supply for the material / competence and parts required by
the organization
 Identify good suppliers, work closely with them in providing necessary information
and the technology infrastructure in order to develop them to a higher level of
performance and enable them to meet the requirements.
 Ensure timely and quality supplies
 Achieve lower prices of the materials procured
 Establishing relationships with suppliers: in the form of long-term contracts, develop
suppliers in the proximity of plant, strategic alliances (build long-term relationship).

Procurement responsibility: there should be an organization structure to take care of the

procurement requirements of the organization. Generally, organizations have a separate
purchasing department to take care of the sourcing requirements. Some smaller organizations
may entrust the purchasing responsibility with the materials planning department. The
benefits of organized procurement are:
 Responsibility for the follow-up of purchase orders with the suppliers
 Purchasing acts as a single point contact for communication with the suppliers
 Consolidation of purchases (avail quantity discounts etc.)
 Avoid / eliminate duplicate purchases and unnecessary inventory buildup
 Develop specialized skills in the procurement function which could result in
operational efficiencies

Supplier selection: Time is gone when organizations treated supplier as seller. Now, in the
globalized Internet world, supplier is treated as a partner in the supply chain. The supplier
selection, according to Shah H.K. (2002), is made after a clear analysis and consideration
with respect to the following factors:
 Company image (legacy)  Supply price / cost
 Financial performance (short term and  Delivery performance
long term viability)  Service level offered
 Management capability  Skilled labour
 Quality systems  Technical capabilities

The company image has to be analyzed in the light of its past performance and financial
stability. Financial performance is a necessary yardstick that will have to be considered in
supplier selection since any inadequacy in the financial performance will deter the
relationships.
Management capability of the supplier is very critical in supplier’s successful performance.
The management should set a clear mission and vision regarding customer service, product
quality and customer satisfaction, among other aspects of supply chain performance..
The supplier should provide quality products and services to the manufacturing plant. The
requirements of product quality that is expected by the customer and the process capability of
the supplier should match. The concepts of quality and quality systems should be well built in
the supplier organization. Suppliers who have obtained ISO 9000 certification could be given
more preference in the supplier evaluation process. Organizations which have built into its
system, the concepts of statistical process control, Deming quality principles and
contemporary philosophies of quality like six-sigma, and Total Quality Management (TQM)
may be the preferred ones.
Supply price is an important component of supplier performance since it will have an impact
on the downstream member’s profitability.
Delivery performance is critical to customer satisfaction and the lead time should be the
smallest. For example, Dell Computers lnc., a major computer manufacturer is capable of
supplying a computer according to customer’s specifications, within 48 hours of ordering by
a customer. This is possible only with the best management of its supply chain and all related
activities.
Service level: of the supplier can be evaluated in terms of spares support, corrective action
and follow up in case of break down and failures of the equipment / component supplied.
Continuous supplier involvement is a necessity to ensure proper servicing of customer
requirements.
Skilled labour: is a valuable asset for any organization and so should be the case with the
supplier also. Supplier’s human resources capabilities in terms of team work, employees’
involvement and commitment to their organization will go a long way in accomplishing
organizational objectives, which will ultimately strengthen the supply chain and its
performance.
Technical capabilities of the supplier organization need no special mention of its importance.
The supplier should preferably have the latest production techniques. He should also be
proactive, in adopting the changing technologies into the production processes. The supplier
should have an optimized production facility with sufficient ‘process capability’ to meet the
customer requirements. The technical capabilities also encompass the suppliers IT
capabilities and ability to get hooked-up with the customer’s Data Network, enabling quicker
response to customers’ requirements.
Supplier evaluation and selection consists of a series of steps and could possibly be
summarized as given below:
1. Identify the quantum and level of outsourcing.
2. Identify the criteria for supplier evaluation.
3. Make the supplier selection (may be carried out by a specially constituted team for
this purpose).
4. Make agreements with the selected supplier.

Supplier Training and Development: After having made the supplier selection, supplier
training and development should follow and the suppliers could be trained on the following
aspects:
 Quality Control and TQM practices,
 Cost Control techniques,
 Technical capabilities,
 Packaging practices,
 Service requirements,
 Environmental awareness.
The process of an ongoing supplier development should be followed for sustained results.

SUPPLIER PERFORMANCE EVALUATION:

Supplier Certification: Policies, procedures, and capabilities of supplier could be examined
and certified. The certification process verifies whether a supplier meets or exceeds the
requirements of a buyer. Certified suppliers are sometimes referred to as “world class”
suppliers. The advantage of using “world class” suppliers is that it reduces the inspection
efforts needed, and there are less returns. A generally acknowledged and accepted
certification is “ISO 9000” for ensuring quality systems in a supplier organization. Similarly,
supplier could get certified for environmental systems and obtain ISO 14001.
Supplier performance appraisal: Once the supplier is selected and the supplier-customer
relationship has been initiated, it is necessary to appraise the supplier on an ongoing basis and
provide the supplier with sufficient feedback enabling it to correct mistakes, if any. The
performance appraisal system should be one of enabler than punitive, in nature.
Some professionals use a moving average of the performance indices; say for example, the
ratings obtained by the supplier in the past six months. In such a method the period of the
moving average is of importance because too small a moving average period will be less
accurate. The rating so calculated will allow a supplier to go scathe free for the past mistakes,
by possibly showing a good very recent performance. On the other hand, a too wide a moving
average period will be overburdening the supplier for the past mistakes and this will amount
giving him a lesser chance for correcting the past mistakes.

The following are the most commonly adopted evaluation procedures:

1. Categorical plan
2. Point rating plan
Categorical Plan: In this type of supplier evaluation, the executives / supervisors of the
buying firm, in the related departments, will maintain an informal evaluation of the suppliers
performance. The individuals involved traditionally include personnel from purchase,
engineering, quality, accounting, and stores. Each evaluator evaluates the supplier on factors
important to him or her. Each supplier is evaluated against all the listed factors in a monthly
or bimonthly basis. Then, the factors are given weights based on relative importance, and
finally all the suppliers are given an overall evaluation, in simple and categorical terms such
as “Preferred”, “Satisfactory”, or “Unsatisfactory”. This method of supplier evaluation is
simple, easy to administer, and effective.

Point Rating Plan: Performance factors such as quality, service level, Price, etc., could be
identified for supplier evaluation. Each of these factors could be rated on a , say, 0-5 point
scale. A rating of “0” is given for the poor performance on quality; and rating “5” given for
the best performance. The other factors identified are also assigned rating values for the
individual supplier. Then, weights are assigned to these factors based on relative importance,
and the total score is calculated supplier wise. This method is similar to the ‘Categorical Plan’
but for its quantitative nature.
Table 8.1 Point Rating Plan
Sl. Factors for Weightage Supplier
No. evaluation A B C D
1. Quality 30% 2 4 3 4
2. Service level 20% 3 3 5 3
3. Price 30% 4 4 4 4
4. Delivery time 20% 3 5 3 3

Overall rating 3.0 4.0 3.7 3.6

In the example shown in Table 8.1, supplier B has obtained the topmost rating; the second
rating obtained by suppliers C; and the third rating obtained by supplier D; the Supplier A
obtained the lowest rating. The factors considered, in this example, are only representative
and not exhaustive. The real life supplier rating plan will be considering more factors on the
different facets of supplier performance.

Supplier integration: Supplier integration should be considered at all stages of the supply
chain activities. It starts from the product development itself. Customer involvement in the
product design and development stage will avoid later problems in manufacturing and will
eventually reduce delays and quality problems.
Supplier integration has to be carried out in the order processing, as well as monitoring of
inventory at the customer’s works. This could be carried out by electronic linking of the
supplier and the buyer, which will ensure quicker and efficient processing of order.
Continuous monitoring by the supplier of inventory levels at the customer’s stores will ensure
that there is no shortage of inventory at the storefront. The linking of customer database and
the supplier’s computer, by adopting networking techniques like EDI or Internet, will enable
better supplier integration and information sharing. The use of information and
communication technology in supply chain will be discussed in chapter 14 later.

OTHER MAJOR CONSIDERATIONS IN OUTSOURCING

The other major considerations in outsourcing are product design and the level of technology
involved. The product design can be simple and integrated in case of design of furniture like
chair or table. However, the design of a modern passenger car could be more complex. It
might be designed modular in construction for technological reasons. The aspects of integral
design and modular design are being discussed elaborately later in this chapter. The
technology involved could be simple in case of sourcing farm grains for a product like
‘Ceralac’ (baby food) manufacturing at one end of the technology spectrum; and at the other
the other end of the technology spectrum could be sourcing of carbon fibre shell required for
the manufacture of the latest fuel efficient version of airliner by a leading aircraft
manufacturer in Western Europe.

PRODUCT DESIGN AND LEVEL OF OUTSOURCING

The product variations and complexity of a product could depend on factors such as the
following: 1. performance requirements, 2. technology involved, and 3. product architecture.
Performance requirement options are generally forced by the demand from customers. The
requirement of the customers will have to be taken care of to keep a strategic advantage in
marketing by meeting the needs of customers. The main aspects to be considered while
making the product design are simplification, standardization, and modularity.
Simplification aims at reducing the number of parts, assemblies, or options in a product.
Value engineering and/or value analysis could prove effective in carrying out simplification
during the product design.
Standardization is another important aspect to be considered while doing product design.
The goal of standardization is to use commonly available and interchangeable parts. National
and international standards govern the design specifications of most of the products. Parts and
components manufactured by various firms are in adherence to these standards and hence
ensure a higher level of inter-changeability. For example, trucks are installed with standard
wheel sizes as per national / international practices. This ensures use of different brands of
tyres and tubes for trucks. Imagine a situation where each truck / bus chassis being fitted with
wheels of different sizes and the complexity involved in keeping a variety of tyre / tube
inventory for a large fleet of trucks or for a state owned bus transport corporation with fleet
strength in thousands.

Modularity in product design combines standard building blocks or modules to make the
equipment or machinery. For example, Maruti cars are modular in design. The fault finding
and carrying out of repair activities while servicing, could be made simple when the car is
modular in design. The product architecture / design could be broadly classified into two
categories:
 Integrated design
 Modular design
Integrated design: Integral design aims at designing the product as whole in order to deliver
the functionality required from it. The individual part or components does not have an
individual identity in the integral design. Identifying product failure and tracing its cause is
difficult in the case of integral design.
Modular design: ‘Modularization’ is to build a complex product or process from smaller
subsystems that can be designed independently yet function together as a whole. Modular
design has many advantages and it enables system outsourcing. Modular design helps
identifying the cause of system failure. The subsystem responsible for the product failure
could easily be identified and this enables better control of quality of subsystem and
components supplied by the vendors.
Product architecture will also tend to influence on the level of outsourcing. A complex
product gives rise to coordination challenges during every stage from concept to
commissioning. The complex nature of the product may not allow outsourcing because
failure detection in case of such complex system might be difficult as well as the failure of
any of the components in such a complex product may be catastrophic. Hence, it may not be
preferable to outsource such items whose design is integral in nature and complex.
Modular construction of the total product may allow greater level of outsourcing, because
responsibility for quality of the individual module can be very easily located. Identifying the
failure cause in case of modular construction is relatively easier as a particular failure could
be traced easily to the specific module which has caused it. The benefits of modular design
are:
Products designed easily in segmented components,
Adds flexibility to both production and servicing,
Allows mass customization of the products.
The other important aspect to be kept in mind while designing a product is the manufacturing
and assembly requirements. This approach is called design for manufacturing and assembly
(DFMA). In order to reduce the time-to-market of a product, a multifunctional design team
could be formed for effective product design. The multi-functional team could adopt
concurrent engineering of product by taking into account the design specification
requirements as well as the manufacturability, keeping in mind the process capability of the
manufacturing process. This design approach which is called ‘concurrent engineering’ takes
care of not only design specification / quality requirements but also adopts a price-minus
system making the product more competitive in the market.
Design for manufacturing is to do with designing a product for easy and economical
manufacturing.
Design for assembly adopts a set of procedures in order to reduce the number of parts in an
assembly. System sourcing could come handy in this case and make assembly easier. Design
for assembly also evaluates the assembly methodology involved and ensures that the product
design is such that it enables easy assembly.

LEVEL OF OUTSOURCING AND TECHNOLOGY INVOLVED

Technology involved in the product will have a great influence in the level of outsourcing. A
very high technology item, needed for assembly in the final product, may generally be
manufactured in-house. At the other end, a low technology standard item might generally be
procured from a standard supplier. In case of standard items and items for which standard
suppliers have been developed, there is a higher degree of tendency to outsource the item.
The extreme case of outsourcing is Vendor Managed Inventory (VMI) and is being practiced
as one of the latest logistics technology.
Vendor Managed Inventory (VMI) is a specific case of outsourcing where in the supplier is
provided with floor space in assembly line. He will assemble his component(s) in the
assembly line with his labour force. Supplier takes full responsibility for the component stock
availability, quality, etc. The organization does a supervising job as for as this component is
concerned, by carrying out final inspection for passing the product.
An automobile assembly plant in a Canada practices Vendor Managed Inventory (VMI).
Each supplier occupies a section of the plant and takes full responsibility for mounting of a
complete assembly (eg., chassis, axles, and suspension, wheels, and tyres, engines etc.). The
car manufacturing company (also called OEM) operates the last module in the sequence, the
final product testing.
System sourcing: Another aspect to be considered regarding product design and its impact on
supply chain management is system sourcing. System sourcing is primarily about outsourcing
of assembly activities. It reduces the number of suppliers (or) the supplier base. In system
sourcing, a number of component suppliers are replaced with a system supplier. For example,
the dashboard panel instruments could be the system sourced from one supplier allowing the
supplier to take care of the subcomponents like dashboard meters, controls and
instrumentation.
System sourcing takes advantage of the concept of ‘modularization’. The main advantage of
modularity is its potential to build “a complex product or process from smaller subsystems
that can be designed independently yet function together as a whole. Carbone (1999) has
expressed that use of system sourcing has made the life easier for OEM purchasers. However,
in practice, when a company goes in for system sourcing of complex products, it could
involve extensive division of labour and clear definition of interfaces. Hence, proper planning
has to be carried out regarding interfaces between different systems sourced from outside
sources and the systems manufactured in-house.
A buyer company with a higher level of design and manufacturing capability may outsource a
fewer number of systems and a company with lesser design and manufacturing capability, on
the other hand, may source systems and subsystems to a larger extent.

==================================================================
System sourcing decision criteria:
Gadde and Jellbo (2002) have identified five important components influencing the system
sourcing decision: System definition, Product development and design, Manufacturing
activities, Supplier capability, and Customer capability.
System definition: While trying to define the system and identifying the product architecture,
the following aspects are to be taken care of:
a. Partitioning of the functionality of the total system into functional elements,
 b. Mapping of functional elements to physical components,
c. Specification of the interfaces among interacting physical components.
Product development and design: The product architecture and the process of portioning,
define the subsystems, and the interfaces among them. Then, the next step is division of
labour in the process of product development and manufacturing. Some of the tasks are done
in-house by the buying company while others are taken care of by the supplier. There should
be clear cut definition of responsibilities attached to supplier as well as buyer.
Manufacturing activities: The portioning of design and development activities decides the
division of manufacturing responsibilities between the system outsourcing firm and the
system supplier.
Supplier capability: the sourcing decisions taken by a customer are affected to a large extent
by the internal resources as well as the capability of the supplier.
Customer capability: It is equally important as the supplier capability. The division of labour
during system design as well manufacturing in a system outsourcing environment will be
greatly influenced by the internal design and manufacturing or assembly capabilities of the
the system buyer.
==================================================================

E- PROCUREMENT
E- procurement could be defined as direct procurement of materials / components from
suppliers through the Internet. Generally, companies tend to buy MRO (maintenance, repair,
and operation) items through Internet. Indirect materials or MRO items cost less when
compared to direct materials which go into the final product that the company makes. The
firm may be less worried about quality of indirect materials since they do not directly affect
the quality of final product. Companies which buy direct materials through Internet, do so
with trusted suppliers with whom they have built a relationship. Such extensive procurement
of direct materials through Internet involves, generally, establishment of electronic
integration between the supplier and the buyer.
E-Marketplaces: consolidates the goods and services offered by many suppliers into a web
site (like a catalog). Low valued and less critical MRO items are sourced cheaply and easily
through Internet in an e-marketplace. E-marketplaces for direct materials consolidate the
materials and parts from a less number of established suppliers and offer them through
exclusive websites. Some e-marketplaces restrict participation to suppliers who have already
been certified for quality and other supplier performance parameters.
Examples of e-market places are: ebay, epiq, etc.
Figure 8.2 Electronic market place – ebay website

There are also other companies like amazon, barnes and noble, officedepot, and landsend,
which offer products through electronic catalogs.
Aviall with its headquarters at Dallas, is a wholly owned subsidiary of Boeing Company.
Aviall provides new aviation parts and related aftermarket operations like repair services.
Aviall markets and distributes products for 250 suppliers and offer approximately 2,00,000
catalog items through its 40 customer service centers located in North America, Europe, and
Asia Pacific.
Reverse auctions: is an e-market framework in which buyers put up in their web sites the
items they want and request suppliers to quote. A time limit is set for bidding; on bid time
closure, the lowest bidder wins the auction. The successful bidder who has given the lowest
quote (of course the supplier should also qualify in other criteria like quality, technical
capability etc.), supplies the material. It is just the reverse of the traditional auction process
(in which the product is put up for auction, the highest bidder buys the product/material) and
hence the name.

Summary
We know that supply chain involves three flows viz. products/materials, information, and
cash. The material constitutes around fifty five percent of the cost of goods sold in a typical
manufacturing firm. This indicates the importance of sourcing and procurement. The
purchasing or procurement is the activity which initiates flow of materials in the supply
chain. A thoughtful approach to selecting suppliers, and making purchase decisions could
ensure timely delivery of materials/parts/components from suppliers.
Organizations have been outsourcing products and services for various reasons depending
upon the business requirements. The reasons could be either short term (tactical) or long-term
reasons (strategic). Generally followed traditional practices with respect to supplier base had
been to limit the amount of purchases from a single supplier (to say, something like 10 to
20%). This was to ensure that the impact on the buyer is not enormous in the event of the
supplier is, due to any unforeseen reason or otherwise, not able to meet the delivery
schedules, unable to ensure product quality, or goes out of the business. However, the latest
supply chain practice is to have one supplier for each component and this concept is called
single sourcing. Single-sourcing results in less number of suppliers for the firm.
Supplier-Buyer relationships could be: Competitive bidding, Ongoing relationship, Business
Partnership. Monczka has categorized the buyer-supplier relationships into the following four
categories: Antagonistic, Adversarial, Cooperative, and Collaborative.
Suppliers are the best intangible assets of any organization. Hence, selection of the right
supplier is a very important aspect of outsourcing. The supplier should ensure timely supply
of raw material inputs to the customer organization downstream of the supply chain, as well
as ensure good quality keeping in mind the overall performance of the supply chain.
The factors considered while making supplier selection are: company history, financial
performance, management attitude, quality, cost management and control, delivery
performance, service, human resources, and technical capabilities.
Continuous supplier involvement is a necessity to ensure proper servicing of customer
requirements. Supplier development, supplier training, supplier certification, and supplier
evaluation are essential features of overall sourcing performance. Supplier evaluation is done
by firms using categorical plan, and point rating method.
Electronic market places could be used for procurement of regular MRO items. The direct
material required for manufacturing or assembly could be procured from trusted firms online
with which the company has strong business relationship. Companies like Aviall provides
aftermarket components and repair services for airlines.

End Chapter Questions:

1. Explain purchasing as a function in supply chain.
2. What are the broad based categories of materials that are procured by the focal enterprise
in a supply chain?
3. Categorize the materials purchased by an organization based on importance.
4. What are the main reasons for outsourcing?
5. What do you understand by single sourcing and what are its advantages?
6. Explain the different types of relationships that could be maintained between a buyer and
supplier. Give examples.
7. What are the four different kinds of supplier-buyer relationships that results in either:
loose/loose, win/loose, or win/win situation? Highlight the relationships that bring about
a win/win situation.
8. Explain the importance of procurement.
9. Enumerate the objectives of procurement function.
10. What are the benefits of organized procurement?
11. Summarize the steps involved in supplier evaluation and supplier selection process.
12. What are the main aspects on which supplier need to be trained? In what specific areas
developmental assistance could be provided to suppliers?
13. What are the main advantages of supplier certification?
14. Explain the commonly used supplier performance evaluation methods.
15. What is ‘categorical plan’ of supplier performance evaluation?
16. Explain ‘point rating method’ of supplier performance evaluation.
17. Explain in brief the supplier integration process.
18. How does product architecture influence the level of outsourcing?
19. What are the benefits of modular design?
20. Explain the concept of ‘design for manufacturing and assembly (DFMA)’.
21. How is the level of outsourcing influenced by technology involved?
22. Explain vendor managed inventory (VMI) with an example.
23. Explain the concept of system sourcing.
24. Define e-procurement and explain its relevance in supply chain management.
25. How does an e-market place function?
26. Define ‘reverse auctions’.

Essay questions
1. Enumerate the major factors considered in supplier selection. Explain in detail.
2. Explain integral and modular product design. What is the impact of product design on
outsourcing decision?.
3. What are the important considerations that influence the system sourcing decisions?
----------------------------------------------------------------------------------------------------------------
Mini Case 8.1: McDonalds - Sourcing
McDonalds is a company that is committed to working with local suppliers and farmers to
source its supply requirements. The company identified a major weakness in the agricultural
supply chain in India. With its poor storage and transportation infrastructure, India has been
facing huge losses in food due to wastage. McDonalds pioneered to develop cold storage in
the food supply chain in its Indian operations which would ensure the quality of its supplies.
McCain Foods which is the supply chain partner, worked closely with farmers in Gujarat in
order to produce high quality potatoes. The farmers were given assistance with respect to
irrigation system, sowing seed treatments, planting methods, fertilizer application, and better
storage.
Radhakrishna Foodland has developed and put in place a better facility and infrastructure to
meet the requirements of McDonalds to provide ‘Cold, Clean, and on-time Delivery. This
resulted in an agreement with McDonalds and Radhakrishna Foodland became the
‘distribution centres’ operator for McDonalds restaurants in Mumbai. The distribution center
plays an important role in ensuring that the supplies received for the restaurants are
absolutely fresh and as per McDonalds quality standards.
McDonalds in the process of working with local suppliers benefits the community in terms of
transfer of advanced technology and state-of-the-art procedures in the areas of agriculture,
food processing, warehousing and distribution, restaurant equipment manufacturing,
restaurant operations, and other food chain related areas. A good example of McDonalds
practice to work with local supplier is Trikaya Agriculture, supplier of fresh iceberg lettuce.
Lettuce could be grown only in the winter months initially. But with McDonalds expertise in
Agriculture, the Trikaya farms in Maharashtra could grow lettuce throughout the year.
McDonalds has provided assistance to Trikaya in the areas of high quality seeds selection,
advanced drip irrigation technology, and refrigerated transportation system. This allows
Trikaya to supply fresh, high quality lettuce to McDonalds urban restaurants that are
thousands of kilometers away.
Trikaya post harvest facilities include a cold chain consisting of a vacuum pre-cooling room
to remove field heat, a large cold room and a refrigerated van for transportation where the
temperature and the relative humidity of this crop is maintained between 1 degree C and 4
degree C and 95% respectively. Vegetables are in the pre-cooling room ensures rapid cooling
to 2 degree C within 90 minutes. The pack house, pre-cooling and cold room are located at
the farms itself, ensuring no delay between harvesting, packaging, and cold storage. Thus
resulting in freshness and no spoilage of the input materials sourced for the company’s
operations.
Dynamix Dairy, Baramati (Maharashtra) supplies cheese for McDonalds. Dynamix has a
100% computer control, high tech automation equipment. The farms in the Baramati district
are scattered and there are longtime lapses between milking of the cows and the final
refrigeration of the milk at the dairy farm. The lack of proper refrigeration can impact the
quality of milk. Dynamix developed a ‘cold chain’ by installing 45 collection centres with
bulk coolers in Baramati district. This enabled prevention of further bacteria growth and
preserving freshness of milk. Collection centres were provided with electronic testing and
measuring instruments so that milk producer could obtain exact value for his milk.
Vista Processed Foods Pvt Ltd., is another player in the McDonalds Cold Chain, and Vista
supplies chicken and vegetable range of products. The infrastructure developed by vista
includes hi-tech refrigeration plants for manufacture of frozen food at temperatures as low as
-35 degree C. This is vital to ensure that the frozen food retains its freshness for a longtime
and the ‘Cold Chain’ is maintained. The frozen product is immediately moved to the cold
storage rooms. Vista has installed hi-tech equipment for both the chicken and vegetable
processing lines, which reflect the latest processing technology (de-boning, blending,
forming, coating, frying and freezing). For the vegetables range, the latest vegetable mixers
and blenders are in operation. Also, keeping cultural sensibilities, absolutely separate lines
are maintained for vegetables and non-vegetarian products. Vista is now capable of offering a
wide range of frozen and nutritious chicken and vegetable products.
Questions:
1. What is the basic commitment McDonalds follows in identifying its suppliers?
2. Explain in brief about the various suppliers of McDonalds.
3. What are the technologies that the McDonalds supply chain adopts in its food
processing?
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 8.2: L&T CONSTRUCTION
Larsen & Toubro Group’s total revenue for the financial year 2018-19 stood at Rs. 1,410
billion. L&T’s Construction Division with its Headquarters at Manapakkam, Chennai is
acknowledged as an excellent green campus spread over 27 acres. L&T has expanded its
operations to countries like the UAE, Bangladesh, Sri Lanka, Malaysia, and South Africa.
L&T came into being in 1938 when two Danish engineers Henning Holk Larsen and Soren
Kristian Toubro set it up as a partnership firm. In 1946, L&T became a private limited
company and in 1950, it turned into a public limited company. L&T was involved in a wide
range of diversified businesses such as: engineering products, earthmoving equipments,
chemical and industrial machinery. L&T is also involved in shipping, and information
technology. L&T served core sectors of the economy like power, infrastructure, oil & gas,
refinery, petrochemical, chemical, cement, steel, mining, etc.
L&T established a leadership position in most of its businesses, thanks to its high tech
engineering capabilities, commitment to quality, and distinguished record in customer
services. In terms of sales, assets, and market capitalization, L&T was one of the top ten
private players in the country while in terms of intellectual capital and brand value it held the
top rank in the Indian market over several years.
L&T earned its reputation through its success in undertaking constructions and supplies for
the infrastructure and large scale industries. It also caters to critical segments of industries
like Nuclear, Hydropower, and Foundation engineering, Transportation & Civil
infrastructure, power plant construction, Hydrocarbon construction & pipelines, engineering
design and research, Electrical & Instrumentation, Transmission lines, industrial projects ,
etc.
The operations of L&T Construction Division was dispersed geographically and it had large
number of participants in its supply chain (in India alone, L&T Construction Division had
approximately 6000 suppliers located in 350 locations) which made it more complex.
Absence of any established IT solution made the situation still worse.
In order to face the challenge of implementing an effective supply chain management (SCM)
system, L&T opted for a web-based SCM solution. It not only made the task of tracking the
vendors easier, but also reduced the time spent on negotiations with them since the vendors
could post their bids online through the company’s website.
In order to keep track of its operations at different locations, L&T Construction came up with
an idea of connecting all its project sites with its headquarters in Chennai through the Internet
and launched its in-house information system, Enterprise Information Portal (EIP).
L&T Construction Division handled turnkey industrial and infrastructure projects in civil,
mechanical, electrical, and instrumentation engineering. The sourcing of materials ensuring
quality, and timely delivery is a complex task.
The materials department of L&T Construction Division got itself ISO 9002 certified,
indicating the level of importance it gave to the management of its suppliers. L&T
Construction Division adopted a sound and efficient supply chain management strategy in
order to keep the supply chain costs to the minimum.
One constant challenge for L&T Construction Division was the nature of the construction
industry itself. With its projects located across various geographical locations and many
suppliers (larger supplier base), it was difficult for L&T Construction Division to keep the
supply chain costs low.
In order to handle the complex challenge of implementing an effective supply chain
management (SCM) system in the company opted to implement a web-based SCM solution
built on Microsoft Technologies – SQL Server 2000, and Windows 2000 Server in the early
2000. The system worked on an on-line-off-line-delivery strategy. The company could now
streamline its entire vendor network.
Questions:
1. What are the segments of industry to which the L&T Construction caters to in the
various types of construction infrastructure?
2. Highlight and discuss the complexity in sourcing function for L& Construction
3. What are the information technology solutions implemented in L&T Construction
Division?
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 8.3: GSK Pharmaceuticals
GSK Pharma was established in the year 1924 in India and is one of the oldest
pharmaceuticals company. GSK Pharma employs 4500 people and is a leading research
based pharmaceutical company. GSK Pharma offers prescription medicine and vaccines. The
prescription medicine includes therapeutic areas such as anti-infective, dermatology,
gynaecology, diabetes, oncology, cardiovascular disease and respiratory diseases. The
vaccine product range includes vaccines for prevention of hepatitis A, hepatitis B, invasive
disease caused by H, influenza, chickenpox, diphtheria, pertussis, tetanus, rotavirus, cervical
cancer, streptococcus pneumonia, and others.
The company’s aim is to improve the quality of life of people, enable them do more feel
better and live longer. The company believes in being closely linked to the communities
where they operate. The company achieved sales revenue of Rs. 2896 crores and profit after
tax of Rs. 352 crores for the year 2017-18.
The GSK procurement function is spread across 50 countries. The company’s procurement
team do more buying goods and services. They constantly innovate and add value to the
entire business and its supply chain.
The company operates an electronic portal for its suppliers in an attempt to enhance the
relationship with its suppliers. The company values supplier feedback and welcomes
innovation from suppliers and third parties involved in its activities.
Questions:
1. What are the products offered by GSK Pharma?
2. Discuss the steps and actions taken by GSK Pharma towards better supplier
relationship management.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 8.4: Essar Oil
Essar is multinational corporation with an annual turnover of 35 billion US dollars. The
company has investments in steel, energy, infrastructure, and services. Essar was started in
1969 as a construction company and has grown into various businesses over the decades.
Essar has been foraying into newer markets in an attempt to keep growing and keep its
entrpreneurial spirit alive.
The gross revenue of Essar oil was Rs. 27419.49 crores and Profit / Loss after tax was Rs.
(14240.6) cores. Essar oil is a world class, low cost refining company with a capacity of 20
million tonnes per annum. Essar oil’s Vadinar refinery in Gujarat is India’s second largest
single location refinery with an annual capacity of 20 MMTPA. The refinery produces
405,000 barrels per day (bpd). Essar oil operates around 1400 retail fuel outlets through a
franchise model. Another 600 retail outlets are in the process of commissioning.
Questions:
1. Discuss the Essar Oil operations in India.
2. Visit the web site of Essar Oil and explain the effectiveness of the Essar Oil supply
chain.
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09. INVENTORY MANAGEMENT

Learning objectives:
1. Understand importance of inventory and its management in the supply chain.
2. Recognize the different types of inventory.
3. Learn about the inventory cost components
4. Learn to use major inventory control techniques: EOQ, EBQ, ABC analysis, etc.
5. Understand ‘Bullwhip Effect’ and reduction of its effect on the supply chain.

It may be recalled that in supply chain, we are concerned about flow of materials, cash, and
information. According to Monzcka et al (2002), in a typical manufacturing firm the
materials cost account for 55 percent of the cost of goods sold. This is a sufficient enough
reason to have a detailed consideration of the materials within the firm and also in the total
supply chain. The definition of supply chain includes three flows and one of the three flows is
materials flow. Inventory is one of the four drivers of supply chain performance. Inventory
which is held in various forms such as raw material, work-in-process, and finished goods
contributes to the cost of operations of the firm and the supply chain. It is the objective of
inventory management to operate the firm / supply chain with minimum inventory and still
provide a good service level to the customer in terms of product availability.
Material storage occurs at various stages in the supply chain when raw materials flow from
one end of the supply chain to the other end, during this processes it gets converted into
finished product for consumption by the customer. The material accumulated for the further
use / processing is called inventory. A typical manufacturing organization carries the
following types of inventories:
 Raw materials
 Procured components and subassemblies
 Partially completed components (work-in-process)
 Tools, jigs and fixtures
 Consumables like welding rods, lubricants, cotton waste etc.
A service organization holds typically the material and consumables required for serving a
customer, for example a fast food center may hold the following items for serving a Cheese
Burger: Burgers, Ketchup, Mustard, Bun, Cheese, Pickles. It should be noted that the fast
food center will stock other materials also, which may be required to serve the customers
with different types of cuisine. On the other hand, a passenger car manufacturer might hold
stocks of various brands cars, spares required for each of the car brands, etc.
The inventories of various kinds are kept both by manufacturing as well as service
organizations in order to:
 Meet the anticipated demand in the supply chain.
 Smoothen the production requirements; to match demand and capacity.
  Avoid stock-out situation; thereby not interrupting the smooth functioning of the supply
chain.
 Take advantage of price discounts offered by suppliers while keeping total inventory
cost minimum.
 Safeguard from undue price fluctuations in the supply chain.

INVENTORY SYSTEMS
Manufacturing firms as well as service organizations need materials and supplies for their
operation. These materials and supplies which are stored for future consumption are called
inventory. Manufacturing firms use large amount of materials and supplies and it consists of
raw materials, components, subassemblies and other supplies. Materials account for a major
portion of the cost of production in manufacturing firms.
Service organizations use less raw material and components, and might use considerable
amount of supplies and service parts. Examples of service organizations are railways,
airlines, hospitals, educational institution, etc. As you might notice, both the types of
organizations use a good amount of components and supplies for their operation.
Storage of materials and finished goods, and proper inventory control are important not only
for the manufacturer but also for distributors and retailers as well. The main objective of
inventory control is to minimize the total cost of holding the necessary amount of raw
materials and supplies, without the risk of running a stock-out.
The different type of inventory held is shown in Figure 7.1 clearly. The materials held in
stock could be broadly classified into the following categories:

Operation system

Work - in - Finished
Raw
process goods
materials,
supplies

Consumables Spare parts

Immediate
Supplier Firm
Customer

Figure 9.1 Different types of inventory - held in the supply chain

Raw Materials: The materials, parts, components, and sub assemblies delivered at
organizations stores, meant for consumption during operations. Suppliers provide the raw
material.
Work in process: These are materials, parts and components that are undergoing conversion
during the manufacturing process.
Finished goods: are the outcomes of production and are ready for shipment to customer or
storage.
MRO (Maintenance, Repair, Operation) items: include repair and service parts like bearings,
nuts and bolts, consumables like lubrication oil, grease, cotton waste, etc.
Further, firms involved in manufacturing might require Tools, Jigs and fixtures,
The inventory requirement in an operations system could be classified into the following two
categories, based on the concepts by which their requirements are estimated.
i) Independent demand inventory
ii) Dependent demand inventory
The independent demand inventory system uses the customer demand forecast as the basis.
The firm has no control over the independent inventory demand. The following discussion
covers the different methods adopted for independent demand inventory control. Example for
independent inventory: demand for a passenger car brand.
The demand forecast is the first input for planning in any organization. Capacity planning and
aggregate planning are carried out based on the demand forecast. The outcome of aggregate
planning is the in-house manufacturing or production which results in master production
schedule (MPS). The master production schedule indicates the demand for finished products
to be produced in-house. The dependent demand inventory system estimates the demand for
items (components, parts, subassemblies) from the master production schedule. The materials
requirements planning (MRP) system calculates the dependent demand for all the items
required for the manufacturing system by taking MPS, bill of materials (BOM), inventory
records as input. The dependent demand inventory management is covered in detail under the
topic “Material Requirements Planning (MRP)”. The reader is suggested to refer any good
book on ‘operations management’ for further details. Example for dependent inventory: steel
coil, wheels and tyres, steering system, engine, transmission, electrical accessories, etc.,
required for a particular passenger car brand.

Inventory system cost: Let us have a brief description on different inventory cost
components and then we will discuss the different methods of inventory control. The total
inventory cost consists of the following components:
a. Unit cost, b. Ordering cost, Holding cost, d. Shortage cost
Unit material cost: It is the cost per unit item of the materials kept under inventory. It is
relatively easier to obtain the unit cost, as it could be obtained by referring to the latest bill or
invoice. It becomes complex to find the unit cost when there are more than one supplier and
supplies are made by them with different terms and conditions. Also, Unit cost becomes
difficult to estimate when a particular component is made internally (say, by another unit of
the same company). Setting the transfer price for the component is mostly a difficult task for
the components which have been made and supplied by another unit of the same company.
Ordering cost: is the cost involved in reordering a particular item from the supplier.
Ordering cost consists of costs of preparing and placing a purchase order, computer cost (cost
of computer time used in preparation of the order), cost of correspondence and telephone
charges, cost involved in receiving the inventory, etc. The cost considered here is for the
repeat orders (reordering cost), as the cost of first order could be phenomenally higher, as the
first order involves more elaborate procedures and checks.
Holding cost: is the cost involved in stocking one unit of material or a component for a unit
time (generally 1 year period is considered). The holding cost consists of interest for the
money (or fund) locked up in the inventory held as well. Holding cost comprises of the
following cost components: Interest, handling cost, storage, obsolescence, spoilage, inventory
administration cost, and cost of insurance. Annual inventory carrying cost could be in the
range of 25 to 30 % of the material cost or more.
Shortage cost: Shortage occurs when an item is needed, but could not be supplied from stock.
The simplest form of shortage cost is the loss in profit due to lost sales. The effect of
shortage is much more serious than just loss of sale; it includes loss of good will, loss of
image and reputation of the organization, and loss of future sales. Shortages of raw materials
for production process might force stoppage of the plant, affect manpower requirement and
maintenance schedule. Shortage cost might include cost of remedial measures taken, in the
event of shortage of a particular inventory item. This could include penalty, cost involved in
expediting orders, additional cost for special deliveries, etc. It may however, be noted that
shortage cost is the most difficult to find, of the cost component of inventory system cost.
The following methods of inventory control are discussed here in this section:
i. Q-system , and P-system
ii. EBQ (Economic Batch Quantity)
iii. Selective Inventory Control
Economic order quantity (or) Q-system: Economic order quantity (EOQ) model was
developed by Wilson in the year 1920’s. The model assumes that the demand is constant and
the order quantity instantly replenished (or) it assumes a fixed lead time, and no shortage is
allowed. The EOQ model is deterministic as it allows no uncertainty. The model is also
called as ‘saw tooth’ model (or) fixed order quantity model. The EOQ model considers the
following cost components: Ordering cost, Carrying cost, and Material cost or unit cost.
The model attempts to find an optimum order quantity. The annual total inventory system
cost is found to be a function of the ordering quantity. Then, by partial differentiation of the
total inventory cost (TC) function with respect to Q and equating to zero, the economic order
quantity is determined. This method will minimize the total inventory cost.
Let, D be the annual demand in units.
C be the unit material cost in Rs per unit.
 C0 be the ordering cost in Rs / order.
Cc be the carrying cost in Rs/unit/year.
In case, carrying cost is expressed as percentage of material cost, then the carrying cost is
equal to i * C, where ‘i’ is carrying cost expressed as a percentage (%) of unit material cost.
Let us say that the annual inventory carrying is 25% of material cost, and incase the unit
material cost = Rs. 40. Then, the inventory carrying cost CC = i * C = 0.25 * 40 = Rs. 10
per unit per year.
Let, Q be the ordering quantity. T be the cycle time.
Annual carrying cost = Average inventory * Carrying cost
= {Q + 0} / 2 * Cc = Q* Cc
Annual ordering cost = No. of orders per annum * ordering cost per order
= D / Q * C0
Annual material cost = D*C
Therefore,(TC) Total inventory cost = D * C + Q / 2 * Cc + D / Q * C0
d(TC) / dQ = Cc / 2 - D / Q2 * C0 (Partial differentiation w.r.t Q)
We will equate d(TC) / dQ to zero, to find out the optimal ordering quantity.
which gives, Cc / 2 - D / Q2 * C0 = 0
Hence, Optimal ordering quantity Q* = SQRT(2 DC0 / Cc)
Second order differential of the total cost (TC) is positive (+ve) and hence Q*(economic
order quantity) minimizes the total cost, TC.

Time
T

Figure 9.2 Economic order quantity inventory model

We will now plot total inventory cost at various levels of order quantity (Q) as shown in
Figure 9.3. The material cost is not taken into account as it is fixed (per annum) and is not a
function of ordering quantity (Q). The two cost components considered for plotting the total
cost curve are inventory carrying cost and ordering cost.
It may also be noted that the total inventory cost is fairly flat over a considerable range of
order quantities in the vicinity of EOQ (Economic order quantity). This means that a
marginal error in the estimation of EOQ is not going to drastically increase the total inventory
cost. This is one of the advantages of EOQ model. The error may be caused in wrong or
incorrect estimation of: i) carrying cost ii) ordering cost or iii) annual demand. However, the
analyst should attempt to minimize such estimation errors.
 The total inventory carrying cost, (Q / 2) * Cc , rises linearly with Q.
 The total ordering cost (D / Q) * C0 , falls as Q increases.
The behavior of inventory cost components viz. total inventory carrying cost, total ordering
cost and total inventory cost have been shown graphically in detail, in the Figure 9.3

Total annual inventory

cost (variable portion)
Inventory
cost
Total inventory carrying
cost = (Q / 2) * Cc

Total ordering cost

= (D / Q) * Co

Q* Order quantity
(EOQ)

Figure 9.3 Total inventory cost and its components

Problem (1): Excel company ltd buys bearings used in the various plant machineries. The
annual demand for the bearings is 1500 units The unit price of the bearing is Rs.500 per unit
and the carrying cost is Rs.120 per unit per year. The ordering cost is Rs.650 per order.
Calculate the economic order quantity. Also, find out the total inventory cost, number of
orders per year, and the cycle time.
Solution: D = 1500 units.
C = Rs. 500 per box.
C0 = Rs. 650 per order
Cc = Rs. 120 per unit per year.
Economic order quantity (EOQ) = SQRT(2 DC0 / Cc) = SQRT((2*1500*650)/120)
= 127.48 units
Annual ordering cost = D / Q * C0 = 1500 / 127.475 * 650 = Rs. 7,648.5
Annual inventory carrying cost = Q / 2 * Cc = 127.475 /2 *120 = Rs. 7,648.5
Total Annual inventory system cost = Q / 2 * Cc + D / Q * C0
= 7648.5 + 7,648.5 = Rs. 15,297
Number of orders = D / Q = 1500 / 127.475 = 11.77 =12 (approx.)
Cycle time = 365 / Number of orders per year = 365 / 11.77 = 31 days

Reorder level: The economic order quantity answers the question of how much to order, but
we should know when to place the order (as instant replenishment assumed in EOQ model is
not practical). This aspect is taken care of by estimating a specific reorder level, for
placement of orders. Order is placed once the inventory reaches the reorder level. The reorder
level is directly linked with lead time. Lead time is the time taken from the moment an order
for a particular item is initiated and the arrival of items at the stores. The lead time comprises
of the following:
i) Preparing an order and sending it to supplier
ii) The supplier assembles the goods and prepares for shipment.
iii) Ship the goods to customer works.
iv) Goods are received, inspected and stored.
Depending upon the situations, the lead time could vary from a few hours to weeks or
even months. In case of firms where suppliers are very close by at arm’s length, the lead
time for material supply could be minimal. Where as an overseas supplier may take a few
months to supply material from the time the order is placed. It is however clear that the
order should be placed ahead of the inventory reaching zero, and ahead of by the lead time
associated with the particular supplier. Hence, the reorder level equals the lead time
demand.

Economic order
quantity

Reorder level

L Time
T

Figure 9.4 Q- system of inventory control

 Reorder level = Lead time demand
ROL = L * D
Where, L is the lead time; and D is the annual demand.

For problem1 discussed above, let us say that the lead time for the bearing is 12 days as
indicated by the supplier). Then, what is the reorder level?
Reorder level = L * D = (12 / 365) * 1500 = 49.3 units
The ordering is done at reorder level such that a quantity equal to EOQ arrives exactly at the
end of lead time. The inventory level has to be continuously monitored to find when the
inventory level reaches reorder level. This is implemented or effected by following a Kardex
system and reviewing the inventory continuously. The other method of implementing the
reorder level is to introduce ‘two bin’ system, in which case the inventory is held in two bins.
It consists of a larger bin and smaller bin and the smaller bin holds inventory equal to reorder
level. The balance quantity is kept in the larger bin. The inventory is drawn from the larger
bin first. Once, the larger bin is emptied, it means that we have reached ROL (Reorder
Level), and immediately an order is placed. Then, the inventory kept in the smaller bin which
is equal to ROL, is consumed during the lead time. At the end of the lead time, the order
quantity arrives and both the bins are replenished. This system of maintaining inventory is
called “Two bin system”.

Problem2: An item supplied by Fantasy private limited, has unit price of Rs.600 per unit. The
demand for the item in 40 units per week and the carrying cost in Rs. 3 per unit per week.
The ordering cost in Rs.360 per order. The company promises a lead time of 2 weeks for
making the supply on receipt of order. What is the reorder level and ordering policy?
Ans: D = 40 unit per week
Cc = Rs.3 per unit per week
Co = Rs.360 per order
L = 2 weeks

Economic order quantity (EOQ) = SQRT(2 DC0 / Cc) = SQRT((2*40*360)/3) = 98 units

Reorder level = L*D = 2*40 =80
The above procedure works well provided the lead time is less than the cycle time. On the
contrary, if the lead time is 3 weeks. Let us say, the supplier informs the company that the
lead time will be increased to 3 weeks due to some problem in their works.
Then, the recorder level = L x D = 3 x 40 = 120 units.
The problem here is that the inventory level will only vary between 0 and 98 (EOQ) and will
never reach ROL = 120 units.
No of orders (annual) = (40 * 52) / 98 = 21.23
Cycle time in weeks = 52 / 21.23 = 2.45 weeks
 Stock level
Lead time demand = 75
units

Q* =98
units

ROL=80
units

Lead time (L)

Lead time (L)

Place Place Order Place Order

order A order B A order C B

arrives arrives
Figure 9.5 Inventory model when the lead time demand is more than the order quantity

We should recognize that in such cases where lead time is greater than cycle time, back
ordering is used. The order placed in the 1st cycle reaches in the 2nd cycle; the order placed in
the 2nd cycle reaches in the 3rd cycle, and so on. Then, the reorder level = 120 – 98 = 22
units. This situation is depicted pictorially in the Figure 9.5 shown above.

SAFETY STOCK
The economic order quantity model assumes that the demand is constant and known exactly.
We will now relax the condition that the demand is constant. This will necessitate holding of
additional inventory called safety stock to take care of the variations in demand during lead
time.
We shall attempt to calculate the buffer stock by assuming that the demand is normally
distributed.
 Stock level

ROL

Service level 95 %

Safety stock

5%
Figure 9.6 Safety stock and service level

The reorder level is kept at mean lead time demand. This will mean that 50% of times the
ROL will be sufficient to meet the demand during lead time; and 50% of times the demand
during lead time will be more than ROL, and hence there will be shortage.
If we keep the ROL at mean lead time demand, then there will be shortage 50% of times.
This is not a prudent business practice and hence we will now introduce the concept of
service level. The service level, say, if it is 95%, will mean that the inventory system will
cater to the lead time demand 95% of times without shortages or in other words there will
shortage only 5% of times. Concept of buffer stock or safety stock is used to put in effect the
service level.
The reorder level, when there is variation in demand will be calculated as follows:
Reorder Level = Lead time demand + Safety stock = L * D + Safety stock
Where, L - Lead Time; and D - Mean Demand
Safety Stock = z *  * SQRT(L)
Where, Z value of normal variate for a particular service level
 Standard Deviation of the demand
L Lead time
In order to find the safety stock, we need to define the service level and the variation in lead
time demand. The variation in lead time demand is indicated by the standard deviation. Let us
say, for the problem1, solved previously, the standard deviation of lead time demand is 30.
The desired service level is 95% and When the service level is defined as 95% it means that
we are prepared allow 5% stock out.
Reorder level = Lead time demand + safety stock = L * D + z * σ * SQRT (L)
= (12/365) * 1500 + 1.645* 30 * SQRT (12 / 365) = 49.5 + 8.95 = 58.45

Problem 3: Demand for cabinets required for switch gear panel assembly in ABC Switch
Gears Private Limited is normally distributed with a mean of 300 units a week and a standard
deviation of 40 units. The reorder cost is Rs. 208 per order, holding cost is Rs. 6 per unit per
year and lead time is fixed at two weeks. What is reorder policy that will provide a service
level of 95%? How much would be cost rise if the service is raised to 97%.
Solution: D = 300 unit / week = 15,600 unit year
 = 40 units / week
Co = Rs. 208 per order
Cc = Rs. 6 per unit per year
L = 2 weeks

Economic order quantity (EOQ) = SQRT(2 DC0 / Cc) = SQRT((2*300*52*208)/6)

=1040 units

Reorder Level = LD + Safety Stock = 2 * 300 + Safety Stock

At 95 % Service Level, Z = 1.645

Safety Stock = z  SQRT (L) = 1.645 * 40 * SQRT (2) = 93 units.
Reorder Level = 600 + 93 = 693 units.

The best policy is to order for 1040 units whenever the stock level falls to 693 units.

The safety stock is not usually used, so the holding cost for safety stock is simply:
= Safety Stock * Holding Cost = 93 * 6 = Rs. 558 per year.

If the service level is increased to 97%, then z = 1.88

Safety Stock = Z  SQRT (L) = 1.88 x 40 x SQRT(2) = 106
The cost of the holding the safety stock = 106 x 6 = Rs. 636/- per year.

Periodic review systems: In constant order quantity inventory system, otherwise known as Q-
system, the inventory level is continuously monitored and when the inventory level falls
below a particular level, an order equal to economic order quantity, is placed. On the
contrary, in periodic review system or P-system, the inventory level is reviewed at constant
intervals and an order is placed equal to the difference between the target inventory level and
the inventory on hand. This system of inventory control is shown pictorially in Figure 9.7.
In P-system, orders of varying quantity are placed at regular intervals. In this system, there
are two things that are to be considered:
i) What is the review period?
ii) What should be the target inventory level?

Stock level

Review 1 Review 2
Target inventory

Q1
Q2

Q1 Q2

T L

Figure 9.7 P- system of inventory control

The review period or order interval can be any convenient period. But, however, it is very
practical to consider the cycle time of an equivalent Q-system, as the review period for P-
system.
The order quantity and the stock on hand when the order was placed, should be enough to last
until the next order arrives, which is ‘T + L’ units of time away; where T is the review period
and L is the lead time. Hence, the target inventory level should be at least D*(T+L).
Since, the demand is normally distributed; there should be a buffer stock to meet the demand
which is 50% of the times higher than the average. Hence, the buffer stock should also be
calculated for the demand over period (T+L). It may be noted that the demand over period
(T+L) is normally distributed with mean D * (T+L) and variance  2 (T+L).
Therefore,
Target inventory = Demand over (T +L) + safety stock
= D (T+L) + z *  * SQRT(T + L)
where D - Mean demand,
 - Standard Deviation
T - Review period
L - Lead Time
Z - Standard normal variable, according to service level desired.
Let us consider problem1 given above, which deals with Excel Company Ltd for bearing
procurement. Instead of EOQ model, let us solve the problem for constant review period (or)
P-system of inventory management.
We know,
D = 1500 units / year
 = 30 units / year
L, lead time = 2 weeks
Let us say, T, Review period = 4 weeks
Then, Target inventory = D * (T+L) + z *  * SQRT (T + L)
= 1500 * (4 / 52 + 2 / 52) + 1.645 * 30 * SQRT (4 / 52 + 2 / 52)
= 173+16.76 = 189.76 units

Problem 4: Demand for an item has a mean of 250 units per week and a standard deviation of
40 units. Stock is checked every four weeks and lead time is constant at two weeks. Describe
a policy that will give 95% service level. If the holding cost is Rs. 2 per unit per week, what
is the cost of safety stock with this policy? What is the effect of 98% service level?
Solution: D = 250 units per week
 = 40 units
Cc = Rs. 2 per unit per week
T = 4 weeks; L = 2 weeks
For 95% Service Level, z = 1.645
Safety Stock = z *  * SQRT(T + L)
Safety stock = 1.645 * 40 * SQRT(6)
Target inventory level = D * (T + L) + safety stock = 250 (6) + 161 = 1661 units.
On review, an order is placed for a quantity = 1661 - stock hand
The cost of holding safety stock = 161 x 2 = Rs. 322 per week
If the service level to be satisfied is 98%, then z = 2.05
Safety stock = z *  * SQRT(T + L) = 2.05 * 40 * SQRT(6) = 201
The target inventory level = 250 (6) + 201 = 1701 units.
The cost of holding safety stock = 201 * 2 = Rs. 402 per week

Economic batch quantity (EBQ): A good percentage of products manufactured are consumed
internally, for producing yet another finished product. The production is carried out in
batches during certain short period of time, and consumed during the cycle time which
includes and is larger than the production time per cycle. In this inventory model, the
production in a batch is made in the first part of every production-consumption cycle. The
production time is only a part of the cycle time. The consumption of inventory is occurring
throughout the cycle. Hence, it is quite evident that in the first part there is production and
simultaneous consumption of inventory. In the second part of the cycle, there is only
consumption of material. It may be noted that the production rate will have to be higher than
the consumption or demand rate. The ordering cost is replaced by setup cost for finding the
Economic batch quantity (EBQ). The Figure 9.8 depicts the batch production and internal
consumption situation in a graphical form.
The maximum inventory level occurs at the end of every production run, and this is:
= (p – d) * t
Where, p, is the production rate in units / unit time
d, is the consumption rate in units / unit time
We know that t=Q/P

Where, Q is the amount of inventory produced per cycle (batch quantity)

Maximum inventory level = (p – d) * Q / P = Q{1- d / p}
Therefore, average inventory level = Q / 2 * {1- d / p}
It should be noted that the inventory level changes linearly both during production time ‘t’ (at
the rate of p–d) as well as during the balance time of the inventory cycle (during which
period only consumption occurs at the rate of ‘d’).
Annual inventory holding cost = ( Average inventory ) * holding cost
= Q / 2 * {1- d / p} * Cc
CC is inventory holding cost ( or carrying cost ) in Rs per unit per year.
Annual setup cost = ( No. of setup made during a year ) * Setup cost
= D / Q * CO
CO is set up cost in Rs per setup.
D, is annual consumption in units / year.

Production rate, p

Slope, p-d

Consumption rate, d
EBQ

Production time time

Cycle time

Figure 9.8 Economic batch quantity

We will consider only the two variable portions of the annual inventory system cost (viz.
inventory carrying cost and setup cost) for finding out the EBQ (economic batch quantity ),
as the annual material cost is fixed.
Total inventory system = Annual inventory carrying cost + Annual setup cost
Cost (variable costs), TC
TC = Q / 2 * {1- d / p} * Cc + D / Q * CO
d ( TC ) / dQ and equate to zero, for finding the optimal batch quantity; we get
1 / 2 * {1- d / p} * Cc - D / Q2 * CO = 0
Economic batch quantity, Q = SQRT{2 * D * C0 / ((1 – d / p) * CC)}

Problem 5: Annual demand for a product which is produced in house is 40,000 units. The
carrying cost is Rs.24 per unit per year and the setup cost in Rs.240 per setup. The
production rate = 400 units per day and the consumption rate = 160 units per day. What is
the economic batch quantity?

Ans : D = 40000 units / year p, Production rate = 400 unit/day

Cc = Rs.24 permit per year d, Consumption rates = 160 units / day
C0 = Rs.240 per production setup
Economic batch quantity, Q = SQRT{2 * D * C0 / ((1 – d / p) * CC)}
= SQRT{2 * 40000 * 240 / ((1 – 160 / 400) * 24)}
= 1154.7 units
Average inventory = Q / 2 * (1 – d / p) = 1154.7 / 2 * (1 – 160 / 400) = 346.41

Annual inventory holding cost = Average inventory * holding cost

= 346.41*24 per year = Rs.8,313.84 per year
Annual setup cost = D / Q * C0 = 40000 / 1154.7 * 240 = Rs.8,313.84 per year

SELECTIVE INVENTORY CONTROL

Inventory items are a major component of total logistics or supply chain cost. There are
always a select few items which contribute to a considerable value in terms rupee annual
consumption value. There are also other items whose non-availability will severely affect the
shop floor function. It could be of small value and less consumed but vital to operation. The
non-availability of such items may force plant to shut down. Such items are vital or critical
items. The following are the widely used selective inventory control techniques.
a) ABC analysis
b) VED analysis
c) XYZ analysis

ABC Analysis: A large manufacturing organization may store inventory ranging from bolts,
nuts, screws to spare electric motor. The cost of bolts, nuts, may cost a few rupees or a screw
may cost 15 to 20 paisa where as the price of a spare motor may range from Rs.10,000 to
50,000 or even more in some special cases. It will not be prudent inventory policy to have
the same approach to bolts, nuts, and screws as well as spare motor meant for special
applications.
In such situations the inventories are grouped into families based on the annual inventory
consumption value of each type of inventory items. Generally, a small portion of the
inventory items (around10%) account for 70% of annual consumption value in rupees. These
are called ‘A’ class items. These ‘A’ class items are a few in numbers and are accorded more
importance in inventory analysis and control. EOQ model (fixed order quantity) or still more
tighter inventory control using stochastic models and inventory simulation models are used
for ‘A’ class items.
Then, the ‘B’ class items which are around 20% of the total inventory items by number,
account for only 20% of annual consumption value. EOQ (fixed order quantity) model or
periodic review system (fixed period) models are employed for inventory control of B class
items.

Table 9.1: ABC analysis calculation

Inventory Price Per unit Annual Consumption Annual consumption
Item code (in units) (in Rupees)
001 P1 C1 P1* C1 = v1
002 P2 C2 P2 * C2 = v2
003 P3 C3 P3 * C3 = v3
004 P4 C4 P4 * C4 = v4
- - - -
500 P500 C500 P500 *C500 = v5

The third category which is 70% of the total inventory items by number, account for only
10% of annual consumption value. These items are called ‘C’ class items. A less tighter
inventory control policy is followed for these ‘C’ class items.

After calculating the item wise annual consumption value (vi), arrange the items in
descending order of annual consumption value (in rupees). Then, the inventory items are
grouped into three categories: A, B, & C class items as shown in the Figure 9.9 very clearly.
This principle of grouping the items in terms their absolute numbers and the annual
consumption value is also called as ‘Pareto Analysis’.
 Percent of total annual

consumption in rupees

100

80

60

40

20 B C
A

20 40 60 80 100

Percent of total number of items

Figure 9.9 ABC Analysis for inventory classification

Example for ABC analysis: The Table 9.2 shows the unit price and annual demand for 20
inventory items with part numbers STD-01 to STD-20 and the Table 9.3 shows the necessary
calculations for ABC analysis.

Table 9.2: Input data for ABC analysis of 20 items

Unit
part_no price demand annual_value
STD-01 300 1200 360000
STD-02 120 800 96000
STD-03 890 120 106800
STD-04 6000 2400 14400000
STD-05 432 2400 1036800
STD-06 1800 360 648000
STD-07 345 120 41400
STD-08 790 160 126400
STD-09 240 98 23520
STD-10 300 1300 390000
STD-11 4200 600 2520000
STD-12 340 670 227800
STD-13 120 460 55200
STD-14 1600 1800 2880000
STD-15 1250 430 537500
STD-16 640 810 518400
STD-17 560 456 255360
STD-18 120 890 106800
STD-19 2900 3200 9280000
STD-20 340 430 146200

It may be noted that when the annual consumption value of the 20 inventory items is arranged
in the order of highest annual consumption value item first and then the next lower annual
consumption value, etc., we get a data pattern shown in Table 9.3. It may be noted that the
first two items (10 percent by number of items) account for 70 percent annual consumption
value. These two items constitute the ‘A’ class items. Next four items which is 20 percent by
number of items and approximately20 percent by annual consumption value constitutes ‘B’
class items. The balance 14 items (70 percent by number of items) account for approximately
10 percent of annual consumption value and these items constitute ‘C’ class items.

Table 9.3: ABC analysis of 20 inventory items

unit Annual Cumulative Item Value
part_no price demand value value percent percent
STD-04 6000 2400 14400000 14400000 5 42.65886
STD-19 2900 3200 9280000 23680000 10 70.15012
STD-14 1600 1800 2880000 26560000 15 78.68189
STD-11 4200 600 2520000 29080000 20 86.14719
STD-05 432 2400 1036800 30116800 25 89.21863
STD-06 1800 360 648000 30764800 30 91.13827
STD-15 1250 430 537500 31302300 35 92.73058
STD-16 640 810 518400 31820700 40 94.26629
STD-10 300 1300 390000 32210700 45 95.42164
STD-01 300 1200 360000 32570700 50 96.48811
STD-17 560 456 255360 32826060 55 97.24459
STD-12 340 670 227800 33053860 60 97.91943
STD-20 340 430 146200 33200060 65 98.35254
STD-08 790 160 126400 33326460 70 98.72699
STD-03 890 120 106800 33433260 75 99.04338
STD-18 120 890 106800 33540060 80 99.35976
STD-02 120 800 96000 33636060 85 99.64415
STD-13 120 460 55200 33691260 90 99.80768
STD-07 345 120 41400 33732660 95 99.93032
STD-09 240 98 23520 33756180 100 100

The Figure 9.10 shows the ABC analysis or Pareto analysis. The three classes of items of
inventory A, B, and C have been shown in the graphical representation. The example taken
for demonstration has considered a total of only twenty items. This clearly is the reason why
there are only two items in the ‘A’ class items. The graphical representation also shows the B
& C class items.

A B C

Figure 9.10 ABC analysis of 20 inventory items

VED Analysis: The inventory items stored are subdivided into the following categories based
on the criticality of the items in terms of its availability:
 Vital items
 Essential items
 Desirable items
Vital Components are those which are very critical and their unavailability will cause great
damage to the plant or may be items of operation safety, or both.
Essential items are those which are required for smooth function of the plant and its
operations; however its absence may not be as critical as that of the vital components forcing
plant to be shutdown. Essential components may be required for very large machines in the
production system which may be one of major productive assets of the organization. Hence,
the items required for such important / large machinery or equipment is essential.
Desirable inventory items are those which rank third in the group of VED analysis. Their
importance is desirable but may not be very critical in terms of their impact in the plant’s
operation, performance, or safety.

XYZ Analysis: XYZ analysis could be viewed as an improvement over ABC analysis, in the
sense that it takes into account the criticality of the individual components apart from the
annual material consumption value (considered in ABC analysis). For example, a
microprocessor chip in an automated factory may have almost negligible annual consumption
value, however its unavailability in the event of its failure, may cause the total plant to be
shut down, until it is made available. The availability of such components is very important
considering their worthiness. To accommodate the relative importance of components that are
to be held as inventory, XYZ analysis groups the inventory items in to three categories, like
in VED analysis, and assigns weightage points to them.
Points
Vital 7-9
Essential 4-6
Desirable 1-3
Then, weighted annual consumption value of each of the inventory item is calculated as given
below, by multiplying the annual consumption money value of the inventory by the weight
points assigned for the criticality of the inventory item:

Cumulative Annual VED Factor New weighted annual

consumption value (= vi * F)
V1 8 V1*8
V2 2 V2*2
V3 1 V3*1
V4 9 V4*9
V5 4 V5*4
- - -
- - -
Vn 5 Vn*5

Then, the inventory items are arranged in the descending order of the weighted annual
consumption value and then Pareto analysis is carried out on this weighted value, thereby
yielding us with three groups of inventory items for monitoring purposes:
i) X items
ii) Y items
iii) Z items
More attention is focused on maintenance and inventory control of X-items and relatively
lesser attention and control for the other two items in the order of their ranking.
It is evident from the discussion above that the following are the main requirements for better
inventory control:
 Reliable forecast of the demand
 Accurate knowledge of the manufacturing facilities (capacity, utilization, etc.,).
 Lead time (for manufacturing in case of in-house processing, for procurement in
case of outsourcing).
 Good estimate of various costs – inventory holding cost, ordering cost, and
shortage cost.
 A good identification system for the inventory items (eg. Bar codes, RFID, etc.).
 Proper classification of inventories by using techniques like ABC analysis, VED
analysis, XYZ analysis.

INVENTORY MANAGEMENT
Inventory management has been an area of intensive research in operations management for
quite long. Supply chain management as a business management approach is equally, if not
more, concerned about keeping inventory under tight control since inventory has a direct
impact on the performance of the firm and the supply chain. It may be noted that enormous
research has undergone in this area starting from Two bin system, Q system, and P system,
inventory model with planned shortages, to advanced simulation techniques. Advanced
simulation techniques are used when there is high level of uncertainty in demand as well as
lead time. The supply chain is concerned with accumulation of inventory at any stage of the
supply chain either in the form of raw material, work-in-progress, or finished goods. This
accumulation and building up of inventory along the supply chain has been explained by
“Bullwhip Effect” a concept put forth by Lee, Padmanabhan, Whang (1997) in their article
titled “The Bullwhip Effect in Supply Chains”.

Bull-whip Effect:
The Bullwhip effect explains how the fluctuation in demand gets amplified into the upstream
of the supply chain. For example, the quantity of diapers required for a baby customer is
more or less constant. However, if you see the demand pattern of the diaper at retailer end, it
is more likely to have higher variations unlike that of the individual baby customer. When
you go one step further into the dealer’s demand, it could be phenomenally varying, it is
needless to mention that the demand for diapers at the manufacturer level will be greatly
fluctuating in nature, due to various factors which influence or cause distortions in the
demand information before reaching to the level of manufacturer in the supply chain. Now,
you should be able to better understand why the demand for raw materials, at the supplier’s
works is erotic in terms of large variations. The amplification of demand variation towards
upstream of the supply chain, from individual customer through the retailer, distributor,
manufacturer, and finally the raw material supplier, is called ‘Bullwhip Effect’.
 Bullwhip Effect: The Magnification of variability in orders in the supply chain

… Could eventually lead … Could lead to greater A number of retailers

to even much greater variability for a fewer each with variability in
variability for a single number of wholesalers their orders
manufacturer

Figure 9.10 Bullwhip Effect

Purposes of inventory:
The following are the main reasons for keeping inventory in the supply chain.
1. Enables the firm to achieve economies of scale in its operation.
2. Helps to balances supply and demand
3. Enables specialization in manufacturing operations
4. Provides protection from uncertainties in demand and order cycle
5. Acts as a buffer between different critical interfaces within the supply chain

Symptoms of poor inventory management:

The following are some of the important indicators of poor inventory management in the
supply chain.
1. Increasing numbers of back orders; and frequent stock-outs.
2. Increasing rupee investment in inventory, with frequent shortages.
3. High customer turnover; loss of sales and lost customer
4. Increasing number of order cancellations
5. Frequent lack of space for storage of inventory / excess unwanted inventory.
6. Large variance in inventory turnover among distribution centers and among major
inventory items dealt by the firm / supply chain.
Summary
Manufacturing firms as well as service organizations need materials and supplies for their
operation. These materials and supplies which are stored for future consumption are called
inventories. Manufacturing firms use large amount of materials and supplies; it could be raw
materials, components, subassemblies, and other supplies. In a typical manufacturing firm,
the materials cost account for 55 percent of the cost of goods sold. This is a sufficient enough
reason to have a detailed consideration of the materials with in the firm and also in the total
supply chain. The different categories of inventories generally held in a manufacturing firm
are: raw materials, procured components and subassemblies, partially completed components
(work-in-process); tools, jigs and fixtures; and consumables like welding rods, lubricants,
cotton waste etc.
The inventories of various kinds are kept both by manufacturing as well as service
organizations in order to: meet the anticipated demand, smoothen production, match demand
and supply, avoid stock-out, etc.
The inventory in an operations system could be classified into: independent demand
inventory and dependent demand inventory. The independent demand inventory is arrived at
from the forecast for the finished goods. The firm has no control over the independent
inventory demand. The dependent demand inventory system estimates the demand for items
(components, parts, subassemblies) from the master production schedule. The master
schedule is the result of forecast demand for the final product, capacity planning, and
aggregate planning.
The independent demand inventory system uses the customer demand forecast as the basis.
The following methods of inventory control are used for independent demand inventory
control: Q-system and P-system, EBQ (Economic Batch Quantity), and Selective inventory
control.

End Chapter Question

1. What are the different types of inventory that a manufacturing organization carries?
2. What is the necessity of keeping inventories of materials in an organization?
3. What are the different components of total inventory cost?
4. Discuss the importance of EOQ model.
5. What are the constituent components of lead-time?
6. Explain ‘two bin system’ of maintaining inventory.
7. Explain the calculation of buffer stock with a neatly labeled diagram.
8. What do you understand by periodic review system of inventory control?
9. Explain economic batch quantity (EBQ) with a neat sketch.
 10. How different is VED analysis of selective inventory control in comparison with ABC
analysis?
11. What are the additional features of XYZ analysis of selective inventory control?
12. What do you understand by the term ‘Bullwhip Effect’?
13. List the causes of bullwhip effect.
14. Explain the counter measures employed to minimize ‘Bullwhip Effect’.
15. What are the indicators of poor inventory management.

----------------------------------------------------------------------------------------------------------------
Mini Case 9.1: ITC Limited
ITC was incorporated on August 24, 1910 under the name ‘Imperial Tobacco Company of
India Limited’. As the ownership of the company got Indianized progressively, the name was
changed to ‘Indian Tobacco Company Limited’ in 1970 and subsequently, the company name
was changed to ITC Limited in 1974.
ITC business spans across FMCG, Hotels, Paperboards & Specialty Papers, Packaging, Agri
Business, and Information technology. Sales revenue for the year 2018-19 was Rs. 52,035.90
crores and profit for the same period was Rs. 12,824.20 crores. ITC employs 32,000 people in
its various businesses. The company is involved in the following businesses:
FMCG & Other Businesses; Branded packaged foods; Personal care products; Education and
Stationery products; Incense Sticks and Safety Matches; Lifestyle Retailing Business;
Cigarettes; Hotels; Agri Business; Paperboards, paper & Packaging. The company also is
involved in information technology solutions business.
The FMCG business comprises of brands such as Aashirvaad, Sunfeast, Gumon, Fabelle,
Bingo, Classmate, Natural, Shower to Shower, Vivel, Engage, Fiama, Charmis, Savlon,
Mangaldeep, Yippe, ITC Master Chef. The efficient and responsive supply chain of the
company ensures leadership position in the FMCG industry.
ITC offers one of India’s pre-eminent Hospitality chains. ITC hotel business offers
responsible luxury in its hotels and the hotels provide global branded cuisines. ITC hotel
business comprises of 108 properties across 74 locations.
ITC has developed a competitive and efficient supply chain which delivers value across the
agri value chain. ITC is India’s second largest exporter of agri-products. ITC exports: 1. Feed
ingredients, (Syameal), 2. Food grains (Wheat & Wheat Flower, Rice, Pulses, Barley &
Maize), 3. Marine Products (Shrimps and Prawns), 4. Processed Fruits (Purees, /
Concentrates, Frozen Fruits, Organic Fruit Products), and 5. Coffee.
The e-choupal is India’s largest rural digital infrastructure and ITC has successfully
developed a backward link across the Agri value chain and offers support through e-choupal.
ITC’s e-choupal provides farmers with information regarding weather, crop conditions, best
practices, and a host of other relevant information. ITC e-choupal provides support to farmers
through 6100 installations covering over 35000 villages, and serves over 4 million farmers.
Paper boards & Specialty Papers business of ITC is the leader in volume of business, product
range, and market reach. ITC’s paperboards & specialty papers has a sound market reach and
environmental performance. ITC is clearly the leader in the paperboards business segment in
India.
ITC’s Packaging & Printing Business is the largest value added convert of paperboards into
value added packaging solutions. ITC’s paperboards business converts 70,000 tonnes of
paper into value added packaging solutions.
ITC Infotech is a specialized global technology service provider. The company caters to a
variety of supply chains in various sectors of manufacturing and services.
ITC, as a company, has been successful on all the aspects of ‘Triple Bottomline’ which are
economic, environmental, and social. The company has an E-waste policy for proper disposal
and management of waste generated due to the electrical and electronic items used in its day-
to-day operations.
ITC has been Carbon positive for 13 years, water positive for 16 years, and solid waste
recycling positive for 11 years. The company’s 43 percent of energy requirements have been
met through renewable energy sources.
Questions:
1. What are the main businesses of ITC Limited?
2. Write about the different value chain / supply chain in which ITC is involved?
3. What is the contribution e-choupal in the Agri value chain of this company
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 9.2: Gujarat Co-operative Milk Marketing Federation (GCMMF)
GCMMF Achieved annual turnover of 4.8 billion US dollars during the year 2018-19. The
daily milk procurement is 23 million litres per day from 18700 village milk cooperative
societies. Milk is collected from more than 3.6 million farmers twice a day, tested, graded,
and transported to the processing centres.
GCMMF products are distributed through 61 sales offices located across India to 10,000
dealers. These stockiest supplied the products to more than 1,000,000 retail outlets.
GCMMF has developed methods of stocking milk and milk products. Surplus milk is
processed into milk powder and stored. This milk powder stock is used in seasons when
supply falls below the demand.
Amul (Anand Milk Union Limited) is the brand name of the GCMMF milk products.
GCMMF products include: butter, cheese, milk powder, sweets, ice-creams, and butter milk.
Amul Products are exported to Middle East, Africa, and the USA.
India is the world’s largest milk producer. The first co-operative milk society was formed in
1946 at Samarkha. A meeting of villagers was called by Morarji Desai (under the advice of
Vallabhai Patel) and the task of forming the first co-operative milk society was assigned to a
freedom fighter Tribhuvandas Patel, a local farmer and freedom fighter.
GCMMF supply chain start where the farmers supplied milk to the VCS (village co-operative
society). The district union processed the milk and took care of making the final product.
GCMMF was the marketing agency for the products produced by the different milk societies
in Gujarat and some unions in other states. GCMMF has 18 member unions covering 33
districts, with each union having one or more manufacturing units producing different Amul
products.
GCMMF’s large product portfolio called for efficient procurement and distribution in order
to ensure product availability across the country. GCMMF’s essential elements of supply
chain included: milk production, procurement, transportation, processing, packaging and
distribution of final products like butter, cheese, ice-cream, etc., to the customers.
Questions:
1. Write about the milk collection network of this company.
2. What are the products distributed by AMUL?
3. Write on the effectiveness of the distribution chain of GCMMF.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 9.3: Havells
Havells is manufacturer of fast moving electrical items. The company offers the brands such
as Havells, Lloyd, Standard, and Crabtree. The product range comprises of:
Consumer: Fans, Lighting, Appliances, Switches, Switchgear, Water Heater, Flexible Cables,
Air Cooler, Pump, Personal Grooming, Water Purifier, and Solar.
Industrial: Cables, Motors, Heavy Duty Fans, Solar, Switchgear, and Professional Lighting.
Havells has eleven state-of-art manufacturing facilities. Havells manufacturing facilities are
located at Haridwar, Faridabad, Sahibabad, Baddi, Alwar, Neemrana, and Noida. The
company’s distribution network comprises of 500 plus Galaxies, 7575 dealers and more than
retail outlets in India. Havells has developed more than 500 exclusive brand showrooms
“Havells Galaxy” in the electrical industry. Havells became the first company to offer door
step service through its initiative “Havells Connect”. Havells achieved total sales revenue of
Rs. 8377.26 crores and EBITDA of Rs. 712.52 crores for the year 2017-18.
Questions:
1. What is the product range of Havells?
2. Explain the distribution chain of Havells. Take the support of company website.
----------------------------------------------------------------------------------------------------------------
10. TRANSPORTATION – ITS ROLE IN LOGISTICS

Learning objectives:
1. Understand the importance of transportation in logistics.
2. Learn about mode and carrier selection.
3. Learn about the different modes of transportation.
4. Know the details of air transportation.
5. Learn the latest trends in logistics.

The transportation cost is a major component of cost of goods sold. The logistics cost in
India is around 13% of GDP (Gross Domestic Product) which is higher compared to the
logistics cost in other BRIC nation which is 9-10% of GDP. The logistics cost in developed
countries is around 7-8% of GDP. The outbound transportation is the largest component of
the total physical distributions costs.

Role of transportation in logistics

The transportation is the physical link which connects the firms to its suppliers and
customers. In the inbound transportation, the raw material is transported, of course goes
through raw material warehouse if necessary, to the manufacturing plant. The finished goods
get distributed by making use of outbound transportation. The finished products might flow
through the warehouse / distribution center, as necessary. Transportation adds value to the
product by providing time and place utility in the market place.
Transportation comprises of moving inventory and materials from one location in the supply
chain to another. The movement of material occurs both within the firm and inter-firm
between the various member firms of the supply chain. We shall discuss the various aspects
of inter-firm material movement in this chapter. The inter-firm movement of material is
termed as the external logistics.

Transportation – mode, carrier selection decision

A common man might think logistics is to do only with the trucks both small and big that we
see every day on the highways. But, logistics has a broader connotation and transportation is
one of components in logistic activities. Transportation refers to the physical movement of
product / material through the supply chain. The present road, rail infrastructure in India is
fairly well developed. The infrastructure development in the eleventh and twelfth plan period
has been phenomenal.

Carrier selection
The decision on carrier selection should be done after due consideration of cost, service and
speed of delivery requirements, and infrastructure availability. The various modes of
transportation are associated with factors such as cost, service level in terms of speed, and
access to the delivery location. The transportation carrier / service provider selection would,
in general, consist of the following steps.
1. Mode selection
2. Carrier selection
3. Make agreement with the selected carrier

Mode selection
The various modes of transportation available are rail, road, shipping, air cargo, and pipeline.
Some specific products like software, movies, and songs could be delivered through the
information technology network. Pipeline transportation allows transportation of oil, gas
over long distances, and certain kinds of slurries like concrete over short distances. In fact,
oil and gas could be well transported across countries very easily using pipeline.
Transportation through ICT network and pipeline are very cheap. But, the limitation is that
only certain products could be transported through these two modes. Hence, we will restrict
our detailed discussion to the most conventional modes of transportation like rail, road,
shipping, and air cargo.
The considerations in the modal selection are transportation cost, speed, access to points of
loading and delivery, existing logistics infrastructure, reliability, carrier capability, security
and safety considerations. The transportation cost mainly depends on the mode of transport.
The cheapest of the conventional modes of transportation is shipping. India has a good
shipping infrastructure with 13 major ports and 187 notified minor pats. India has a very good
potential for coastal shipping with a coastline of 7516.6 km. However, in India, inland
waterways are not well developed and are not navigable. The problem with shipping is low
speed and is not accessible to all places. The inland transportation, both to the port as well as
from the port, need to be coupled with either rail or road transportation.
The next cheapest mode of transportation is the railways. India has one of the largest railway
networks in the world. The Indian railway has a route length of 67,368 kms (Broad Gauge
61,680; Metre Gauge 3,479; Narrow Gauge 2,209).
In recent times, there has been phenomenal development in the road infrastructure in the form
of golden quadrilateral and the East-West and North-South corridor projects. The national
highways road network is well developed offering positive externalities like quicker
transportation, less fuel consumption, and less vehicle maintenance. The road transport by
truck offers maximum accessibility to the point of loading and delivery. The transportation by
road is relatively costlier compared to railways.
The transportation by air, of course, is the speediest of the various modes of transportation.
However, it is costly and mostly high valued items with less weight and smaller volume is
transported by air. The fuel consumption by air transportation is high and causes heavy
carbon footprint by making huge greenhouse gas (GHG) emission.
Transportation cost: The transportation cost is highest by air, followed by road, rail, and
shipping. The cost of transportation is the cheapest with shipping. However, accessibility is
a problem which could be solved by combining with rail or road for inland movement.
Intermodal transportation with containerization could help solve the problem of accessibility.
The rail transport is the next cheapest. However, speed and accessibility problem are present
with railways. Road is costlier than rail and shipping, but offers maximum accessibility. Air
transport is the costliest, but offers highest speed. Again like shipping air transport also has
the problem of accessibility and has to be linked up with truck transportation for movement
to and from the airport.

Speed: The transit time or speed consideration puts air transport on the top of the list, of
course, with associated higher transportation cost. The truck is speedier than rail, and
shipping is the slowest of the various modes of transportation.

Accessibility: Accessibility is the ability of the transporter to move the material from the
source to the destination. Road tops list with respect to access. The other modes like rail, air,
and shipping have their own limitations.

Carrier ability: The fleet strength and the ability to cater to special freight requirements are
the criteria with regard to carrier ability. The road network would have an advantage in this
regard over the other modes of transportation. The other considerations of carrier ability are
material handling equipment support and communication technology.

Reliability: Reliability mainly refers to the transit time. We could rely more on the air
transport followed by road on this aspect. Railways and shipping have their own handicaps
on reliability due to various reasons.

Security and safety: Air transportation is the most secured followed by road. The railways
and shipping have limitations on the security and safety aspects. There is lot of theft and
pilferage both at ports and in the railway network. The road is also relatively more secured
and safe, but is more prone to damages by natural calamities and political riots.

Make
Mode Carrier
agreement with
selection selection
selected carrier

Figure 10.1 Transportation mode and carrier selection

Carrier selection
The logistics manager after selecting the mode of transportation should invite bids from
prospective carriers in the particular mode(s) of transportation. The prospective carriers
submit bids and the carriers are selected based on capabilities such as fleet strength, previous
experience, warehouse, material handling equipment, etc., The main consideration, of course,
for successful selection of a particular carrier is the freight rate quoted. The steps involved in
mode and carrier selection are shown in Figure 10.1 very clearly.

Agreement with selected carriers

Once the particular carrier has been selected for a specific period, the firm should make
necessary agreements with regard to quantity of material to be moved, destinations, and the
slab rates per tonne-km of cargo movement. Special higher rates are applicable for cargo
movement by road over hilly terrains like Nilgiris, and Kashmir in India.

Basic modes of transportation

The inter-firm transportation could be carried out through different modes of transport, as
listed below:
1. Surface transport 3. Air Transport

 Truck  International
 Rail  Domestic
2. Water transport 4. Pipeline transportation

 International 5. Electronic transportation

 Coastal

Figure 10.2 Different modes of transportation

The choice of a particular mode of transport has its impact on the efficiency and
responsiveness of the supply chain in terms of cost and time-to-customer respectively. The
different modes of transport listed above have their own associated cost, speed, and also
constraints with respect to size and weight of the consignments. The Figure 10.2 pictorially
depicts the different modes of transportation. Now, let us discuss the different modes of
transport.

SURFACE TRANSPORT:
The main two components of surface transport are: 1. Road transport, 2. Rail transport. The
railways, in India, have been growing in terms of volume of operations (in RS.), and have
been introducing innovative methods of cargo transport like own your wagon. Now, recently,
railway has opened up the container operations of railways to private operators. However, the
market share of railways vs. road sector is on the decline since 1950 onwards. The
importance and role of road transport compared to rail has been on the increase since 1950 in
India. The use of truck is more compared to rail transport for most of the nations in the world.

RAILWAYS
Rail is one of the principal modes of transport for freight and passengers. The total route
length of Indian Railways is as given below in Table 10.1. Progress in industrial and
agricultural sector has generated a higher level of demand for rail transport especially in core
sectors like coal, iron and steel, ores, petroleum products, and essential commodities such as
food grains, fertilizers, cement, sugar, salt, edible oil, milk, medicines, etc.

Table 10.1 Railway lines (Gauge wise) – length

Sl
No Gauge type Route length (kms)
1 Broad Gauge 61,680
2 Metre Gauge 3,479
3 Narrow Gauge 2,209
Total 67,368
Source: Ministry of railways and http://www.indianrailways.gov.in

The Figure 10.3 shows an increasing trend in the cargo volume of business handled by the
rail network in billion tonne kilometer (btkm). However, there is a decline in the volume of
cargo handled by railways after 2013-14.
The railway network consists mainly of broad gauge and metre gauge. The broad gauge
which is 86 % of the total network has generated 98% of the freight output in net tonne-km.
The operating ratio (total cost / total revenue) for metre-gauge is 171% compared to 81% for
broad gauge. In order to increase the freight transport system efficiency and bring down
operating cost, ministry of railways is resorting to concerted efforts in gauge conversion and
the percentage of broad gauge has been growing steadily in the recent past. The bar chart in
Figure 10.3 shows the amount of freight moved from the year 2000-01 to 2016-17 in billion
tonne-kilometers.
 Figure 10.3 Freight transport by railways in billion tonne-kms)

Indian Railways faces a tough competition from road transport. This is easily understandable
in light of high responsiveness and customer orientation of the road transport. Railway is a
relatively inexpensive mode of transport. However, it has restrictions on the height and width
of the consignments. Generally, railways do not have weight restrictions. Some main features
of rail transport are shown below:

 Capable of carrying a wide variety of

products, much more than the other
modes of transport.
 There is only one operator i.e Indian
Railways.
 It has been divided into 18 zones for
administrative purposes

The Indian Railways has a huge operational coverage over the entire Indian subcontinent. For
effective administrative control the Indian railways has been divided into operational zones.
There are Indian 18 zones and 68 divisions in the Indian Railways (as on May 2019).
Railroads characteristics: the rail transport has certain special characteristics with respect to
the nature of its operation, accessibility, and transit time. Rail is a long haul and large volume
transport system. However, accessibility could be a problem in case of rail transport. The
main advantage with railways is the intermodal services offered by handling containers.

 Rail is a long haul, large volume

system (high fixed costs; own rights-
of-way).
 Accessibility can be a problem.
 Transit times are spotty, but are
generally long.

Advantages of railroads: the rail transport provides some unique advantages and is given
below for ready reference:

 Reliability and safety are improving

and are generally good.
 Offers premium inter-modal services.
 Straight piggyback and containerized
freight.
 Double stacks of containers.
 RoadRailer service.
 Own your wagon operation.
 Intermodal transportation.

International transport by rail is minimal, as the rail gauges differ between nations. However,
it could be used effectively as part of inter-modal transport operations.

MOTOR CARRIERS
The motor carrier industry is characterized by a large number of small firms. In 2016, there
were 229.7 million registered motor vehicles and 10.516 million registered goods vehicles.
Low cost of entry could be the cause for these large numbers of registered goods vehicles in
India. The sector mainly consists of for-hire and private carriers. The total road network in
India is 5.5 million kms. This road network is being used for transporting 64.5 percent of
goods and 90 percent of passengers in India. The national highways (NH) road network
amounts to 132,499 kms as on 01-03-2019.
The most widely used mode of transport in India is road. Freight charge for road transport is
marginally higher than that of rail transport. The road transport in India has developed due to
the planned development of road infrastructure in the form of national highways, and state
highways. The rural road network though large in terms of length in kilometers, has not been
considered for discussion here because of the meager traffic that flows in such roads. The
road network in India comprises of:
i. The primary road system covering national highways;
ii. Secondary and feeder road system covering state highways and major district roads;
iii. Rural roads including village roads and other district roads.
Central government is responsible for the national highway system totaling a length of
132,499 km. Development of the “Golden Quadrilateral” has definitely provided a facelift to
the Indian roads infrastructure. Another advantage with this mode of transport is that it
involves less formalities and restrictions unlike air and railways.

Road Transport Sector

14%

Organized
Unorganized

86%

Figure 10.4 Transportation sectors - organized versus unorganized

The Indian road conditions, but for national highways, is not in good shape. However, there
is solace in the fact that the national highways (NH) network, though a smaller portion of the
total network, carries 40% of the traffic. Commercial vehicles on Indian roads are able to run
only 250 to 300 kilometers on an average per day, as compared to 600 km per day in the
developed nations. The road freight industry stands out unique with the majority of the
market share held by the unorganized sector. The pie diagram in Figure 10.4 clearly shows
that the organized sector has only 14% share of the total road freight transportation industry.

TRUCK COMPANIES
Transport by trucks is the main mode of transport in India and in most of the nations of the
world. Trucks have the advantage of providing point-to-point transport service. Trucks are
also versatile for handling small loads as well as for loads requiring many delivery points.
However, truck is not the optimum mode of transport for large quantity of loads to be
transported for long distances. This disadvantage may also be overcome with the advent of
high capacity trucks manufactured by leading manufacturers like Isuzu, MAN, Volvo, Bharat
Benz heavy duty trucks.

Table 10.2 truck fleet ownership pattern in India

Sl No Ownership pattern Percentage %
1 Small fleet operator (1-5 trucks) 74
2 Medium fleet operator (6-20 trucks) 15
3 Large fleet operator (more than 20 trucks) 11
Total 100
Source: Logistics in India Part2 – KPMG

Truck operation is mainly in the private sector. There are around 10.516 million trucks on
Indian roads as on 2016; and the total number of registered vehicles 229.7 million. The truck
operation and availability of truck transport services is well developed in India, operating
through a wide network of brokerage system. Due to stiff competition among operators, the
industry thrives on a very low margin. As a survival tactics, the truck operators resort to
overload operation in order to enhance their cash-in-flow. This, however, costs the operators
in terms of higher maintenance cost and penalty by Transport Authorities. The major cost of
overload operation is in the form of damage done on to the Indian roads which themselves are
already in poor condition. There are two types of operation in this sector:
i. Truck transport companies
ii. Truck operators.
The registered transport companies own sufficiently large fleet of trucks. On the other hand
individual truck operators in the unorganized sector own a few number of trucks only. It
should be noted that only 14% of goods transport in India is in the organized sector, and the
balance is in the unorganized transport sector. The Pie diagram in Figure 10.6 clearly shows
this pattern in the distribution of unorganized versus organized sector in the transportation.
The majority of truck operators own less number of trucks and Table 10.2 shows further
details on this aspect of truck fleet ownership.
Table 10.3 Rail vs Road Transport Comparison
Cargo moved
Btkm percentage
year road Rail road rail
1950-51 6.0 37.6 13.8 86.2
1960-61 14.0 72.3 16.2 83.8
1970-71 47.7 110.7 30.1 69.9
1980-81 90.9 147.7 38.1 61.9
1990-91 145.1 235.8 38.1 61.9
2000-01 494.0 312.4 61.3 38.7
2005-06 658.9 439.6 60.0 40.0
2006-07 766.2 481.0 61.4 38.6
2007-08 851.7 521.4 62.0 38.0
2008-09 920.2 551.5 62.5 37.5
2009-10 1012.9 600.6 62.8 37.2
2010-11 1115.0 625.7 64.1 35.9
2011-12 1231.0 667.6 64.8 35.2
2012-13 1508.0 649.7 69.9 30.1
2013-14 1653.6 665.8 71.3 28.7
2014-15 1824.3 681.7 72.8 27.2
2015-16 2026.1 654.5 75.6 24.4
2016-17 2226.6 620.2 78.2 21.8

[Source: working group on: railways report / road report; and KPMG report_2011]

Rail versus Road transport – A comparison:

The rail transport as well as road transport has shown positive growth since 1950, in terms of
cargo moved in billion tonne-kilometres (btkm). However, the percentage share of railway
has been on a continuous decline. The Table 10.3 provides the data on transport quantity in
billion tonne-kilometres as well as the market share percentage for both rail and road
transport.

In 1950, the market share of rail transport was 86.2 percent and that of road transport was
13.8 percent. However, the scenario has been changing continuously in favour of road
transport. The market share of road transport in 2016-17 was 78.2 percent and the market
share of rail transport was only 21.8 percent.
 Figure 10.5 Rail vs Road Transport

SHIPPING TRANSPORT
Transport by water is a major component of global logistics operations. Water transport by
ship is more suitable for transport of items like iron ore, minerals, food grains, bulk
chemicals, petroleum products and other raw materials. Water transport can be classified
into:
1. International ocean transport
2. Coastal shipping
3. Inland waterways shipping
Shipping is a very inexpensive mode of transport. However, it is less responsive compared to
other modes of transport. Shipping plays an important role in transportation in India which
has a coastline of about 7,516 kilometers.
India has a total shipping fleet of 1400 vessels with gross registered tonnage (GRT) of 12.683
million tones. There are 944 vessels in in coastal shipping and 456 vessels in overseas
shipping. The Shipping Corporation of India (SCI) is a public sector company and is the
company which operates the largest fleet of ships in India. The Table 10.5 shows the shipping
fleet details of India. The Table 10.5 shows the number of ships operated by India as of 2018.
The numbers indicated against India includes the fleet owned and operated by Shipping
Corporation of India also.
Table 10.4 Shipping Fleet in India
No of vessel GRT
India:
Coastal 944 1,479,000
Overseas 456 11,204,000
total 1400 12,683,000

SCI
Coastal 11 250,000
Overseas 59 2,956,000
total 70 3,206,000

There are 13 major ports in the country apart from 187 minor ports operating in the coastline
of about 7,516 kms. Tonnage handled in all major ports, during 2017-18, was 679.5 million
tonnes. During the year 2017-18, Kandla and JNPT ports handled 110.10 million tonnes and
66.00 million tonnes respectively. The 95% of cargo movement on account of Indian exports
and imports is by sea. However, 70% of the cargo is moved by foreign shipping companies.
Shipping can be classified into:
Coastal shipping and
Overseas shipping.
Coastal shipping: India has a long coastline of 7,516.6 kms with 13 major ports and 187
minor ports. Coastal shipping is the most energy efficient and cheapest mode of transport for
carriage of bulky goods like iron and steel, iron ore, coal, timber, etc. over long distances.
Coastal shipping has been reserved exclusively for Indian ships after independence.
Overseas Shipping: Because of the importance of overseas shipping in international trade,
considerable attention has been paid to increase the shipping tonnage in the plan period. India
has as its main objective acquisition of a modern, diversified fleet with the objective of export
promotion and improved balance of payments of the country. Foreign shipping companies
handle 70% of Indian export / import cargo.

DIFFERENT TYPES OF SHIPS

The ships depending upon the capacity and type of use have been divided into many
categories. The major types of ships that are used for transportation purposes are listed
below:
1. General cargo ships:
 Large high capacity cargo holding
 Engaged on a contract basis
 Many ships have self-contained cranes for loading / unloading operations
2. Bulk carriers:
  Specially designed to haul minerals, food grains, coal etc.,
 Can handle multiple cargo in its operations
3. Tankers:
 Specially designed for liquid cargoes like petroleum and other chemicals.
 Largest vessels afloat, some VLCCs at 500k+ tons
4. Container ships:
 Increasingly more common and important is handling container cargo in the
international trade.
 Larger vessels can handle up to 5,000 containers.
5. RO-RO (Roll on-Roll off):
 Basically a large ferry that facilitates the loading and unloading process by using
drive on/off ramps
 May also have the capacity to haul containers, etc.
6. Other
 OBO (ore-bulk-oil) multipurpose carriers
 Barges (not transoceanic)
Note: Images of ships are available in chapter 16 for the reference of the reader.

Characteristics of shipping transport:

Shipping provides advantages like low cost and high volume capability, however, it has
certain limitations inherently. The main characteristics related shipping are:
 Relatively low cost mode,
 Cause less carbon emission / fuel efficient,
 Meant for long distance transportation of low value bulk type like mineral, food
grains, etc.,
 High transit time,
 Low accessibility; intermodal operation would solve this problem,
 High capability in handling large volumes of cargo.
Ocean transport is a low cost mode of transportation. India export for the year 2017-18 was
19,56,514.52 crores of rupees (11.66% of GDP) and import was 30,01,028.71 crores of
rupees (17.89% of GDP). India has a significant interest in international ocean transport
because of the considerable quantum of imports and exports.
International shipping companies use intermodal transportation in providing logistics services
at the global level. These companies effectively combine truck and ocean shipping, rail and
ocean shipping. Sometimes truck and rail combination along with ocean shipping provides
the total intermodal transportation from source to destination. The containerized
transportation facilities intermodal transportation, at the same time ensures safety of products,
lesser damage, and no pilferage.
AIR CARGO
This is the most expensive and fast way of transportation. Air transport has restrictions with
respect to volume and weight of the consignments. There are twenty international airports,
including those in the four major cities. The major airports handle over 90% of international
traffic and 40% of domestic traffic. The ‘Open Skies’ policy of the government has been a
cause for significant increase in the air cargo operations in India. As far as the world trade is
concerned, it is still dominated by sea transport because air transport is very expensive and is
also unsuitable for carrying heavy, bulky goods. However, transportation of high value light
goods and perishable goods is increasingly being carried by air transport. The growth of air
cargo in India has also been manifold though it might not have kept pace with the progress
made all over the world. The Table 10.5 shows how both international and domestic air cargo
traffic has increased.

Table 10.5 Air Cargo - International and Domestic (in million tonnes) – India

Period International Domestic

Cargo Cargo
2007-08 0.57 1.15
2008-09 0.55 1.15
2009-10 0.69 1.27
2010-11 0.86 1.50
2011-12 0.81 1.49
2012-13 0.78 1.41
2013-14 0.84 1.44
2014-15 0.99 1.54
2015-16 1.05 1.66
2016-17 1.12 1.86

Domestic cargo transport is handled both by international airports and other airports in India.
However, international cargo is handled primarily by international airports. Both Domestic
cargo and International cargo are poised to grow according to the projections. The major
reasons, which can be attributed to this expected increase, are:
1. Increase in overseas trade (setting right the balance of payments).
2. Indian economic policies (liberalization).
3. Customer service orientation - speedier delivery.
4. Inventory control policies of firms.
5. E-commerce.
Companies like UPS, DHL, FedEx operate air cargo operations successfully in carrying
parcels / small packages. Generally light weight, small volume consignments are sent by air.
This includes electronic products, medical supplies, and perishables products like fruits and
flowers for which quickness in delivery outweighs the cost of air freight.

Figure 10.6 Air cargo being loaded into an airplane

Domestic air-cargo handling though small compared to the total cargo movement, is not
insignificant. Some of the package carriers, operating globally combine air-transport and
truck for convenient pickup at source and delivery at customer’s doorsteps. The Figure 10.6
shows air cargo handling operation.

PIPELINE
This mode of transport is used mainly to transport oil and gas. Though capital intensive, this
is a relatively less costly mode of transport during operation. The disadvantage with this
method of transport is that only certain types of products like oil, gas could be transported in
this mode of transport. Research level work is going on to find feasible ways of transporting
coal through pipelines in slurry form.

Characteristics of pipeline transportation: The following are the key characteristics of

pipeline transportation:
 Accessibility is predefined by the network of pipelines.
 Capital intensive, less operating cost
 Own rights-of-way much like the railroads.
 Major advantage is low rates.
 Only certain types of products (oil, gas etc.,) could be transported.
ELECTRONIC TRANSPORTATION
Electronic transportation is the latest form of transport available for some specific goods such
as music, e-books, e-journals, computer software, and other electronic media products. The
electronic transport is carried out through the Internet. This is probably the cheapest mode of
transport (thanks to the low cost of Internet time and high bandwidth). The only and main
restriction is that only electronic software based products could only be handled in this mode
of transport. Digital divide could also be a handicap in using this mode of transport especially
in less developed countries.

LATEST TRENDS IN TRANSPOTATION

1. MERGE-IN-TRANSIT
Merge-in-transit could very well be defined as collection of components / subsystems from
different suppliers meant for a single customer and synchronize the arrival of the ordered
components / subsystems in one lot as single consignment, at the consumers’ doorstep. This
will avoid inconvenience to the customer of multiple deliveries and also ensure better
customer satisfaction. The Figure 10.7 gives a schematic view of merge-in-transit.
It is increasingly becoming more common for a complete product to be a system that
comprises of multiple components from various sources. Of course, your customers view
each order as a single product, requiring a single delivery. Merge-in-transit comes in handy in
meeting such requirements. Customer does not realize or feel that the components and
subsystems of the product ordered by him / her has come from different sources; like one
component from supplier, and another from supplier warehouse, and then the main system of
the product may be shipped from the manufacturing plant of the company. All these
components and subsystems are merged during the transit with the help of the logistics
provider, enabled by the power of information and communication technology. Finally,
customer receives the total product he/she ordered as one consignment at their doorstep.
Merge-in-transit avoids allocation of your personnel and physical resources to manage
multiple in-coming shipments, which may not undergo any value addition at your works
except checking correctness of packing slip and redirecting to your customer. The maximum
work that may be carried out by the firm could be repacking which can conveniently be
assigned to your logistics operator. Your organization will prepare the list of items to be
supplied to a customer. Identify from which supplier or the warehouse they have to be
collected and give necessary instructions to your supplier / warehouse supervisor. The rest is
taken care of by the Logistics operator as value added service offered by them.
Merge-In-Transit combines multi-component orders, for a single delivery to the customer.
Not only does ‘Merge-In-Transit’ reduce the inconvenience to consumers by eliminating
multiple deliveries. Shipment could be directed by the manufacturer (supplier) and merged in
field during the logistics process and this virtually eliminates inventory storage at your works
or at warehouse.
Benefits of ‘Merge-in-transit: The following are the benefits of merge-in-transit application
in logistic activities.
1. Faster order-to-fulfillment cycle time (less lead time) and quicker delivery.
2. Increased customer satisfaction.
3. Less amount of inventory in the supply chain; and hence less inventory carrying
cost.
4. Reduction in handling, re-handling charges, which will enhance the profit margin.
5. Reduced warehouse and other storage requirements, and hence less cost.

Figure 10.7 Merge-in-transit

2. CONTAINERIZATION
Containers play an important role in the international trade. Containers are available in two
standard sizes of 20 feet length and 40 feet length, as indicated in Figure 10.8. Based on the
consignment requirements, the appropriate container size can be selected. Containerized
cargo allows ease of handling and facilitates intermodal transportation.

The advantages of containerized transport are:

 Speedy inter-modal transport.
 Lower handling cost.
 Reduced breakage and pilferage of the products.
 Low insurance cost, etc.

Length = 40 ft

Width = 8 ft

Height = 8.6 ft

Figure 10.8 Standard 40 feet container

3. INTER-MODAL TRANSPORT
Inter-modal transport could be defined as the use of two or more transportation modes, from
point of origin to the point of destination in an integrated manner, facilitating a smooth and
seamless flow of goods and commodities. In case of inter-modal transport, the carriers
cooperate on the movement of shipment by publishing a through rate. Logistics managers are
looking for the best way to move shipments and often attempt to take advantage of multiple
modes of transportation, each of which has certain useful characteristics. The Figure 10.9
shows an intermodal transport operation with cargo in container.

Growth in Information Technology enables quicker and easy tracking of shipments and better
control over logistics, even when more than one mode of transportation is used in the supply
chain. Multi-modal transport is more suitable for international logistics operations.
Containerized transportation has facilitated multi-modal transportation to a large extent. For
example, knitwear produced at Thirupur in Tamil Nadu (India) is moved to the nearest
container freight station (CFS) or inland container depots (ICD) by road and loaded into the
containers. Then, the container with cargo is transported to the nearest port at Chennai by
trailer trucks. The container is then moved by ship to its destination viz., New York, by ocean
carriers like SCI, APL, etc.
 Figure10.9 Inter-modal transport and containerized cargo

Biggest disadvantage is that carriers are reluctant to participate in inter-modal transportation.

Cultural bias towards using only one mode exists and this makes bringing in change more
difficult. Certain types of inter-modal services have been fairly well developed, such as:
rail/water, motor/water, rail/motor, and motor/air.

Types of Inter-modal Services: The Figure 10.10 depicts the intermodal options in a clear
manner. The different types of inter-modal transport services in vogue are:
 Piggyback,
 Fishyback, and
 Birdyback.

Piggyback: Piggyback services could be either Trailer-on-Flat-Car (TOFC) or Container-on-

Flat-Car (COFC). In case of Piggyback services, a motor carrier or a container is placed on a
rail flatcar and transported from one terminal to another. Piggyback combines the low cost of
long-haul rail movement and convenience of truck (flexibility). The Figure 10.17 shows the
various intermodal transport operations.

Trailer-on-Flat-Car (TOFC): In case of Trailer-on-Flat-Car (TOFC) inter-modal transport, the

truck is transported on a flatcar by rail for long-haul purposes and then the short distance
pickup and delivery requirements are taken care of by motor transport. At the terminal
facilities, motor carriers perform the pickup and delivery functions.
Some of the salient features of TOFC are given below:
 The road trailers ride in special rail flatcars.
 Takes advantage of motor flexibility and rail’s long haul economic advantage.
  Multiple service plans made available for shippers.
 Some railroads provide varying levels of service, differentially priced.

Container-on-Flat-Car (COFC): a container is placed on a rail flatcar and transported from

one terminal to another. The COFC combines rail and motor transport. Long distance
hauling of the container is carried out by rail. The short distance pickup and delivery
requirements are taken care of by motor transport. The products are transported untouched
until they arrive at the consignee’s unloading dock. Advantages of this mode of transport are
reduced theft, less damage, reduction in multiple handling costs, and reduction of intermodal
transfer time. The COFC changes materials handling from labor intensive to capital intensive
and may reduce costs from 10 to 20%.

Rail Air
Birdyback

Piggyback

Truck

Fishyback

Water Pipeline

Figure 10.10 Types of Inter-modal Services

Fishyback: inter-modal transport couples motor accessibility with the low cost of water
carriage. Birdyback inter-modal transport combines the accessibility of motor with the speed
of the airline.

Land bridge: concept may apply for international shipments where oceans are separated by a
large land mass. For example, containers moving from Japan to Europe may dock at Long
Beach, CA, transfer the containers to a railroad, and reload the containers onboard another
ship at Norfolk, VA., continuing the voyage on to a European port.

RoadRailers: Newest concept referred to as a “RoadRailer”. Essentially a trailer that has

been reinforced to ride on a rail bogey and be coupled together directly and this avoids the
trailer truck being placed on a rail flat car for long haul movement. This type of
transportation saves weight and locomotive power and thus save fuel for the railroad
transport. Special lower rates are offered for such transportation. For the motor competitive
transit time is a benefit when part of the travel is on road by the trailer truck directly to
customer point.

Summary
Transportation is the physical link connecting the firm to its suppliers and customers. The
movement of material occurs both within the firm and inter-firm across the supply chain. The
transportation of material from one firm in the supply chain to another is also called as
external logistics.
The major considerations to be kept in mind while selecting a particular transport mode are:
transportation cost, transit time or speed, reliability, accessibility, carrier capability, and
security and safety.
The inter-firm transportation could be carried out through different modes of transport, such
as: surface transport (truck and rail), water transport (international and coastal), air transport
(international and domestic), pipeline, and electronic transportation.
The latest techniques in logistics practices like merge-in-transit, containerized transport
improve the logistics performance and / or reduce logistics cost.

End Chapter Questions

1. Explain the role of transportation in logistics.
2. List down the basic modes of transportation.
3. Briefly explain the carrier selection process.
4. What are the major considerations to be kept in mind while selecting a transport
mode?
5. Define transportation cost and what are the factors that influence it?
6. Explain the relationship between transit time or speed and cost in the supply chain.
7. Define the following:
a) Reliability in transportation
b) Accessibility in transportation.
 8. What do you understand by carrier’s ability?
9. Highlight the major characteristics of rail transportation.
10. Why would you recommend rail transport for long haul operations?
11. List out the advantages of rail transportation.
12. Write in brief about the roadways network in India?
13. What are the major disadvantages with road transport sector being highly unorganized
in nature?
14. What are the different types of motor carriers?
15. Briefly write about the salient features characterizing the sea transport.
16. List the different types of ships used in transport.
17. What are the major characteristics of air transport?
18. What are the main reasons attributable to the increase in air transport in India?
19. List down the main characteristics of pipeline transportation.
20. Explain in brief about electronic transportation.
21. Explain the concept of ‘merge-in-transit’.
22. List out the benefits of ‘merge-in-transit’.
23. What is containerization and what are its advantages?
24. Explain the concept of ‘intermodal transport’
25. What are the different types of intermodal services?
26. Explain the concept of: a) Land Bridge b) Roadrailers.

Essay questions
1. Explain the different modes of transportation in detail.
2. What are the positive impacts of road transport infrastructure development in
logistics?
3. Write about road transport infrastructure in India.
4. Explain in detail the two broad categories of shipping in India.
5. Explain about piggyback type of intermodal services.
----------------------------------------------------------------------------------------------------------------
Mini Case 10.1: Manufacturing Supply chain - Suzuki
A company with net sales of 781,048 million rupees and a profit after tax of 77,218 million
rupees, for the financial year 2017-18, is by no means a less than a significant presence in the
Indian auto industry. Maruti has employee strength of 9,100 and has sold 1.78 million cars in
FY2017-18. During the financial year 2017-18, Maruti Suzuki had also exported 126,074
cars to various countries. This automobile giant has its manufacturing facilities at two places
in India and produces 16 car models including hatchbacks, sedans, Limousines, and SUVs.
The first manufacturing site has three manufacturing facilities for car assembly and one
engine manufacturing facility. The second site has a manufacturing facility which is quite
flexible with capability to change from one model to another easily due to its automatic tool
changes, centralized weld control system, and numerical control machines that ensure high
quality of cars produced in this facility. This facility produces some of its light models for
global market. The second site also has a facility for manufacturing diesel engines.
Maruti which manufactures 16 models of cars has 1100 dealers in 801 cities; and 2965
service points distributed across India in 1422 cities. The company with its strong
manufacturing facilities has been a pioneer in developing a strong distribution logistics
network that resulted in huge savings for the company and savings in petrol consumption for
the nation by avoiding self driven mode of sending the cars to the dealer network. Maruti was
the pioneer to transport cars in trucks, articulated to suit the car transport requirements.
Maruti Suzuki actively integrates it suppliers and ensures supplier development. The
company also ensures green nature of the supplier works. It should be noted that 88 percent
of Tier-I suppliers are located within 100 kms.
Maruti extended the safety audits and training to Tier-I suppliers. The entire Tier-I suppliers
are signatory to green procurement guidelines and 84 percent of Tier-I supplier plants are
ISO14001 certified. Maruti Suzuki had sent 25,305 MT sent to suppliers for recycling. The
company had spent Rs. 125.08 crores for CSR activities.
Questions:
1. What are the manufacturing capabilities of Suzuki as a major in the passenger car
manufacturing industry in India?
2. Bring out the strengths of Suzuki in its distribution of the various models of cars.
3. Maruti Suzuki exported 7 percent of the vehicles by volume and what do you think
are the transport requirements for export of these cars?
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----------------------------------------------------------------------------------------------------------------
Mini Case 10.2: Ambuja Cements Limited (ACL)
Ambuja Cements is a company driven by its vision to be the most admired and competitive
company in the industry. In the year 2018, the company achieved a sales turnover of Rs.
10,977 crores, and profit after tax of Rs. 1,487 crores. Ambuja Cements makes use of
renewable source of energy to the tune of 7.1 of its energy consumption. The company
achieves its goals and objectives with respect to triple bottom line (3BL) under the titles:
people, planet, and profit. Ambuja Cements has under its fold 13 plants (5 integrated plants,
and 8 grinding plants), and 5 shipping terminals. The production capacity of this company is
29.65 MTPA.
Ambuja Cements through its mission aims at creating value for all:
Delighted customers
Inspired employees
Enlightened partners
Energised society
Loyal shareholders
Healthy environment
The company has the following broad categories of products: Ambuja Cement; Ambuja Roof
Special; Ambuja Cool Walls; Ambuja Cement Compocem; Ambuja Buildcem; Ambuja
Poercem; Ambuja Railcem; Alccofine.
Ambuja Cements has been taking steps to the needs of the three main customer segments:
individual customers, masons and contractors, and professionals.
The following are the two broad cement categories supplied by Ambuja Cements:
 Ordinary Portland Cement (OPC)
 Pozzolana Portland Cement (PPC)

ACL manufactures cement of the following qualities: OPC, PPC, OPC53, OPC export, and
PPC plus. The company distributes its cement product in the western, eastern, and northern
India. The company is quite aware of the importance of adequate infrastructure in the form of
public road and highway, rail network, rolling stock, port facilities, etc. Improved
infrastructure would enable cost efficient and safe movement of material between cement
plants, customers, and suppliers. The company has expressed that shortage of rail wagon is a
bottleneck in its supply chain. The cement production capacity of the company is 29.65
million tonnes per annum (MTPA).
ACL aims at building a long-term relationship with its suppliers. Suppliers are expected to be
committed to their social responsibility, adhere to international standards such as ISO9001,
Occupational Health and safety Assessment Series OHSAS 18001 & ISO 14001
(Environment Management System). Suppliers should also have systems to comply with any
local provisions. Suppliers are assessed through a “Self-Assessment” system having a
checklist integrating SA 8000, ISO 14001, and legal requirements. In case the suppliers are
not able to meet the minimum requirements, ACL would engage in a dialogue with the
supplier and adopt mechanisms to improve the supplier standards. Process assessments of
compliance with the standards are part of the supplier qualification and reassessment of
supplier standards carried out at periodic schedules. Any contract made with the suppliers
includes clauses on CSR and OH&S. Ambuja Cements achieved 29% reduction (1990-2015)
in carbon emissions. Ambuja Cements ensures its supply chain excellence considering vast
geographical distribution of its customers in India
Questions:
1. What are the cement products brands offered by Ambuja Cements?
2. Explain the role of Ambuja Cements in the construction industry.
3. What are the standards to which Ambuja Cements adheres to in order to maintain and
improve system quality and product quality?
4. Discuss the logistics and distribution network requirements for Ambuja Cements.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 10.3: Hero MotoCorp
Hero Honda is the largest manufacturer of two-wheelers, based in India. The story of Hero
Motocorp started with a vision of a mobile and an empowered India. The product portfolio of
the company consists of a wide range of motor cycles and also scooters. The company aims
at worldwide reach, millions of delighted customers, and cutting edge technology. The
company believes in innovation faster than that of industry. The company has supply chain
which remained agile and responsive to customer requirements. Hero Motocorp operates five
facilities located at Dharuhera and Gurugram of Haryana, Haridwar of Uttrakhand, Neemrana
of Rajasthan, and at Halol of Gujarat for manufacturing two wheelers. The company also
operates two manufacturing facilities abroad, one in Columbia at Villa Rica of Cauca
Province and Jessore in Bangladesh. Hero Motocorp has a manufacturing capacity of 9
million units of two wheelers and has presence in over 50 countries. During the year 2017-18,
the company achieved sales revenue of Rs. 33397.64 crores and profit after tax Rs. 3697.36
crores.
Hero Motocorp believes in building a seamless green supply chain that includes ‘green dealer
development programme’. The company encourages collaboration with its suppliers in order
to achieve its overall corporate environmental goal. Hero Motocorp is leveraging information
technology tools and technologies effectively to improve efficiency and productivity.
Questions:
1. Comment on the facilities location of Hero Motocorp and its logistics management.
2. Discuss the green environment in facilities and green supply chain in distribution in
Hero Motocorp. Refer the company website for details.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 10.4: Hindalco
The main business of Hindalco includes Aluminium, Copper, Cargo Handling, Fertilizers,
and Acids. Hindalco is a leading producer of Aluminium and downstream value added
Aluminium products. Hindalco operates one of the largest single location copper smelter with
a capacity of 500,000 TPA and this facility is located at Dahej, Gujarat. Hindalco produces
DAP & NPK fertilizes as value added downstream products. The company produces
sulphuric acid and phosphoric acid as by-products in the copper production process. Hindalco
operates an all weather dry cargo jetty at Dajej (Dahej Harbour Facility).
The company has achieved total sales revenue of Rs. 44,382.75 crores and profit after tax of
Rs. 1,436.49 crores during the financial year 2017-18. Hindalco is part of the Aditya Birla
Group of companies. Sustainability efforts at Hindalco comprises of sustainable mining
practices, energy conservation, recycling, environment friendly disposal of industrial wastes,
safety practices, socioeconomic development of communities around the plant, and
empowerment of employees.
Questions:
1. What are the products offered by Hindalco supply chain?
2. Visit Hindalco company website and explain the logistics and transportation
requirements of this company.
3. Explain the sustainable practices followed by Hindalco supply chain.
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11. WAREHOUSING

Learning objectives:
1. Understand the basic functions of warehousing.
2. Learn about the other value added services provided by warehousing.
3. Understand the major considerations in warehousing decisions.
4. Understand the warehousing facility decisions - number, size, and location.
5. Know the basic activities in warehousing (receiving, put-away, order picking / order
assembly, and shipping).
6. Understand warehouse management systems (WMS)

Traditionally, warehouses have been used as a short-term storage place for materials.
Warehouses have been used for storing raw materials for further processing, and storing
finished goods for distribution to customers.
Donglas M.Lambert et al have defined warehousing as given below:
“Warehousing is that part of a firms logistics that stores products (raw materials, work-in-
progress, and finished goods) at and between point of origin and point of consumption and
provides information on the status, condition, and disposition of items being stored.”
The functionality of warehouses has undergone a dramatic change. Warehouse apart from
serving as a storage place, is used for other functions such as break-bulk, consolidation, and
cross clocking. Value added services like packaging and labeling is done at warehouses based
on the requirement of the customer.
Functions of warehousing: the following are the major functions that the warehouse is used
for while serving the purpose of storage as well.
1. Volume transport Raw material (inbound)
Finished goods (outbound)

2. Facilitating ‘milk-run’ collection of materials from suppliers.

2. Supply mixing.
3. Product mixing.
4. Cross-docking.

Volume transport: is employed in the inbound / outbound logistics in order to reduce cost of
transportation, achieve higher vehicle utilization.
In the inbound logistics system, raw material / parts supply from many suppliers collected
using trucks / vans of smaller capacity and are pooled together and transported to the
manufacturing unit using heavy duty trucks. This process is many a times referred to as
‘consolidation’ in the supply chain network.
 Figure 11.1 warehouse facilitates - inbound and outbound volume transport

In the out bound logistics volume transport is carried out by transporting finished goods in
bulk using heavy trucks to warehouses located in the distribution network. The finished
goods that have been transported in bulk are broken into smaller consignments based on
specific customer orders and dispatched to the retailers / customers in smaller capacity trucks
/ vans. Break bulk operation involves practically no storage in the warehouse.

Supply mixing: Raw materials required by a manufacturing plant may be provided by many
suppliers as LTL consignments. Such material are received, consolidated as one shipment
unit and sent by a truck to the manufacturing plant. This process is also referred to as
‘consolidation’ of raw materials on the supply network.
 Figure 11.2 Warehouse facilitates – supply mixing

Product mixing: A warehouse receives materials / goods from different manufacturing

plants and the materials / goods meant for a particular customer is / are identified and sent in
a single transportation shipment to him or her. The customer may give an order for items that
are manufactured in more than one plant. In such circumstances product mixing concept
helps in meeting the customer order. In fact, an extension of this concept is that a customer
order may have many items – first part of customer order may be received from the
manufacturing plant; the second part may be shipped directly by the supplier; the third part of
the same customer order may be in stock at the warehouse. In such situations, all the three
parts are merged as a unified order at the warehouse / distribution center and delivered to
customer as a single consignment. This concept is called ‘in-transit mixing’ or ‘merge-in-
transit’.
 Figure 11.3 Warehouse facilitates – product mixing

Cross docking: The cross docking station receives goods at one door and ships them out
through the other door almost immediately without putting the product in storage. The
materials from different suppliers meant for retailers are collected in the warehouse from
incoming trucks. The consignments are sorted according to retailers and sent to the retailers
in smaller sized trucks. The cross docking ensures that the material does not stay in the
distribution center more than 24 hours and in some cases the throughput time in the
distribution center may be as low as an hour. The picture shown in Figure 11.4 demonstrates
the process of cross docking.

The other functions for which the warehouses get utilized are:
1. Value added services
2. Break bulk
3. Repackaging
4. Protection against contingencies
 Figure 11.4 Cross docking at distribution centre

Value added services: The value added services provided in the warehouse are:
Repackaging, Labeling.

Repackaging & labeling

Repackaging is one of the value added services provided in a warehouse. The finished
product may be transported to the warehouse in large containers. The customers would like to
have products like coffee, tea, etc., in smaller custom size packets. For example, customers
would prefer to have coffee packets in sizes of 50gms, 100gms, 250gms, and 500gms. This
requires packaging of coffee at the warehouse. The warehouse would have the packaging
equipments located in the packaging area of the warehouse. Similarly another value added
service provided in the warehouse is labeling of products.

Warehousing – decision variables

The logistics manager needs to make decision on warehousing with regard to:
 Number of warehouses
 Physical location of warehouses
  Warehouse capacity (in sq meter built up area)
 Warehouse ownership (Public / Private)
 Warehouse layout & design
 Products to be stored

Number of warehouses
Decision on the number of warehouses will be made keeping in mind the aspects such as:
 inventory costs
 warehousing costs (variable and fixed)
 transportation costs
 stock-out costs (lost sales, if any)
 customer service level

Warehouse design & layout

The main aspects to be considered with respect to design and layout are:
Make an estimate of the storage requirements (based on demand forecast)
Convent the storage requirements in terms of volume (Cubic metres)
Provide for aisle and material handling requirements.
Make provisions for future expansion
Make arrangements for inbound / outbound transport interfaces
Provide area for receiving, picking, sorting and assembly
Make space provision for office, rest room, canteen etc.,

Layout design principles

While making a decision on the warehouse layout, the following principles should be applied.
 always one storey for storage
 Material movement should be in straight lines, curvilinear movement of material
should be avoided as far as possible.
 Use proper storage equipments like racks
 Make use of the full height of the warehouse
 Minimize aisle space so that more space is available for storage.
 Make use of efficient material handling equipments and save energy..

Warehouse Ownership (Public versus Private)

The ownership decision of warehouses is yet another major decision in the development of
logistics network. The supply chain manager should make a decision whether to build a
firm’s own warehousing facility or to use public and / or rented warehouses. There are pros
and cons attached to the different warehousing ownership decisions.
The cost of using public warehouse is variable in nature and generally directly proportional to
the quantity of material/good stored and the time duration for which the storage facility is
used. Private warehouse involves a high component of fixed cost. Hence, the volume of
storage requirement should be sufficiently high enough to necessitate private warehouse.

The factors to be considered while making a decision for warehouse ownership are:
 Quantity of materials / products to be stored
 Variations in material storage requirements
 Service area to be covered by the warehouse / distribution center
 Security control requirements (high value items and products would require a private
warehouse).
 Customer service level
 Value added services that could be provided by warehousing (private ownership
would be preferable for value added services, break-bulk, cross docking etc.)

Fertilizer companies like FACT have their own warehouses in the Cauvery river delta regions
covering Tiruchirapalli and Tanjore districts of Tamil Nadu, India. This decision probably is
due to the high demand for fertilizers from farmers in these districts. It is quite obvious that
the demand condition of the market area to be served by the warehouse has to be kept in mind
while making any warehousing decision.

Breakeven analysis for warehousing choice:

The break-even concept could be used for deciding on whether a company needs a private
warehouse or should it use a public warehouse. The Figure 12.5 clearly indicates that a
company should use public warehouse until point ‘A’ in the x-axis. The company can opt for
private warehouse after point ‘A’. It should be noted that the public warehousing costs are
mostly variable and private warehousing costs have a higher component of fixed costs. This
automatically requires higher and constant storage volume requirements for justifying the
investment in private warehouse facilities.

The Figure 12.5 shows the BEP analysis for making ownership decision viz public versus
private ownership of warehouse. The line ‘OG’ indicates the cost curve for public warehouse
which has only variable cost in proportion to the volume of product stored. The line ‘BC’
shows the total cost curve for private networks, which consists of fixed as well as variable
cost components. The point ‘P’ is the breakeven point between the two options of private and
public ownership of the warehouse. When the quantity to be stored in the warehouse is more
than point ‘A’, say at a higher level indicated by point ‘M’, then it is preferable to go in for a
privately owned warehouse.
 Total cost
G

P C

Fixed cost
L M
O
Volume of
Public A Private material storage
warehouse warehouse

Fig. 12.5 Public versus private warehouse - cost comparison

Warehousing functions
The warehousing functions could be grouped into two basic categories viz. material
movement, material storage. The activities that constitute the two categories of warehousing
functions are given below:
1. Material movement:
 Receiving
 Storing
 Order picking / order assembly
 Shipping
2. Material storage:
 Stock location
 Warehouse management

Material movement:
The various activities involved in material movement are: Receiving, storage, order picking
and assembly, and shipping. Now, we shall discuss, in brief, each of them.

Receiving:
This activity includes physical unloading of the material from the incoming truck at the
inbound unloading interface provided in the warehouse. Quality check, in some cases, may
be required before moving the material into the warehouse.
Storage:
Storage involves in putting the material / products, which may be in unitized / palletized
form, in proper storage locations. The movement of material for storage is carried out using
forklifts, pallet trucks, towlines, conveyors, etc. The storage locations could be decided based
on: customer, product characteristics, space availability etc.

Order picking / assembly:

Involves picking up material based on requirement of retailer / customers. The material gets
moved from the storage area into the order picking and assembly area. In the assembly area,
the material may get unitized or put on pallets so that it could be dispatched to customers.
Sometimes the unitized loads could be covered with shrink wrapping and stretch wrapping.

Latest logistics practices

Latest logistics practices have moved some of the assembly operations down into the
distribution channel. Many product assembly activities are carried out in either the warehouse
or distribution centers. The products are shipped into the warehouse or distribution center in
generic form for assembly at the warehouse or distribution center based on customer orders.
This permits higher level of customization of products as per customer’s requirements. This
is also referred to as concept of postponement. When such activity is carried out on a large
scale using the power of information technology to coordinate synchronized material flow, it
is called as ‘mass customization’.

Shipping:
Shipping involves moving the material on to the outbound trucks. Materials meant for
specific customers would have been picked and assembled as unit loads / palletized. Such
outbound consignments are loaded on to the trucks using, generally, forklifts. In the
warehouse, specific provision in terms of space is made for shipping, called ‘shipping bay’.

Material storage
There are two aspects to be considered under material storage and they are: storage location
and warehouse management.

Storage location
Storage location deals with the criteria used for stock locations in the warehouse. The
considerations for stock locations are product characteristics, size, popularity, etc. The more
popular items are put nearer to the shipping bay enabling easy access and movement. Bigger
sized materials are put at farther locations in order to avoid hindrance for material handling
equipment during movement. Proper coding needs to be done for proper identification of
material location. Barcoding and RFID are made use of for identification of storage location.
Warehouse management
The major objectives of warehouse management are:
 Provide excellent customer service
 Minimize warehousing cost (operation of maintenance cost)
 Maintain aspects related to health of safety
 ensure proper stock location with bar codes / RFID
 deploy proper level of automation
 Ensure environmental protection

Summary
The warehouse may be defined as a facility in the supply chain where the goods and materials
are held temporarily for further transportation and distribution. Traditionally, warehouses
have been used as a long-term storage place for materials. Warehouses have been used for
storing raw materials and finished goods for further consumption in or distribution through
the supply chain. However the functionality of warehouses has undergone a dramatic change.
Warehousing provides time and place utility for raw materials, industrial products, and
finished goods. Logistics system design views warehouse as a switching facility than as a
storage facility for inventory.
Major functions that the warehouses are put in to use while serving the purpose of storage
are: Volume transport; Raw material (inbound) and Finished goods (outbound); Supply
mixing; Product mixing; Cross-docking. Certain value added services are also provided in the
warehousing process like product repackaging and labeling.
Major considerations to be kept in mind while planning for a warehousing facility are: market
and the product stability, type of goods to be handled, type of facility, inventory decisions,
level of technology, and unit loads.
Logistics manager should make warehousing decisions with respect to: number of
warehouses, physical location (region, specific location, etc.), warehouse size (in sq. metres
of built area and other space requirements), warehouse layout, and what products and
materials to store. Another important decision is whether the firm should have its own
warehouse or use public warehouses.
Basic warehousing functions could be grouped into two basic categories viz. material
movement, material storage. The activities that constitute the two categories of warehousing
functions are: 1. Material movement: Receiving, Put-away, Order picking / order assembly,
Shipping, 2. Material storage: Stock location, and Warehouse management.
While effective planning and control, and optimum use of resources are objectives of
warehousing management, the specific objectives of warehouse / distribution center
management are: meet required customer service level, ensure cost effective operation,
optimum use of resources, ensure safety of operations and staff, maintain stock integrity,
proper control and information system, and ensure environment protection.
Warehouse Management Systems (WMS) enables the successful performance and
operational efficiencies of the warehousing system; and its primary objective is to control the
movement and storage of product within the warehouse and also control the related
operations like receiving, put-away, picking, and shipping. It attempts to optimize the
equipment, labour, and the storage capacity utilization. Warehouse management systems
make use of barcode scanners, RFID, mobile computers, wireless LANs to efficiently
monitor the flow of products within the warehouse.
The other important aspects in warehousing are: just-in-time operations; and cost
considerations in warehousing.

End Chapter Questions

1. Define warehousing?
2. What are the ‘value added services’ provided through a warehousing facility?
3. How does warehousing helps in protecting against contingencies in demand?
4. Explain the smoothing function of warehousing.
5. Explain the concept of break-bulk.
6. What do you understand by repackaging?
7. List and explain the different types storages followed in warehousing.
8. Compare the advantages and disadvantages of using privately owned and public
warehouses.
9. List the aspects that the logistics manager should focus on while making warehousing
decisions.
10. What are the factors to be considered while deciding on the number of warehouses?
11. What aspects are to be considered while making the layout design for the warehouse?
12. What are the basic principles to be kept in mind while designing the layout for
warehouses?
13. What are the main objectives of warehousing design and layout?
14. What are the factors that influence the ownership decision with respect to
warehousing?
 15. Draw up a comparative breakeven analysis graph between private and public
warehousing options.
16. What are the operational considerations with respect to warehousing?
17. What are the performance measures with respect to warehousing?
18. How could performance monitoring on the cost effectiveness of warehousing
operation be implemented?
19. Explain the role of information system in warehousing.
20. What are the aspects to be considered in the warehousing activity with respect to
environment protection?
21. Explain in detail warehouse management Systems (WMS).
22. List and explain the considerations in warehousing in a JIT environment.
23. What are the major cost components in warehousing?

Essay questions
1. What are the major functions of warehousing? Explain in detail.
2. What are the major considerations to be taken into account while carrying out
warehousing decisions?
3. List and explain the two major categories of warehousing activities.
----------------------------------------------------------------------------------------------------------------
Mini Case 11.1: Glaxo Smithkline Consumer
Glaxo Smithkline (GSK) believes in integrity in its operations. The company offers
nutritional and OTC (over the counter) products. The various nutritional products are
Horlicks, Boost, Maltova, and Viva. Under the OTC products category, GSK offers /
distributes Crocin in tablet form for adults and as drops and suspension for the babies.
GSK owned manufacturing sites are located at Nabha (Punjab), Rajamundry (AP), Sonapat
(Haryana). The company also operates third party facilities at twelve sites. The product
portfolio consists of nutritional categories, analgesics, rubefacients, and oral care.
The company achieved total sales revenue Rs. 4,157.55 crores and profit after tax Rs. 700.10
crores for the year 2017-18. The company is headquartered at Gurgaon, Haryana and has four
regional offices at New Delhi, Kolkata, Mumbai, and Chennai. GSK Consumer operates 23
depots and three regional distribution centers located at Kandlakoya (Hyderabad), Ambala,
Delhi. The prominent products distributed by GSK Consumer include Eno, Crocin, Iodex,
and Sensodyne. The GSK distribution network comprises of 25 warehousing locations
supplying through 850 distributors and directly covering over 3.3 million retail outlets.
Questions:
1. What are the products of GSK Consumer?
2. List the various facilities maintained by GSK Consumer.
3. Explain the distribution network of GSK Consumer.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 11.2: Mahindra
Mahindra is premier utility vehicle and farm equipments manufacturing company. The
company was founded in 1945 as a steel trading company and entered automotive sector in
1947 and brought to market the iconic Willys Jeep. The company employs more than 240,000
people in over 100 countries across the globe. The company’s strategic location in India &
Australia provide cost advantage over Western European and North American manufacturers.
During the year 2017-18, the company achieved total income of Rs. 47,577 crores and profit
after tax was Rs. 4190 crores. The brands like Mahindra Tractors and Scorpio are well known
and well accepted brand names in India. The automotive sector achieved sales volume of
5,48,508 units and the farm equipment sector achieved a target sales volume of 3,17,531
units.

Table 11.1: Mahindra plant locations

The commercial vehicles manufacturing facilities of Mahindra are located at Zaheerabad

(Telangana), and Hardwar (Uttarakhand); the Mahindar Navistar manufacturing facility is
located in Chakan (Pune, Maharashtra). The passenger vehicle manufacturing facility is
located at Nashik, Maharashtra, and Kandivali; and the two wheeler manufacturing facility is
located at Pithampur, Madhya Pradesh. The Farm Tractors manufacturing facility is located
at Jaipur, Rajasthan.
The Mahindra Rise (Mahindra Group of companies) involves in busineses such as Aerospace,
Agri business, Automotive, Construction equipment, Defence, Energy, Farm equipment,
information technology, etc. The company’s philanthropic activities are in the areas of
education, environment protection, health, culture, and sports. The community development
activities are being carried out through its various trusts and foundations.
Mahindra is environmental conscious and its efforts with respect sustainable business
initiative are significant. Mahindra plants are ISO 14001: 2015 and OHSAS 18001:2007
standards certified.
Questions:
1. Explain the various manufacturing facilities with respect to plant location and
products manufactured.
2. Discuss the type of temporary storage required for both commercial vehicles and farm
tractors produced by Mahindra.
3. Delineate the initiatives taken by Mahindra regarding environmental protection.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 11.3: Ensuring Food Security of Nation – FCI
Food availability is very crucial for ensuring a good social life. It is a Himalayan task to
ensure food availability in a vast nation like India. The surplus food grains of the northern
states will have to be distributed to deficit states in the rest of the country. This involves long
distance movement of the food grains. FCI moves about 250 lakh tonnes of food grains over
an average distance of 1500 kms.
Warehousing is a major activity in storing and preserving food grains for further distribution.
FCI has a network of storage depots. This includes silos, go-downs, and CAP (Cover and
Plinth) – an indigenously developed method by FCI.
CAP is an open storage technology with adequate precautions for rat and damp proof plinths,
use of dunnage, and covering of stacks with specially fabricated polythene covers etc.
FCI has 33.634 million tonnes of storage capacity (both owned and hired) in go-downs
located allover India. An additional CAP capacity of 3.709 miilion tonnes is also available at
the disposal of FCI.
Questions:
1. What are the types of warehousing systems?
2. Comment on improvements of warehousing and storage practices of FCI.
----------------------------------------------------------------------------------------------------------------
CH12. MATERIAL HANDLING

Learning objectives:
1. Define material handling and discuss its importance in logistics
2. Material handling applications: receiving, in storage handling, and shipping
3. Importance of physical handling in the various stages of logistics network
4. List and learn about the different material handling equipments

Material handling could be defined as efficient short distance movement in or between the
various facilities and a shipping interface (inbound or outbound). Material handling is
generally more labor intensive and there is a lot of scope for labor productivity
improvements. There has been advancements made in the technological front and, material
handling has also been keeping pace by mechanizing and automating many of its activities.
Material movement within a facility or with other facilities increases warehousing cost and
hence the movement of material should be minimized. Material handling is involved at
receiving the incoming materials, movement into the storage location, and movement for
shipping.
Handling at receiving: material handling at the receiving point is mainly carried out
manually. More often handling equipments like forklifts, cranes, and conveyors are used for
receiving material into the facility (warehouse / distribution center, etc.).
In-storage handling: movement of material within the facility is meant for order picking and
assembly. The material handling is done by making use of forklifts, pallet trucks, AGVs, etc.
When the material is stored in an automated environment with narrow aisle high rise pallet
racking system combined with ASRS (Automated Storage and Retrieval System), the
material movement for storage and retrieval is fully automated and is much easier.
Automation with sortation systems, and conveyors could be employed in large warehouses
dealing with smaller parcels, fruits, etc.
Handling for shipping: The products / materials meant for shipment could be assembled after
picking, in the form of unit loads / palletized enabling easy handling. Material handling
equipment like forklifts, pallet trucks are used in shipping.

MATERIAL HANDLING SYSTEMS

Physical handling of materials is an essential part of overall logistics function. Labor
productivity is a sensitive issue and this might necessitate the use of mechanized / automatic
equipment like forklifts, conveyors, racks and ASRS systems. The technology in this area is
also evolving and improving to keep pace with the overall developments in the field of
logistics and also in line with the responsiveness that is expected of a globally competitive
supply chain.
As has already been mentioned, the three primary material handling requirements in a
warehouse are: receiving, in-storage handling and shipping. The various material handling
equipment are made use of for order picking, sorting, transportation, and shipping related
activities. The different types of material handling equipment could be grouped into the
following main categories:
 Manual or non-automated material handling system
 Mechanized material handling system
 Semiautomatic material handling systems
 Automated material handling systems
 Information directed systems

MANUAL OR NON-AUTOMATED
Manual or non-automated material handling systems have been widely used in warehousing.
Such systems would continue to dominate in spite of greater automation of warehousing and
material handling systems. The main functions for which such systems applied are: storage,
order picking, sorting, transportation and shipping.

Material Storage Racks:

The major material handling systems which are used for storage are: racks, pallets, shelves,
drawers. Mostly operator controlled devices are used for stacking materials into the storage
racks. Forklifts are also employed in such jobs and order picking is mainly carried out by
forklifts.
The different types of ‘fixed’ systems of material handling include different types of racks,
bin shelves, carousels, and storage drawers and cabinets.

The main types of racks, as shown in Figure 13.1, include the following:
 Conventional pallet rack
 Single deep rack
 Double deep rack
 Drive-in rack
 Gravity flow storage rack
 Carton flow rack
 Pallet flow rack
 Push back rack
 Cantilever rack
 Reel rack
 Mobile rack
 Portable rack
 Pallet rack Drive-in rack

Cantilever rack Pallet flow rack

Figure13.1 Main types of racks (source: SSI Schaefer)

Racks are used for short-term or long-term holding of materials, products, and loads in a
manufacturing or distribution facility, or warehouse. Right size of racks is to be chosen based
on physical size and weight of the items to be stored. In general, items stored in racks in a
warehouse are cartons, pallet loads, or large individual units of components or products.

Pallet racks: are single or multi-level structural bulk storage systems and the same is shown
in Figure 12.1. Racks are used for stacking and storing of single items or palletized unit
loads. Racks are generally made of steel structure and the space between racks is used by
men or equipment like forklifts for accessing the materials. This space provided for accessing
the material stored in the racks is called the storage aisle.
The racks design and construction should adhere to the local and national building codes and
current rack standards. There are different types of pallet racks depending upon the type of
construction or means of access and a brief description of these racks are provided here for
reference.

Single deep rack: it is the simplest of all racking systems and it permits only one-unit-deep
pallet loads to be stored side-by-side. All the pallets are easily accessible from the aisle space
in this type of racking system. This type of racking system is also called ‘selective rack’ or
‘single deep selective rack’. For achieving storage density ‘double deep rack’ is used and it
allows two pallet loads stacked back-to-back.

Drive in rack: this type of racking system is ideal for storing similar pallets. This structure
allows vehicle to enter from one side for picking up or delivering pallet loads that rest on
continuous rails. Drive-in racks eliminate the aisle space required for access. This system of
rack storage ensures LIFO (Last in First Out) system of inventory keeping.

Gravity flow storage rack: Gravity flow storage rack systems are shaped in a manner such
that material flows automatically due to gravity. The rack is sloped forward and the material
is loaded from the back side of the rack and material with drawl is done by the order picking
personnel from the front end of the gravity flow system. This system is suited for products
that are of uniform size and shape, and is shown in the Figure 12.1. The three types of
racking system explained below: 1. carton flow rack, 2. pallet flow rack, and 3. push back
rack, are based on the ‘gravity flow storage rack’ system principle:
a) Carton flow rack or flow-through rack: ideal for small quantity case storage. This
type of racking system uses shelves equipped with rollers or wheels that allow product
and materials to flow from the back of the rack to the front.
b) Pallet flow rack: uses concept similar to ‘carton flow racks’ but on a large scale and
are used for holding pallet loads. Both ‘carton flow rack’ as well as ‘pallet flow rack’
system ensure FIFO (First in First Out) type of inventory system.
c) Push back rack: allows palletized unit loads and materials to be stored by being
pushed up on a gently graded ramp. Push back rack differs from ‘carton flow rack’ and
‘pallet flow rack’ in the sense that it offers LIFO (Last in First Out) system of inventory
management.

Cantilever rack: this system comprises of center column-based rack with arms projecting
from the columns for front-loading of large objects without obstruction from rack support
upright structures.

Reel rack: these are storage systems specifically used to store reels of cable or cord by
cradling them in the rack.
Mobile rack or mobile racking system: this type of racking system comprises of single
deep selective rack with wheels at the base for movement of the entire structure along tracks
embedded in the warehouse facility’s floor. Safety of the personnel during material access is
ensured by interlocking protective systems provided in the mobile racking systems.

Portable rack: comprises of self contained rack units made up of bases, decks, and posts
available for temporary expanded storage as per the requirement.

Bin shelves: are used for storing small parts. The height of the bin should be such that an
average height human could access it for storing and with drawl. The items are handpicked
from such bin systems. They are an inexpensive storage system for small parts.

Modular storage drawers and cabinets: Storage drawer cabinets shown in Figure 12.2 are
similar to bin shelves in terms of functionality. They are also used mainly for storing small
parts like bolts, nuts, and other fasteners. This storage system should be equal to or less than
5 feet in height such that a normal height human could store and withdraw material from it.

Figure 12.2 Modular Drawer Cabinets (Source: Champion Tool Storage)

MECHANIZED MATERIAL HANDLING SYSTEMS
The following are some of the important and widely used material handling systems under
the mechanized category:
 Forklifts
 Walkie-Rider pallet trucks
 Towlines
 Tow tractors
 Conveyors
 Carousels (vertical and horizontal)

Forklift trucks: are mechanized systems which can move palletized loads /cartons. The
materials could be moved inside the facility to any specific location and they are capable of
lifting the materials in the vertical direction (upwards / downwards) to put the materials in the
correct location. Pallet or slip sheet is used as a platform on which cartons are stacked for
movement by forklifts. Slip sheets are cheaper compared to pallets and are more suitable
when the products are to be handled only a few number of times. Forklifts could handle not
only unit loads, but also small container loads and other products.
An important category of material handling equipment’s is forklifts and trucks which are
used mainly for movement of material during the manufacturing process or during
warehousing. The following are a few of the standard material handling equipments under
this category:
A. Manually operated trucks
1. Hand pallet truck (capacity 2000 kgs)
2. High lifter pallet trucks (capacity 1000 kgs)
3. Manual stackers(capacity 800 kgs)
B. Horizontal transport powered trucks
1. Electric stackers
2. Powered pallet truck (capacity 3600 kgs)
3. Powered pallet truck (capacity 3000 kgs)
C. Electric stackers
1. Electric stackers (capacity 1800 kgs)
2. Electric stackers (capacity 1600 kgs)
3. Wide straddle stackers (capacity 1350 kgs)
4. Electric stacker (capacity 200 kgs)
D. Special applications trucks
1. Four-way truck (capacity 2000 kgs)
2. Order picker truck (capacity 1000 kgs)
3. Very Narrow Aisle Truck (capacity 1300 kgs)
4. Reach Truck (capacity 2500 kgs)
E. Diesel powered forklift trucks of higher capacities.
Note: The above given are a series of standard material handling equipment offered by an
Indian major producer of such equipments under this category.

Fork lift: The Figure.12.3 shows a standard forklift in action. The forklifts are manufactured
with the option of either diesel engine or electric battery. Generally, higher and medium
capacity forklifts are powered by diesel engine and lower capacity forklifts are equipped with
electric motors driven by batteries.

Walkie-Rider Pallet trucks: provide low cost method of general material handling in
warehouses. They are used for loading, unloading, order picking, transportation throughout
the warehouse from one point to another. The power source for Walkie-Rider pallet truck is
electric batteries. Figure 12.4 shows a semi electric pallet truck pictorially.

Figure 12.3 Standard forklift in action Figure 12.4 Semi electric pallet truck
(Source: Crown) (Source: Crown)

The Table 12.1 indicates different material handling equipments offered in India for
applications in facilities such as factories, warehouses, and distribution centers. The Godrej
Material Handling offers equipments of its own brands and is also complimented by brands
of international partners such as Komatsu, Crown, Hubtex, and Harlan.
Table 12.1 Typical material handling equipments manufactured in India
----------------------------------------------------------------------------------------------------------------
A. Godrej Material Handling
1. Counter balanced trucks (Godrej, Komatsu, and Crown)
2. Warehouse trucks (Godrej, and Crown)
3. Side loaders (Hubtex)
4. Tow tractors (Harlan)

B. Toyota Material Handling India

1. Hand Pallet Trucks:
LHM 230 2300 kg Maximum lifting capacity
LHM 300 3000 kg -do-
LHM 075UL 750 kg -do-
LHM 230QP 2300 kg -do-
LHM 230SI 2300 kg -do-
LHM 230G 2300 kg -do-
LHM 200ST 2000 kg -do-
LHM 230WI 2300 kg -do-
LHM 200SC 2000 kg -do-

2. Pallet trucks (walk with):

LHT100 1000 kg Maximum lifting capacity
LWE130 1300 kg -do-
LWE140 1400 kg -do-
LWE160 1600 kg -do-
LWE180 1800 kg -do-
LWE200 2000 kg -do-
LWE250 2500 kg -do-

3. Pallet trucks (ride on):

LE200 2000 kg Maximum lifting capacity
LPE240 2400 kg -do-

4. Pallet trucks (stand in):

LE200 2000 kg Maximum lifting capacity

5. Pallet trucks (seated):

LRE200 2000 kg Maximum lifting capacity
LPE300 / LRE300T 3000 kg -do-
6. Powered stackers:
Model Max lifting capacity Max lifting height Speed (kmph)
SRE135 / SRE135L 1350 kg 5.4 metres 9.4
SRE160 / SRE160L 1600 kg 6.3 metres 9.4

7. Reach trucks
----------------------------------------------------------------------------------------------------------------

Towlines: are either in-floor or overhead-mounted drag devices. It consists of a combination

of four wheel trailers, all towed together. Towlines are mainly used in order pickup /
selection applications. Electric power would be available on a continuous basis through the
towlines circuitry.

Tow tractors with trailers: consists of a driver guided powered unit pulling a number of
four-wheel trailers attached to it. Each of the trailers are loaded with the palletized loads. The
Tow tractor with trailer is used in order selection applications.

Figure 12.5 Towlines (source: SI System) Figure 12.6 Conveyors (source: Hytrol)

Conveyors: as depicted in Figure 12.6, are used in receiving and shipping applications
mainly. Conveyors could be used for movement of materials from one operation to another.
The different types of conveyors are: power conveyors, gravity conveyors, roller conveyors,
and belt conveyors. Power conveyors are equipped with a drive chain. Gravity conveyors,
roller conveyors, and belt conveyor systems allow modifications in the material movement
system with less difficulty. Also, portable gravity type roller conveyors are used for loading
and unloading applications in warehouses.
The different types of conveyors are listed below for ready reference.
A. Gravity conveyor:
1. Chute conveyor
2. Gravity roller conveyor
 3. Gravity wheel conveyor
B. Powered conveyor:
1. Accumulation conveyor
2. Belt conveyor
3. Chain conveyor
4. Live roller conveyor
5. Paternoster or platform conveyor
6. Slat conveyor
7. Vertical reciprocating conveyor

Carousels: delivers product placed in a bin mounted on an oval rotating track, they facilitate
order picking process by the warehouse personnel. The entire carousel rotates thereby
bringing the desired bin nearer to the operator. The carousel, as shown in Figure 12.7, could
either be horizontal or vertical.

Figure 12.7 Vertical and Horizontal Carousels (Source: Remstar)

SEMIAUTOMATIC SYSTEMS
Semiautomatic systems are generally high fixed cost and low variable cost systems. They
have less flexibility in material handling operations in comparison to material handling
equipment like forklifts. Examples of this type of material handling equipments include:
 AGVS
 Robotics
 Sortation systems
 Live racks
Automated Guided Vehicle System (AGV): performs the material handling operations similar
to that by tow tractors with trailers or rider pallet trucks, but the essential difference is that the
AGV is operator less.
AGV is either optical or magnetic controlled. Optical AGVS use light system to track and
follow a tape installed on the floor of the warehouse. The magnetic AGVS follow an
energized wire fixed on the floor of the warehouse. Figure 12.8 indicates the overall
configuration of an AGVs. Newer versions of AGVs make use of infra-red sensors and
information technology for finding their path of movement. The path followed by such latest
AGVs is flexible. Newer AGVS are smaller and simpler to operate in various material
handling applications.

Figure 13.8 AGV (source: egemin)

Sortations: Automated sortations are used in combination with the conveyors. The selected
products in the warehouse are put on a conveyor meant for a particular destination point
(generally shipping dock). The sortations divert the products through different conveyors to
their respective shipping docks. It is required that the master carton must be provided with a
distinguishing code for identification and proper diversion. The sortation’s controllers could
also be programmed for customized rate of flow through the conveyor system based on
changing requirements. Such automated material handling system provides benefits like
reduced labor, increased speed and accuracy.
Robotics: Robots have been successfully used in manufacturing. With advances being made
in robotics, it could be successfully deployed in material handling applications as well.
Artificial intelligence that is being built on to robots could be to the advantage of its use in
material handling applications.

AUTOMATED MATERIAL HANDLING SYSTEMS

Automated material handling systems that are being put into use in warehousing applications
include the equipments / systems given below:
 ASRS
 Order selection systems
 Information directed systems
Automated storage and retrieval system (ASRS): are among the most important storage and
order picking equipments in material handling. The advantages of ASRS are reduced labor
and increased inventory accuracy compared to manual systems. A typical ASRS is pictorially
shown in Figure 12.9 for demonstration.

The different types of AS/RS systems are:

1. Unit load AS/RS --- material in pallets
2. Mini-load AS/RS --- material stored in trays, totes, or cartons
(less than 1000 pounds)
3. Micro-load AS/RS --- material stored in small containers, totes, or tray
(less than 100 pounds)

Figure 12.9(a) Mini-load ASRS Figure 12.9(b) Unit-load ASRS

Information directed systems: are information technology (IT) based systems and have
moderate fixed cost and variable cost associated with them. They have higher level of
flexibility and utilization. Examples of such systems are:
PC (Personal Computer) directed forklifts
RF (Radio Frequency) controls
AGVs (vision based / information technology based)
Summary
Material handling could be defined as efficient short distance movement in or between the
various facilities and a shipping interface (inbound or outbound). Handling in a warehouse or
distribution center has an impact on how effectively materials flow through the system. The
main functions for which the material handling equipments are put into use could be
classified into: handling at receiving, in storage handling, and handling for shipping.
Physical handling of materials is an essential part of overall logistics function. There is
enough scope for labor productivity improvements in material handling; and labor
productivity is a sensitive issue. The material handling equipments could be grouped into the
following main categories: manual or non-automated, mechanized, semiautomatic,
automated, and information directed systems.

End Chapter Questions

1. What are the main functions of material handling?
2. List the different types of material handling systems.
3. What are towlines?
4. What are the two kinds of carousels? Explain their functioning briefly.
5. What are the semiautomatic material handling systems?
6. Explain the operation of AGVS.
7. What is ASRS? List the advantages of using ASRS.
8. Explain the role of robotics in material handling.
----------------------------------------------------------------------------------------------------------------
Mini Case 12.1: Petronet LNG
Petronet LNG is one of the fastest growing companies in the energy sector in India. The
company operates LNG receiving and refrigeration facilities at Dahej, Gujarat and Kochi,
Kerala. The Dahej facility has a nominal capacity of 15 MMTPA [equivalent to 60
MMSCMD of natural gas] and the Kochi terminal has a capacity of 5 MMTPA [equivalent to
20 MMSCMD of natural gas]. The company is in the process of developing a third facility at
Gangavaram, Andhra Pradesh.
Petronet LNG has been formed as a joint venture to import LNG and setup LNG terminals. It
is a joint venture with GAIL, ONGC, IOCL, and BPCL as partners. The authorized capital is
Rs. 1200 crores. The vision of the company is to be key energy provider to the nation by
leveraging the company’s unique position in the gas value-chain.
GDF SUEZ is the largest importer of LNG in Europe and is the strategic partner for Petronet
LNG. GDF SUEZ holds 10 percent equity in Petronet LNG. GDF SUEZ business covers
every aspect of the gas supply chain like natural gas production, supply, transmission,
liquefied natural gas (LNG), storage and distribution, and other applications.
The total revenue achieved by the company was Rs. 30,916.02 crores and profit after tax was
Rs. 2077.92 crores for the year 2017-18.
Natural gas consists mainly of Methane and small amounts of Ethan, Propane, and Butane. It
is transported through pipeline but is extremely bulky. A high pressure pipeline can transport
only about one-fifth of the energy that can be transported through an oil pipeline.
LNG project / chain components are:
i. Upstream development of long-term natural gas supply for feed gas to an LNG
plant.
ii. Downstream development of liquefaction, storage and loading facilities.
iii. Marine transportation.
iv. Downstream development of receiving terminals for regasification and pipeline
transportation to market. The special material handling equipment required for
handling gas along the value chain is of critical importance.
Application of LNG: Electricity generation; domestic & commercial consumption; industrial
– boiler steam raising & heating; alternative fuel to diesel; petrochemicals.
Questions:
1. Delineate on the gas value chain of Petronet LNG.
2. Explain the special material handling equipments required for the gas value chain of
Petronet LNG.
3. What are the special requirements to be taken care of in handling the gas as a product?
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----------------------------------------------------------------------------------------------------------------
Mini Case 12.2: MRF
The company was started in the 1940s as a rubber balloon factory with a funding amount of
Rs. 14,000. In 1952, the company changed its course and started manufacturing tread rubber.
This business initiative made it grow to become one of the leading producers of tyres for
almost all applications. MRF has grown to a great stage and at present exports tyres to 65
countries across the globe. The company has six independent facilities and has a strong
network of 3000 dealers and 180 different offices. MRF is involved in manufacturing
products such as tyres, tubes and conveyor belts, paints and toys. MRF distributes tyres only
through authorized dealer network in order to ensure quality of products supplied and provide
proper customer services.
The total revenue of the company for the year 2017 was 14,651.24 crores and profit after tax
for the same period was Rs. 1451.08 crores. The company apart from manufacturing tyres is
involved in businesses like paints & coats, and toys (funskool).
The company also involves in motor sports and cricket training. It provides training to fast
bowlers through the ‘Pace Foundation’. The company is involved in motor sports events like
racing, karting, rallying, etc.
The company receives its input for research & development activities, especially in tyres
design from individual customers through marketing department and also receives vehicle
specific inputs on tyre design from OE (Original Equipment) customers. All the six factories
operated by MRF are TS16949 / ISO9001 certified.
Questions:
1. Highlight and discuss special material handling tyres for tyres manufactured by MRF.
2. What are the special characteristics of the tyre distribution chain?
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 12.3: Schaefer Group
Schaefer was started in the year 1937 by Mr. Fritz Schaefer. It is now one of the world’s
leading suppliers of storage systems. Schaefer employs around 7500 people at 50 locations in
35 countries on 4 continents. Its’ Indian operations were started in the year 2008. The various
material handling systems supplied by Schaefer are given below:
Storage systems for palletized goods:
Selective pallet racking
VNA pallet racking
Drive-in pallet racking
Double deep pallet racking
Pallet Flow Thru pallet racking
Push Back pallet racking
Mobile pallet racking
Satellite systems
Automatic Storage and Retrieval Systems (AS/RS)
Combination of systems

Storage systems for non-palletized goods:

Carton Live Storage (KDR)
Picking modules
Multi-tier shelving / Long span shelving
Storage and Transport plastic containers
Conveyors (Pallet Box)
Picking Trolleys

Handling Equipment:
Hand and powered pallet trucks\
Stackers
Low and High level order pickers
Counter balance lift trucks
Reach trucks
Double deep reach trucks
VNA Trucks
Side Loaders and 4 directional reach trucks
SR Machines (AS/RS Systems)
Combination Systems

Warehouse support systems (IT):

Wireless mobile terminals (RF/DC)
Pick by Light
Host computer
Bar code scanners / printers
Labeling and Bar codes
Warehouse Management Software
Questions:
1. Download pictures of at least one equipment under each item listed above. Prepare a
specification for the equipment from the information provided in the web-site.
2. Who are the competitors for Schaefer at the International level, in providing material
handling equipments?
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----------------------------------------------------------------------------------------------------------------
Mini Case 12.4: Hindustan Copper Limited
Hindustan Copper Limited is a public sector enterprise of the Government of India and was
incorporated in 1967. The company has the distinction of being India’s only vertically
integrated company from mining, beneficiation, smelting, refining, and casting of refined
copper metal into saleable downstream products. The company operates four manufacturing
units and they are located in Ghatsila (Jharkhand), Khetri (Rajasthan), Malanjkhand (Madhya
Pradesh), Taloja (Maharashtra), Jhagdia (Gujarat). The sales turnover of the company was
Rs. 1746.97 crores and net profit was 79.61 for the year 2017-18.
Main products: Continuous Cast Copper Rod; Copper Cathode; and Copper Concentrate.
By-products: Copper Sulphate; Sulphuric acid; Reverts; Anode Slime; and Nickel Hydroxide.
Hindustan Copper is headquartered at Kolkata and operates through four regional offices
located at Kolkata (Eastern region), Mumbai (Western region), Bengaluru (Southern region),
and Delhi (Northern region). The company has go-down facilities located at:
Eastern region: Sankrail (Howrah, West Bengal)
Western region: Taloja Copper Plant (Maharashtra)
Southern region: Hyderabad, Bengaluru
Northern region: Chowki Dhani (Jaipur, Rajasthan), Faridabad (Haryana), Sahibabad (Uttar
Pradesh).
Questions:
1. Explain the supply chain of Hindustan Copper Limited
2. Delineate on the distribution network of Hindustan Copper Limited.
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13. PACKAGING

Learning objectives:
1. Understand the importance of packaging.
2. Learn about the various functions of product packaging.
3. Identify three categories of packaging: primary, secondary, and tertiary packaging.
4. List the materials used in the three categories of packaging.
5. Learn about the latest practices in packaging.

Packaging is meant for enclosing and protecting a product for further movement through the
supply chain to the customers. Packaging has an impact on handling efficiency in the
logistics system and adds up to product cost. Proper packaging will enhance product safety
and handling. Packaging, in fact, does the marketing function of giving a good image of the
product when packaging has been done properly with better design, colour and proper size.
When products are pooled together using palletization / containerization, it allow better
material handling throughout the logistics processes. Packaging serves mainly two functions
of the organization / supply chain which are marketing and logistics. The main functions
served by packaging are:
 Product containment
 Protection and safety
 Information about product
 Product handling

Product containment
Product containment function is the most important function of packaging. The packaging
keeps the product together so that it could be successfully put on to the hands of customer
through the distribution networks / logistics system. Packaging makes a lot of difference
during material handling in the logistics system. Packaging practices like palletization, and
containerization helps in carrying out the logistic activities effectively. Palletized products
are easy to be handled by forklifts, for loading and unloading purposes.
Products must be contained for distribution through the logistics channel. Let us consider
handling carton of 100 pencil boxes. The products must be contained for distribution of the
products through the logistics channel. For example handling a carton having 100 pencil
boxes; each pencil box with 10 pencils (1000 pencils in total) is much simpler and easier than
handling 1000 pencils separately as loose items. Containment function of the product
packaging helps in keeping the product together, as otherwise, if the packaging breaks, the
products may be damaged or lost. Further, it may be dangerous if the packaging breaks open
and the products contained in it are hazardous.
Unitization
Product unitization helps in handling, as explained already. The product with the primary
packaging is put into secondary packaging like corrugated boxes. A number of corrugated
box cases are put into a stretch-wrapped pallet and a number of pallets are loaded into a
container for transportation to the customer point for distribution and final consumption.
Containerized transportation helps in intermodal and long distance transportation which
might include transport by sea.

Protection
Packaging offers protection for the product against damages during transit, and prevents theft
and pilferage. Packaging also protects the product from the impact of environment due to
moisture, sunlight, dust, insects etc. Products like cement should be kept off from moisture
else the product will get damaged easily and packaging helps prevent damage to the cement
during transit, storage. Food items / medicine need to be guarded against any possible
contamination and products like photo film needs to be protected from sunlight, product
packaging helps meeting these requirements of product protection.

Product information
Packaging provides product information like weight, price, manufacturing date, expiry date,
etc. In case of food products and medicine, it is essential to provide information on the
ingredients. Green labeling of products indicate to the customers that the product has been
manufactured by processes which are environment friendly.

Product handling
Packaging helps in material handling throughout the logistics processes. Packaged products
when put in an extra packaging material like cartons, becomes all the more easy to handle.
Products kept inside cartons could be easily unitized or assembled on a pallet. When products
are containerized, it enables handling and allows intermodal transportation. Container would
have information about gross / net weight, handling instructions, etc.

Packaging materials
The materials used for packaging are glass, plastic, cardboard, wood and metal. There are
advantages and disadvantages in making use of each these materials for packaging. The main
parameters to be considered while selecting packaging material are: strength, weight, cost,
and recycling properties. Proper care must be taken in selecting the packaging material as
otherwise it will create a poor image of the product with the customer and difficulties in
logistics handling system.
Previously, companies used hard packaging materials like wood and metal for exterior
packaging. Now, there is a trend towards using corrugated boxes and plastics for packaging.
Plastics have actually revolutionized packaging by providing many advantages such as:
 Low weight / Shipping protection Ratio
Cushioning effect for products during transit in the logistics operations

The cushioning materials are used in the packaging to protect products from shock, vibration,
etc., during transit and handling. Cushion effect in packaging is provided by plastic materials
with air bubbles, etc.

Packaging materials under each of the three broad categories of packaging (primary,
secondary, tertiary) are:

Primary packaging:
Bottles Aerosol spray can
Cans Cushioning
Plastic bags Blister packs
Plastic bottles Skin packs
Envelopes Wrappers
Secondary packaging:
Boxes
Cartons
Shrink wrap
Tertiary packaging:
Pallets
Slip sheet
Bales
Barrels
Crates
Bulk bags
Stretch wrap
Container

PRIMARY PACKAGING MATERIAL

1. Bottle: is a small container with a neck that is narrower than the body and a "mouth".
Bottles are often made of materials like glass, plastic or aluminum and are mostly used for
storing liquids like water, milk, soft drinks, beer, wine, vegetable cooking oil, medicine,
liquid soap, shampoo, ink, etc. The mouth of the bottle is closed after filling it with the liquid
to be stored, either with a cap or stopper. In case of glass bottles used for packaging liquid
items, they are collected and recycled.
2. Cans: a sealed container for food, beverages, etc., and made of aluminum, sheet iron
coated with tin or other metals. Canned fast food products and beverages are distributed
globally. Examples: Canned Chinese fast food items, and Malaysian orange juice in cans,
etc., that are distributed in the Indian market.

3. Plastic bag: is a type of flexible packaging made of thin, flexible, plastic film. Plastic bags
are used for containing and transporting food product, wheat and corn flour, iodized salt, etc.

4. Plastic bottles: are made from the following materials having different qualities and their
usage in packaging applications could be decided based on their characteristics:
 High Density Polyethylene (HDPE)
 Low Density Polyethylene (LDPE)
 Polyethylene Terephthalate (PET)
 Polyvinyl Chloride (PVC)
 Polypropylene (PP)
 Polystyrene (PS)
 Fluorine Treated HDPE
 Post Consumer Resin (PCR)
 K-Resin.

The Plastic Bottle Material Code System helps in easily identifying the material with which
the plastic bottle has been made and its recycling characteristics. This system is designed to
be easy to read at a glance and distinguishable from any other marking on the bottom of a
container. The Figure 13.1 shows the symbols for the various plastics material.

Figure 13.1 Plastic bottle material code systems.

5. Envelope: is a packaging material usually made of paper or cardboard and designed for
holding a flat object like a bundle of papers together. Envelope is widely used in postal
services and letter couriers.

6. Aerosol spray: This type of spray can is a canister containing liquid under pressure from
pressurized vapor in equilibrium with another liquid. When the can's valve is opened, the
liquid is forced out of a small hole and emerges as an aerosol or mist. Typical liquids
dispensed in this way are insecticides, deodorants and paints. An atomiser is a similar device
that is pressurized by a hand-operated pump rather than by stored gas.
7. Package cushioning: is used to help protect fragile items during shipment. It is possible
that during transit a package may be dropped, kicked, and impacted. These events may
produce potentially damaging shocks and package cushioning helps to protect the product
from any damage in such situations. Transportation vibration from conveyors, trucks,
railroads, or aircraft can also damage some items. Shock and vibration are controlled by using
cushioning material while packaging the product so that the chance of product damage is
minimized.
Cushioning material is usually provided inside a shipping container such as a corrugated box.
Cushioning material is designed to deform or crush to help keep levels of shock and vibration
below levels so that damage to the product inside the box is avoided or minimized. Product
packaging may use cushioning which could often be between two and three inches thickness
depending on the actual packaging requirements considering the safety of the items.

8. Blister pack: is a term for several types of pre-formed clear plastic packaging which are
used for small consumer goods such as medicine tablets, razar blade cartridge pack, etc.
The two primary components of a blister pack are a pre-formed plastic blister and a printed
paperboard card which has a heat-seal coating

9. Skin pack: is a type of carded packaging where a product (or products) is placed on a
piece of paperboard, and a thin sheet of transparent plastic is placed over the product and
paperboard.

10. Wrapper: is a flat sheet made out of paper, cellophane or plastic which is folded or
vacuum sealed to enclose an object and protect it from wear and tear.

SECONDARY PACKAGING MATERIAL

1. Boxes: are available in different forms and shapes. Generally, they are rectangular in shape
with vertical sides. The major materials used for making boxes are corrugated fibre or non-
bending paper board.

2. Carton: is a type of container typically made from paper board or cardboard. Cartons are
mainly used for packaging milk, egg, juice, etc.

3. Shrink wrap: This type of packaging material is made up of polymer plastic film. When
heat is applied to this material it shrinks tightly over whatever materials or product it is
expected to cover. Shrink wrap is commonly used as an over-wrap on many types of
packaging of products like CDs, DVDs, cartons, books, beverage cans, large appliances,
pallet loads, etc. Shrink wrap can be the primary covering for some food items such as cheese
and meat.
TERTIARY PACKAGING
1. Pallet: is a flat transport structure designed to support a variety of goods in a stable fashion
while being lifted by mobile forklift or any other jacking device. The goods are placed on top
of the pallet, and can be secured to it by straps or stretch-wrapped plastic film. While the
majority of pallets are made of wood, pallets manufactured from plastic, metal, paper are also
used.
It is generally cheaper to buy a wooden pallet than a plastic one, but the life expectancy of a
wooden pallet is relatively short as plastic pallets can last much longer in normal use. Plastic
pallets are stronger, more hygienic and safer in some applications. Using plastic pallets can
be environment friendly if they are disposed of properly after their useful life. As mentioned
earlier the useful life of plastic pallets are relatively longer compared to that of wooden
pallets and its use is cost effective.

2. Slip Sheets: are thin pallet-sized sheets made of plastic or fiberboard, used in commercial
shipping. Skids are used, generally, as a use and throw basis. Goods are placed on the slip
sheets and then secured usually by pallet shrouds or pallet wrap. A specially adapted forklift
truck drags the load onto itself and places it into a truck. At the destination the process is just
reversed.

3. Bale: is compressed package of any one of a variety of textiles, wool bale, cotton bale, etc.
This is a convenient form of packaging light weight and high volume products or items.

4. Barrel: barrel or cask is a hollow cylindrical container, traditionally made of wood staves
and bound with iron hoops. Someone who makes such barrels is known as a Cooper.
Contemporary barrels are also made in aluminum and plastic.
Barrels often have a convex shape, bulging at the middle. This constant bulge makes it
relatively easy to roll a well built wooden barrel on its side, changing directions with little
friction. It also helps to distribute stress evenly in the material by making the container more
spherical.

5. Crate: is a large container generally made of wood, often used to transport large, heavy or
odd shaped items. A crate has a self-supporting structure.

6. Bulk bag or super sack: is a standardized container in large dimensions for storing and
transporting items like: sand, fertilizers, granules of plastics or other dry products. It is most
often made of thick woven polyethylene or polypropylene and normally measures around 110
x 110 cm and varies in height from 100 cm up to 200 cm. Its capacity is normally around
1000 kg; but the larger units can store even more amount of material. Transporting and
loading is done on either pallets or by lifting it in loops. Bags are made with either one loop
or four lifting loops. The single loop bag is suitable for one man operation as there is no need
for a second man to put the loops on the loader hook. Emptying is made easy by a special
opening in the bottom or by simply cutting it open

7. Stretch wrap or stretch film: is a highly stretchable plastic film that is wrapped around
items to be packaged. The elastic recovery of the packaging material keeps the items tightly
bound. It is frequently used to unitize pallet loads; also may be used for bundling smaller
items.

8. Container: a large, van-like, re-useable box for consolidating smaller crates or cartons into
a single shipment, designed for easy and fast loading and unloading of freight. A detailed
coverage on containers is provided in the chapter on ‘Transportation’.

PACKING REQUIREMENTS FOR EXPORT SHIPPING

Export shipments moving by ocean requires a higher degree of protection and accordingly the
packaging needs to be better. This is due to the fact that an export shipment requires more
handling at the various stages in transit as well as due to the unfavourable conditions to which
the consignment might get exposed to during shipment. The consignment may have to endure
long distance and bad weather during international shipping. The export contracts basically
enlist stringent packaging requirements in order to avoid damage and subsequent trouble in
insurance claims. The packaging in an international environment should take care of size
requirements, as there are restrictions in the consignment dimension that could be transported
either by road or by rail. Even while shipping by ocean, size is a constraint since odd sized
objects could create trouble in handling and may also result in sub-optimal utilization of
space in the ship. The international shipping scenario is shown in Figure 13.2 for better
understanding.

Origin Destination

Port1 Port2

Figure 13.2 Export by ocean

Containerized transport is recommended in export business as containers enable better
handling, protection and meets international consignment dimensions. Marking signs on the
export consignment enables better care for the goods exported during the various logistics
operations. The marking signs, shown in Figure 13.3, are some of the important ones used in
an export contract.

Figure 13.3 Symbols used in packaging

LATEST TRENDS IN PACKAGING

Global economy and international competition necessitates innovation in the field of
packaging as well in order to improve logistical performance, reduce cost, and provide better
customer service. Logistics managers and shippers have started questioning the traditional
packaging materials and packaging methods, they have started experimenting and using new
materials which are less costly and are adopting innovative packaging systems. The recent
trends in packaging are: film-based packaging, blanket wrapping, returnable containers, pallet
pools, plastic pallets, etc. There are two significant improvements that have been achieved by
adopting the newer trends in packaging and they are:
1. Newer packaging concepts are customized for specific requirements of the product
and / or logistics systems.
2. Adoption of new packaging materials and methods result in cost savings and
reduction in waste material disposal.
Film-based packaging: Film-based packaging has been traditionally used for unitization of
products by using shrink-wrap and stretch-wrap systems. Film-based packaging is used to
form the actual “shipping packages” for consumer goods such as cans, bottles, appliances,
furniture, and small vehicles. Benefits of film-based packaging are:
 Less shipment weight and volume (cu. space)
 Saving in storage space
 Less waste disposal requirements
 Better protection for products

Blanket wrapping: is a traditional form of packaging provided in a ‘moving van’ carrier,

which ensures protection for the material inside. Blanket wrapping is best suited for ‘nesting’
irregular-shaped products like chairs, sofa, office furniture, laboratory equipment, restaurant
furnishings, and store fixtures. The irregular shaped products, otherwise, would require
individual corrugated boxes or other packaging material. This method of packaging saves
packaging material and results in total reduction of waste disposal.

Returnable containers: Returnable containers have been in use for long in the logistical
system. An example of returnable containers is the gas cylinders used for supplying natural
gas to households, automobiles, and other applications. Automobile manufacturers have been
using returnable racks for interplant supply of automobile body parts. Chemical companies
reuse large steel cans in their shipping operations. Materials used for making reusable
packages are: steel, plastic, and corrugated fiber boxes.
The returnable containers usage requires proper numbering system for monitoring and control
purposes; otherwise, the containers may be lost or missed during transit or storage. Deposit
system (as in the case of gas cylinders for natural gas supply to households) is also in use to
ensure proper working of the returnable containers system.
The decision to invest in returnable containers involves considerations like number of
shipments cycles, transportation costs versus purchase and disposal cost of expendable
containers. The other considerations to be taken into account are improved housekeeping and
reduced damages in the products. Also, to be considered are the cost of sorting, and cleaning
costs attached reusable containers. The evaluation method like ‘net present value’ could be
used, in order to have a comprehensive evaluation of cost-benefits attached to the use of
returnable containers.

Intermediate bulk containers (IBC): are used for shipping granular or liquid products.
IBCs are used when the shipping quantities are smaller than tank cars but larger than bags or
drums. They are used for packaging products like: resin pellets, food ingredients, and
adhesives. The frequently used intermediate bulk containers are bulk bags and boxes. Bulk
bags are made from woven plastic with an inner lining which acts as additional protection.
They’re generally made for one or two ton capacity. Bulk boxes are usually pallet size and
are lined with a plastic bag. IBCs for wet products require use of box made of rigid material
or casings.
IBCs generally have a height between 700 mm and 2000 mm.. The width and breadth of the
IBCs are usually dependent on the country's pallet dimension standard. IBCs may have pallet-
like base so that forklifts can easily handle them. Some of the IBCs are designed in such a
manner that they are able to fold down, when empty, thereby bringing down their height.

Pallet pools: Palletization is an important contribution to logistical system productivity.

Pallets, however, involve significant investment and disposal problems. Poorly constructed
pallets may fall apart and cause product damage and other problems. Maintenance of quality
pallets is a difficult but essential task.
Pallet pools are third-party suppliers who maintain and lease high-quality pallets throughout
the country. This offers reduced damage, lower disposal costs, and improved utilization of
pallet resources.

Plastic pallets: Plastic pallets have also been used in the logistical system of grocery industry
etc. Plastic pallets attempt to address some of the shortcomings of wooden pallets. Plastic
pallets are more sanitary, lightweight, and recyclable. Lifecycle costs of plastic pallets are
compatible with that of wooden pallets; however, they require a higher initial investment.

Refrigerated pallets: Refrigerated pallets are a self-contained refrigerated shipping unit

compatible in size to a loaded shipping pallet. The refrigerated pallets can be shipped in a
regular dry van like any other LTL shipment. It eliminates dependency on refrigerated trucks
and makes possible just-in-time delivery of perishable products. Refrigerated pallets, as an
integrated technology, facilitate efficient and effective supply of range of products requiring
controlled temperatures in order to increase shelf life and marketability. Products like fresh
foods, confections, frozen foods, flowers, chemicals, and pharmaceuticals could be shipped
best by using refrigerated pallets.

BENEFITS OF PACKAGING
The following are some of the benefits of proper packaging with respect to improvement in
logistics performance and reduction in logistics cost:
1. Lighter packaging may save transportation costs.
2. Careful planning of packaging size/cube may allow better space utilization.
3. More protective packaging may reduce damage and requirements for special
handling.
4. Environmentally conscious packaging may save disposal costs and improve the
company’s image.
5. Returnable containers provide cost savings and environmental benefits
Summary
Packaging has an impact on the cost and productivity of the logistics system. Proper
packaging decision will improve product safety and handling performance at minimal cost.
Packaging is a process of covering, wrapping or crating goods for distribution to customer.
Package material actually acts as a container of the finished product. Package serves
functions such as: container, protection for the finished goods, communication about the
product, facilitator of handling during logistics operations.
The packaging could be grouped into: primary, secondary, and tertiary. The primary
packaging covers the product and is the one which is in contact with the product. This is also
known as consumer packaging or interior packaging. Marketing manager is concerned about
the interior packaging of the product or consumer packaging mainly. The primary and the
tertiary packaging are the two outer layers of the packaging and are mainly meant for
logistics and handling requirements. The primary and tertiary packaging are referred to as
industrial packaging or exterior packaging.
The materials used for packaging are: glass, plastic, cardboard, wood, and metal. Previously,
companies used hard packaging materials like wood and metal for exterior packaging. Now,
there is a trend towards using corrugated boxes and plastics for packaging. Plastics have
actually revolutionized packaging by providing many advantages such as: low weight /
shipping protection ratio, and provide cushioning effect for products during transit in the
logistics operations. A variety of materials are used for: primary, secondary, and tertiary
packaging. Packaging requirements for export shipping are more stringent.
The latest practices in packaging are: film-based packaging, blanket wrapping, returnable
containers, intermediate bulk containers (IBC), pallet pools, plastic pallets, and refrigerated
pallets.

End Chapter Questions

1. Explain the concept of packaging.
2. What is consumer packaging and why is that the marketing manager is more
concerned about the consumer packaging?
3. List the three types of packaging used.
4. What is palletization?
5. What are the functions served by packaging?
6. Explain as to how packaging helps in managing the logistics system better.
7. Bring out the differences between ‘consumer packaging’ and ‘industrial packaging’.
8. Indicate five materials used in industrial packaging.
 9. What are the materials used in secondary packaging?
10. List the different materials used in tertiary packaging.
11. What are refrigerated pallets?
12. What are the benefits of packaging?

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Mini Case 13.1: Nefab – Complete packaging solutions

Nefab, the leader in Industrial packaging solutions was started in the year 1923. Nefab
provides the following categories of packaging materials:
Inner packaging: Expendable packaging:
Air Pad Corrugated boxes
Air Pack Expendable pallets
Bubble Wrap Plywood boxes
Corrosion protection
ESD Returnable Packaging:
Foam Cushioning Pallet Collars
Honey Comb Plastic packaging systems
Inner Fittings Returnable pallets
Loose Fill Steel Racks & Containers
Paper Pad Plywood Container

Long term packaging: Packaging Accessories:

Aluminum Boxes Indicators
Flight Cases Packaging tools and machines
Plastic Boxes, Cases, and Totes Paper dunnage bags
Plywood Boxes and Cases Stretch Film
Water tight boxes and cases Tapes, Labels, and Straps

Nefab provides complete packaging solutions for the logistics requirements. The different
market segments catered to by Nefab are: Telecom, Automotive, Renewable Energy, and
Industry.
The company also makes sincere efforts in taking care of the environmental requirements.
The following are some of the steps followed:
 Only use renewable raw material resources
 Ensure that material is not taken from rainforest or other sensitive or threatened areas
 Use non-toxic glue only
 Spend resources on returnable systems
 Ensure our packaging is completely recyclable after use
 Use of light weight packaging material
 Transport methods use less fuel to transport goods
 Optimization of container space and weight

Nefab adopts a total cost and offers optimized packaging solutions to customers thereby
reducing the customer’s supply chain cost. Nefab has its headquarters at Sweden and the
company operates in over 30 countries worldwide and has 2,800 employees as of end 2018.
Nefab achieved total sales of SEK 4.5 billion during the year 2018. Nefab makes all efforts
to reduce the impact of packaging materials on the environment.
Questions:
1. Highlight the different types of packaging materials offered by Nefab.
2. What are the steps to be followed in order to make the packaging environment
friendly?
----------------------------------------------------------------------------------------------------------------

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Mini Case 13.2: Tata Global Beverages
Tata Global Beverages is a business with high values, big ambitions. The company is
developing global brands like Tetley and Tata Tea. Tata Global Beverages has around 2000+
SKUs produced across tea, coffee, and water. This company offers 330+ million servings of
the company brands for consumption every day across the world. This company has a
significant brand presence in 40+ countries. The various brands of Tata Global Beverages
are:
India: Tata Tea, Tetley, Tata Coffee, Himalayan, Tata water plus, and Tata Gluco+.
International: Tetley, Teapigs, Teapigs, Tata Tea, Vitax, Jemca, Laager, Good Earth, and
Eight O’Clock
The brands have been grouped, as given below, based on type of product:
Tea brands: Tata Tea, Tetley, Teapigs, Jemca, Vitax, and Good Earth
Coffee brands: Eight O’Clock, Map Coffee, Tata Coffee Grand
Water brands: Himalayan, Tata Water Plus, and Tata Gluco+
Tata Tea is the largest and most trusted packaged Tea brand in India. Tetley is a global well
known tea brand and it has joined Tata Global Beverages since 2000. The brand ‘Good Earth’
is an herbal and specialty tea category and is quite famous in USA. ‘Good Earth’ brand
joined Tata Global Beverages in 2005.
Eight O’Clock is a famous coffee brand in US and is part of Tata Global Beverages. This
brand has been introduced with a campaign for a meeting at Eight O’Clock. Tata Coffee
Grand instant coffee focuses on the premium market. Map Coffee is quite famous in
Australia.
Himalayan is a water brand of Tata Global Beverages and is made from a plant in the
foothills of Himalayan Hills. Tata Gluco Plus is a glucose based drink for instant energy. The
hydration or water solutions which are Himalayan, Tata Water Plus, and Tata Gluco are quite
dominant in the domestic market in India. A 50:50 joint venture between Tata Global
Beverages and Pepsico, NourishCo provides hydration solutions.
Vitax is a fruit & herbal tea brand and joined Tata family in 2013. Jemca is a Czech tea brand
and joined Tata family in 2013. Laager is a South African tea brand and is part of Tata family
since 2006.
Tata Global Beverages earns 65% of consolidated revenues from markets outside India.
Sustainability is key to long-term success and Tata Global Beverages has identified four key
areas with respect to sustainable development and they are: ethical sourcing, climate change,
packaging, and water. The total sales revenue of the company for the year 2018-19 was Rs.
7,252 crores and profit after tax was Rs. 457 crores.
Tata Global Beverages continuously attempts in transforming the sales and distribution
management of the company. This company also has a focus on efficiency, effectiveness, and
agility in order to reduce costs and enhance growth.
Tata Global Beverages is committed to optimize consumer packaging, make efficient use of
resources, and reduce environmental impact without compromising on product quality and
product safety. Packaging should also take into account consumer expectations.
Questions:
1. What are the products offered by the Tata Global Beverages value chain? Highlight
the special packaging requirements for these categories of food products.
2. Give a detailed view of the brands offered by Tata Global Beverages in tea, coffee,
and water businesses.
3. Visit a super mall in your city and collect the details about the type of packaging
materials used by Tata Global Beverages.
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----------------------------------------------------------------------------------------------------------------
Mini Case 13.3: Nestle
Nestle is a nutrition, health, and wellness company with a mission of ‘Good Food, Good
Life’. Nestle has eight manufacturing facilities and four branch offices in India. Nestle is
governed by its business principles. The net sales revenue of the company was Rs. 11,216.2
crores and profit after tax was Rs. 1,606.9 crores for the year 2018.
The major product categories of the company comprises of milk products and nutrition,
beverages, prepared dishes and cooking aids, chocolates and confectionery. The company
achieved increased sales by redesigning of the milk pack. The redesigned milk pack made it
easy for customers to identify its presence on the shelf of the retail outlets and malls.
Nestle distributes a diverse range of products that require different packaging materials. The
packaging materials used include paper, wood, metal, glass, and plastics. The company
follows packaging practices with an aim to reduce the effect of packaging materials used on
the environment without compromising on product safety, quality, and consumer acceptance.
Nestle has implemented SAP in most of the factories resulting in improvement of reliability
of operation and people productivity. Nestle has implemented a stock replenishment system,
CMI which is managed by customer representative. The implementation of CMI has lead to
inventory optimization and improvement in productivity. The company has also implemented
warehouse management system (WMS) in many locations.
Volatality and uncertainty in raw materials supply is a reality and the company’s procurement
team continued to leverage economies of scale and ensured supply of quality materials and
services at competitive prices. The company continues to develop local raw materials and
develop alternate vendors to reduce risks and deliver savings. The company has implemented
responsible sourcing, started in 2010, to over 150 suppliers with regular audit and continuous
feedback on compliance. The company has an efficient supply chain with high level of sales
automation.
Questions:
1. What are the major product items of Nestle? Identify the product packaging practices
of the company.
2. How effective Nestle supply chain in India? Write about supplier development efforts
in Nestle India.
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Mini Case 13.4: UltraTech Cement Limited
UltraTech Cement Limited is the largest manufacturer of grey cement, ready mix concrete
(RMC), and white cement in India. The consolidated total revenue of the company for the
year 2018-19 was Rs. 35,703.50 crores and profit after tax was Rs. 2,455.72 crores. The
various product groups of the company consist of:
 UltraTech Cement
 UltraTech Concrete
 UltraTech Building Products
 UltraTech Building Solutions
 Birla White
UltraTech provides various products that meet the different needs of construction sector. The
product range consists of Ordinary Portland Cement, Portland Blast Furnace Slag Cement,
Portland Pozzalana Cement, White Cement, Ready Mix Concrete, building products, and
other building solutions.
Cement is sold under brand names ‘UltraTech, UltraTech Premium, and Birla Super’.
Ultratech uses HDPE bags for packaging cement.
White Cement is being manufactured and sold under the brand name ‘Birla White’.
Packaging material used for White Cement is PP (Poly Propelene) Sack Bags and pouches.
Ready Mix Concrete is offered under the brand name ‘UltraTech Concrete’. The new age
building products are provided under brand names such as ‘Xtralite, Fixoblock, Seal & Dry,
and Readiplast’.
UltraTech Building Solutions is in a retail format and offers various primary construction
materials under one roof.
Questions:
1. What are the product groups under Ultratech?
2. What are the different construction solutions offered by Ultratech?
3. Highlight the packaging requirements for the products supplied by Ultratech.
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14. INFORMATION TECHNOLOGY IN SCM

Learning objectives:
1. Importance of information technology in supply chain management.
2. Know about information and communication technology in SCM.
3. Data storage and retrieval in supply chain.
4. Learn about the role and importance of Enterprise Resource Planning in SCM.
5. Get to know the role of e-business and its impact on supply chain management

The information is vital for linking up the member firms of the supply chain together as a
strong chain. Mentzer et at (2001) have clearly indicated information as one of the three
flows in the supply chain. Further, Russel (2006) has pointed out that information is ‘heart
and brain’ of supply chain.
The role and impact of technology are inevitable in any country in the present world regime
of technology revolution. The level of technology in any country would have a propound
impact on the knowledge level of people and the capability of its business firms. The level of
growth in any country is closely related to the technology implementation level.
Supply chain is an integrated group of business processes and activities with the goal of
providing customers with products and services. Supply chain makes use of information and
communication technology together the various business processes involved in meeting the
needs of the customer.
The uncertainties in the supply chain are: inaccurate customer demand information, variation
in lead time, product changes and variations, order cancellations, etc. The management of
uncertainties is critical for ensuring supply chain performance. Information and
communication technology help in achieving this objective to a considerable extent.
The lack of information such as inaccurate customer demand data / forecasts cause a ripple
effect on the flow of customer demand information upstream of the supply chain. The main
aspects that are to be considered with respect to use of information and communication
technology for making improvements in the supply chain performance are:
 Capturing customer demand data (POS data collection)
 Data storage and retrieval
 Data manipulation / analysis and reporting

The various technologies that enable the process of implementing information and
communication technology infrastructure across the supply chain are:
 Point of sale (POS) data
Bar code
Radio frequency identification tags (RFID)
 Data communication technologies
  Electronic data interchange (EDI)
 Internet
Broadband
XML
 Intranet
 Extranet
 Database technologies: SQL Server, Oracle Database, etc.
 Enterprise Resource Planning (ERP)
 Supply Chain Management Software (SCMS)
 E-business systems

Point of sale (POS) data

The point of sale data is collected by making use of bar code, memory buttons, and radio
frequency identification (RFID) Tags. The data so collected using these devices are
processed and stored in a computer network for use in decision making.

Barcode:
Barcode is a representation of a particular number like product code in machine readable
form. Bar code might hold information such as: item number, price, destination, supplier
name, handling instructions, etc. Parcel service companies like FedEx and UPS have been
using bar code for tracking of parcels sent through them. The barcodes make possible the
online tracking of parcels sent through these parcel service companies. Point of sale (POS)
data collection in a super market sales counter helps better planning of inventory at the
various levels of its supply chain. The Figure 14.1 demonstrates the use of barcode in a super
market application.

Figure 14.1 Barcode applications in supply chain

Memory buttons:
Memory buttons are coin sized devices that could store a small database of information
relating to the item to which it has been attached. Memory buttons are similar to barcodes in
terms of use, but are capable holding larger amount of data when compared to barcodes. The
information / data stored in the memory button could be read by the reader when the reader
touches the memory button. Memory buttons could be attached to containers / trucks and it
improves tracking of these throughout the supply chain. Memory buttons can be used for
vehicle fleet management when they are programmed to hold maintenance data of the vehicle
fleet. Memory buttons is a good alternative to barcodes or RFID because they have been
designed to survive for years in harsh working environments. They are very much suitable
for various applications including military, aerospace, utility, transportation, etc.

Radio frequency identification (RFID):

Radio frequency identification tags make use of radio waves for transferring data between the
radio frequency reader and the RFID tags. This ensures transmission of data about the item
to which it has been attached. RFID, in addition, is capable of providing the location details
of the item to which it is attached. Every RFID has a unique identification number. RFID
scanners transmit radio signal through an antenna which will ‘turn on’ the RFID tag and the
tag responds with its identification number. There are two types of RFID tags viz., passive
tags and active tags. The active RFID tags have their own transmitter that can send signals
for the reader to pickup. But, the passive tags require the reader to initiate the
communication process. The tags can also be of either ‘read only’ type or ‘read-write’ type
like many of the other memory devices. The read only tags holds the information stored on it
and the information could be read by a reader. In case of ‘read-write’ tags the information
stored in the tags could be altered. The working of radio frequency identification (RFID) tag
in an application environment is shown in Figure 14.2.

There are special types of RFID tags which could for example monitor and record
temperature inside a ‘reefer’ (refrigerated container) and the data could be accessed remotely
and permits action that could be taken to set right the temperature inside the ‘reefer container’
which may hold perishable materials like fruits, vegetables, flowers, etc.,
RFID tags enable supply chain applications like:
 Tracking and billing of items bought by customers in retail stores automatically
 Monitoring items in a retail super mall store
 Tracking parcel item dealt by parcel service providers like DHL, FedEx, UPS, etc.
 Tracking containers / trucks

RFID tags are finding more and more applications in various businesses. However, it is
unlikely that it will totally replace barcodes due its relatively higher cost.
 Figure 14.2 RFID applications in supply chain (source: Dematic)

Data Communication Technologies

The major data communication technologies used in a supply chain are:
1. Electronic Data Interchange
2. Internet (Intranet & Extranet)
3. VPN (virtual private network)
4. Enterprise Resource Planning (ERP)

Electronic Data Interchange (EDI)

EDI enables business partners to exchange documents in standard format in a computer-to-
computer environment.

EDI supports exchange of data directly from a computer in one organization to another
application in a computer located at its trading partner’s organization. Electronic link of this
kind is established, in general, between organization having long term relationships. The
Figure 14.3 shows a typical EDI transaction between supplier, customer, and their bankers.
 Figure 14.3: Typical EDI transaction

Internet: A global information system that links many computer networks together. The
global networking of computers and information sharing happens in what is called “World
Wide Web (WWW)”. Internet is a global data communications network that is based on
Internet Protocol (IP) standards for moving data from one point to another or essentially from
one computer to another computer. Once a device is hooked onto the Internet, it can
communicate with any other device that is also connected to the Internet. Before the advent
of Internet, companies had to put in place expensive dedicated networks to connect their
systems to other companies’ systems for transmission of data. Networks over Internet
Protocol when provided with extra data protection and privacy through password protection
and use of firewalls could result in virtual private networks (VPNs). This makes data
transmission more secured and safe between the supply chain members who are linked by
such networks. The Figure 14.4 shows a typical computer network in a firm.

Broadband and XML technologies are enablers of use of Internet for data transmission.
Broadband basically means any communications technology that offers high speed (faster
than a 56Kb dial-up modem) access to the Internet with a connection that is always on. This
includes technologies such as coaxial cable, digital subscriber line (DSL), fixed wireless, and
satellite communication.
 Figure 14.4 A typical ‘Enterprise Network’

XML (eXtensible Markup Language) is a technology that can transmit data in flexible
formats between computers, and between computers and humans. While EDI is rigid in
formats, XML allows flexibility in data transmission. Slowly, XML and similar other
technologies will replace EDI technologies. At present there are solutions available for
integrating systems based on EDI with XML based systems.

DATA STORAGE AND RETRIEVAL

Database systems: Database systems like SQL server2000, Oracle, etc., are available for data
storage and retrieval. A database is an organized form of storage of data. Business process
data is quite complex and it may involve data on sales, production, finance, payroll, etc.
Storage of such wide range of data requires efficient storage and retrieval systems. This
requirement is effectively taken care of by database systems like SQL server or Oracle.
Business transactions generate data and are to be updated into the database for storage and
retrieval. These transactions can be recorded as soon as they happen in a real time basis or
may be recorded in batches on a periodic basis and that is called “batch” processing.
A database provides for different types of data retrieval based on the individual requirements.
For example, customers would like to view information regarding the different products and
quantities they had purchased over a period of time. On the other hand, a manufacturer’s
view will show information on all the customers who bought their group of products over a
period of time and also show detail of products that each customer bought, their credit limit
details, etc.
ENTERPRISE RESOURCE PLANNING (ERP)
Enterprise resource planning (ERP) is a single end to end integrated software solution. It is a
cross-functional enterprise system driven by an integrated suite of software modules that
support the basic internal business processes of a company. ERP integrates the business
processes in real time and helps in planning and managing the resources of an organization
more effectively. The main objective of ERP system is to integrate all the business processes
into a single unified computerized information system. The business houses which want to
implement ERP solution in their organization can install custom made software, uniquely
developed for their organization or put in place branded ERP solutions available for ready
installation.

The various branded ERP solutions are provided by companies like SAP, SSA Global,
Oracle, J.D.Edwards, Ramco Systems, etc. In fact, branded ERP solutions are provided as
modules and the client company has the freedom to choose the ERP modules based on their
business requirements.

An enterprise while implementing ERP has two options:

1. An organization could reengineer the business processes to suit the ERP format and
then implement the ERP solution.
2. Customize the ERP modules to suit the existing business processes of the company.

It should be noted when business processes are reengineered, the inefficiencies in the existing
processes gets removed. Then, the ERP solution modules are implemented over an efficient
process platform in the firm and the supply chain. Hence, it is always preferable to carryout
process reengineering before ERP implementation.

ERP system modules: the various modules of ERP system include financial accounting and
controlling, materials management, production planning and control, quality management,
plant maintenance, sales and distribution, human resource management, project management
etc. The Table 14.1 provides the typical modules offered by the top ERP solution providers.

Cost of ERP Implementation: The major cost components of ERP implementation are:
 Reengineering,
 Hardware,
 Software,
 Training and change management,
 Data conversion.
ERP benefits: The benefits of ERP implementation are:
 Improved quality and efficiency,
 decreased costs,
 Decision support,
 Improved enterprise flexibility to meet customer needs.

Table 14.1 Typical ERP solutions provided by renowned ERP vendors

Oracle SAP

Customer Relationship Management Consumer products and life sciences

Financial Accounting Discrete Manufacturing

Human Resources Financial Services

Supply Chain Process Manufacturing

Public Sector Public Sector

Banking applications Retail and wholesale distribution

Retail Service industries

Telecommunications

Higher education etc.

Ramco

SSA Global Process Manufacturing

Corporate performance management
Customer Relationship Management
Enterprise Resource Planning
Financial Management
Human Capital Management
Product life cycle Management
SME solutions
Supplier relationship management / SCM
Warehouse Management, etc.
Discrete Manufacturing
Enterprise Asset Management
Aviation
Human Resources Management
Industry specific solution by Ramco:
Manufacturing
Hi-tech
Aviation Transport
Retail / distribution
Government & Public Sector
ROLE OF E-BUSINESS AND ELECTRONIC INTEGRATION IN SCM
The Supply Chain Management uses information technology at the firms’ level for better
integration of members of the supply chain by proper interfacing and exchange of data and
information between the supply chain members. Hence, we will limit our discussion to B2B
integration in this chapter.
Business to Business (B2B) integration occurs when two business houses carryout business
with each other, with mutual trust and sharing of information, for mutual benefit of both the
parties. This B2B integration using computers and information technology synchronizes the
activities of all the elements in the supply chain thereby resulting in better overall
performance of the supply chain.
The level of information sharing between organizations could differ based on the trust that
has been built into each other based on the past performance and present information
requirements of the organization and the supply chain. There are three important aspects to be
considered while carrying out supply chain integration and they are:
1. Key supply chain members with whom link should be established (supplier,
distributor, retailer, customer?).
2. Identify supply chain processes for which electronic integration should be carried out.
3. Level of integration with the identified supply chain member.
The organizations may limit information sharing only to the tune of purchase order placement
online either through Internet or through their private network with EDI. Organizations who
have built-in lot of mutual trust due to a very long lasting relationships in the past, may build
an extensive network, data storage and retrieval system at each other’s works. Such a system
may allow sharing information on the customer company’s inventory stock position with the
supplier. The electronic network linking of the customer database with the supplier computer
network would allow automatic order trigger and supply of materials.
B2B integration which when carried out ensures better performance, for the parties involved.
The customer organization benefits by better response from the supplier leading to less down
time and less stock-outs. The supplier benefits from increased availability of orders, because
of the investment that the customer organization has made in building B2B integration in
terms of investment in computer, other hardware and networking with the supplier. Once
having deployed the hardware, network, and software and integrated electronically with the
supplier, it will be costly for the customer company to terminate relationships with the
supplier on flimsy reasons. B2B applications provide a competitive advantage for the
supplier, as well as improved availability of materials on time to the customer and this result
in mutual benefit for both the parties.
Improvements occur in the supply chain performance due to B2B integration in the following
areas:
 Raw material supply
 Transportation
 Meeting customer demand
The use of information technology for B2B integration would result in the following benefits:
i. Paper transaction is eliminated, and hence less cost.
ii. Reduced lead time for supplies, result in quicker delivery.
iii. Increased productivity due to higher availability of raw material supplies.
iv. Reduced cost due to efficient supply chain management.
v. Minimized errors due to higher level of automation.
vi. Better relationship between supplier and customer organization.
It should be noted that B2B integration investment requirement is quite high. However, the
benefits seem to outweigh the cost.

Summary
Information is one of the three flows in the supply chain. Information and communication
technology integrates the various processes in the supply chain. This enables providing the
products and services more efficiently and effectively to the customer.
The important aspects on which focus should be laid on while envisaging the use of
information technology in order to enhance the information sharing among the members of
the supply chain are: Data capturing and data communication, Data storage and retrieval, and
Data manipulation and reporting.

The important information technologies which enable information sharing are: Point of sale
(POS) data - Bar codes, Radio frequency identification tags (RFID); Data communication
technologies - Electronic data interchange (EDI), Internet, Broadband , XML, Intranet,
Extranet; Database technologies - SQL Server, Oracle Database; Enterprise Resource
Planning (ERP); Supply Chain Management Software (SCMS); and E-business systems.
A successful information technology based solution for managing supply chain is Enterprise
Resource Planning (ERP). ERP integrates the business processes in real time and helps in
planning and managing the resources of an organization. The main objective of ERP system
is to integrate all the business processes (functions and activities) into a single unified
computerized information system. Typical ERP functionality covers the following modules:
finance, manufacturing and logistics, and human resources.
The major cost components of ERP implementation are: reengineering; hardware; software;
training and change management; and data conversions.
Electronic integration in a B2B environment has an important role in procurement and
distribution activities of the supply chain.

End Chapter Questions

1. List the different enabling technologies used for supply chain integration.
2. What is the role of bar coding in information sharing in supply chain?
3. Explain how POS data helps in better planning in the logistics network?
4. How could RFID help in better information sharing in the supply chain?
5. Explain EDI technology as a platform for information sharing in the supply chain.
What are its limitations?
6. What is electronic fund transfer (EFT)?
7. Explain how Intranet / Extranet technologies can help in supply chain management?
8. Explain how ERP enables supply chain integration?
9. What is ‘vanilla implementation’ of ERP systems?
10. What are the main components of ERP system?
11. List four major ERP solution providers at the global level.
12. What are the four types of conversion methods adopted when a legacy or traditional
system is replaced with an ERP solution?
13. What are the cost components of ERP solution? Explain briefly.
14. List the various benefits of ERP solution.
15. What are the strategic and operational benefits of B2B integration in a supply chain
network?
----------------------------------------------------------------------------------------------------------------
Mini Case 14.1: RFID – The Future Technology
The history of radio frequency identification dates back to the second world war when
Germany made use of a very crude form of radio frequency identification system. Watson-
Watt under a secret project developed a system for the British and was named ‘identify
Friend or Foe (IFF)’ System. They installed a transmitter on each airplane and when it
received a signal from ground station will transmit back a signal identifying it as friendly.
RFID works on the same principle. A signal is transmitted and it wakes up a transponder on
the product. This transponder either reflects back a signal (passive system) or broadcasts a
signal (active system).
Companies went on to commercializing this technology which involved a simple bit tag
which was either on or off. When someone pays for a product, the tag in it is turned off and
he can walk out with the product. In case someone walks off with a product without paying,
then it signals a warning and could be identified. This type of RFID tags were used as anti-
theft detection system.
RFID technology received a boost up when ‘Uniform Code Council’, ‘EAN International’,
‘Procter & Gamble’ and ‘Gillette’ established funding to set up ‘Auto-ID center’ at the
Massachusetts Institute of technology. Two professors Sarma and Brock contributed
enormously towards application of RFID in the supply chain.
In the year 2003, the RFID technology was licensed to Uniform Code Council and the
Uniform Code Council created the FPC global as a joint venture with EAN International to
commercialize EPC technology.
RFID could be effectively made use of in the supply chain for inventory management,
container location and tracking etc. Biggest retailers in the world have already started
implementing RFID technology in their supply chain. It is quite interesting and worthy to
note that a foreign mission at Chennai has implemented RFID technology for its library
management.
Questions:
1. What are active and passive RFIDs and what are their applications?
2. Explain how RFID could be used for collecting POS (point of sale) data?
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 14.2: Indian Railway Catering & Tourism Corporation Limited (IRCTC)
Indian Railway Catering & Tourism Corporation Limited (IRCTC) was incorporated on 27th
September 1999 as an extended arm of railways to upgrade, professionalize and manage
catering and hospitality services at stations, on trains and other locations. IRCTC was formed
with an intent to develop and promote domestic and international tourism through
development of Budget Hotels, Special tour packages, information & commercial publicity,
and global reservation system.
IRCTC provides tourism services through booking full train charters, coaches as well as
reserved berth programmes through regular trains. IRCTC has provided such services to over
50,000 persons in a short period since the inception of such tourism services.

Internet Rail Ticket Reservation:

IRCTC identified the demand for railway tickets delivery at door-step of customers. IRCTC
has provided the rail ticket delivery system at Delhi, Chennai, Bangalore, Kolkata and
Mumbai. The train ticket door-step delivery system would be extended to Hyderabad, Pune,
and Ahmedabad very soon. IRCTC plans to extend such services to other towns after the
consolidation of services at the existing places where such service has already been provided.
IRCTC provides a robust on line ticket reservation & online ticket delivery in digital form.
Such an electronic ticketing system is also provided through the company’s ticket reservation
website www.irctc.co.in

Non-Railway Segment:
IRCTC is diversifying into Non-Railway Segment which includes Budget Hotels, Food
Kiosks, Food Parks, Catering Services, Facility Management Service, Guest House, and
Hostel Management, etc.
IRCTC through Facility Management Services plans to provide one window solution for
catering, front office, house keeping, security, laundry, ITES and horticulture services to
government organizations, corporate and educational institutions.

RailNeer:
IRCTC provides bottled drinking water branded ‘RailNeer’ to the railway passenger at very
affordable price. The purified water is bottled at water purifying plants located at Nangloi
(Delhi), Danapur (Patna), Palur (Chennai).
Questions:
1. Explain the different modes of service delivery in the railway by IRCTC.
2. Delineate on the service supply chain of IRCTC.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 14.3: HCL Technologies
HCL has grown since its inception in 1976, a time period at which India had only 250
computers. In fact, HCL has initiated the development of Indian computer industry. The
company developed India’s first indigenous microcomputer in 1978. HCL’s operation in
India comprises of two listed companies: HCL Technologies and HCL Infosystems. The
main offerings from HCL include product engineering, custom & package applications, BPO,
IT infrastructure services, IT hardware, system integration, and distribution of information
and communication technology (ICT) products across a wide range of industries.
HCL is company that enables its customers to reorient or re-imagine their business towards
the digital age. HCL employs 137,000+ people across 44 countries. HCL Technologies
achieved total revenue of Rs. 22,775 crores and profit of Rs. 7,362 crores during the year
2017-18.
HCL Technologies adopts the following strategies in its operations:
Being agile and lean.
Experience centric and outcome based approach.
Ecosystem or environment driven.

HCL Technologies offers a portfolio products and services comprising of enterprise grade
software platforms, Software-as-a-service (Saas), BPO, etc.
Questions:
1. What are the products and services offered by HCL Technologies?
2. Explain the various strategies adopted by this company in its operations.
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 14.4: “Growth strategy with a humanitarian touch” Hindustan Unilever
Hindustan Unilever Limited (HUL) is India’s largest FMCG (Fast Moving Consumer Goods)
company. HUL caters to nutrition, hygiene, and personal care products for the customers. A
company with deep roots in local cultures has a commitment for achieving exceptional
standards of performance and productivity. HUL is an 18,000 employee strong organization.
The turnover of the company was Rs 37,660 Crores and profit after tax was Rs. 6,080 crores
for the year 2018-19. It has come up to this stature through planned growth, acquisition, and
mergers. The company brands comprises of the following categories.
Food & Refreshment: The brand items under this category are Annpurna, Brooke Bond 3
Roses, Brooke Bond Red Label, Brooke Bond Taaza, Brooke Bond Taj Mahal, Bru,
Cornetto, Kissan, Knorr, Kwality Wall’s, Lipton, and Magnum.
Home Care: The brand items under home care category are Active Wheel, Cif, Comfort,
Domex, Rin, Sunlight, Surf Excel, Vim.
Personal Care: The brands under this category are Aviance, Axe, Breeze (Soap), Brylcream,
Citra, Clear, Clinic Plus, Close Up, Dove, Elle18, Fair & Lovely, Hamam, Indulekha, Lakme,
Lever Ayush, Lifebuoy, Liril, Lux, Pears, Pepsodent, Pond’s, Pure Derm, Rexom, SunSilk,
Sure, TIGI, TONI & GUY, TREsemme, Vaseline.
Water Purifier: Pureit is an in-home water purifier and the first of its kind. This purifier is
meant for purifying tap water and makes the water safe to drink.

HUL & Technology Adoptation:

HUL believes that the technologies like Internet of Things, Cloud Computing, and Artificial
Intelligence opens up a lot of opportunities. Especially, data management and analytics would
get more attention at HUL. The strategy involved in exploiting data collected in the
company’s supply chain will be as per the following steps:
Step 1: What data do we have and what more do we need?
Step 2: How to acquire the data?
Step 3: How to store the data?
Step 4: How to manage the data?
Step 5: How to use the data?

Step 1: involves defining a strategy for data application in HUL.

Step 2: involves identifying the source for obtaining data. It could be to collected internally,
buy data from vendors, obtain through partnerships with other firms.

Step 3: This step defines the data architecture to be adopted and technology deployment.
Technology identification could involve defining hardware and software (Database
technology).

Step 4: involves security of the data. This might involve Data Server Configuration and
firewall to be used. This step also would define authority for accessing, editing, and
modifying data. This is very essential to ensure data integrity in the total organization and
also prevent any abuse of data.

Step 5: This is the most important aspect of data management strategy to be followed in any
firm. How to analyze the data collected and obtain usable information out of it. Further, it is
very important to know, how to use the information so obtained through data intelligence for
decision making and monetization of this information for better performance of the firm and
the total supply chain.

HUL Re-imagining Supply Chain:

HUL aims at having a holistic view towards managing the total value chain, in order to
completely transform the way business is carried out by the firm in a connected world. The
HUL supply chain involves: Plan, Source, Make, and Deliver.

Plan: The firm aims at adopting and achieving the following:

 1 Day planning cycle time (Real time)
 Integration of the supply chain operations
 Segmentation of the activities / functions in order to enhance productivity and
ultimately profitability.

Source: The sourcing strategy for the HUL would involve:

 Integrated e-tendering
 Real time Forecast and proving information to suppliers
 Smart Inventory Modeling

Make: The strategy to be adopted for the ‘make’ part of the supply chain which involves the
production operation or assembly line execution or service rendering would follow the
important strategies as follows:
 Digital Factory
 Smart adaptation of Robotics
 Network Redesign

Deliver: this part of the supply chain involves new logistics models involving deployment of
information technology to reduce cycle time. This would result in reduction of cash-to-cash
cycle in the value chain. The firm aims at establishing efficient fulfillment centres. This
activity could involve operations such as cross dock, break bulk, and value added servicing
like packaging and labeling.

The firm aims at having end-to-end cost focus, needless to mention that it involves supply
chain and logistics cost.

Project Shakthi:
Project Shakthi is a rural initiative by HUL and it targets villages populated 2000 on a unique
win-win business solution model. The project Shakthi impacts in twin ways - one, it provides
an entrepreneurial opportunity to needy rural women folk; and second, the Shakthi Vani
programme contributes towards increasing awareness. HUL benefits by enhancing its rural
reach by taking its brands to the remotest of the villages. Project Shakthi provides advantages
of micro-credit to rural entrepreneurs and business opportunity to distribute HUL products on
a direct-to-home basis.
HUL provides training to entrepreneurs, and make them business savvy and competent
business people in the rural India. Shakthi has far reaching impact on the rural India by
creating livelihood for under privileged women. The programme has already benefited
45,000 families of Shakthi entrepreneurs covering 135,000 villages across 15 states.
Questions:
5. What are steps taken with respect to data management and analytics in HUL supply
chain?
6. What are information technology initiatives taken by HUL in its supply chain,
especially in sourcing and procurement?
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15. REVERSE LOGISTICS SYSTEM

Learning objectives:
1. Understand the importance of reverse logistics system
2. Discuss the reasons for returns in the logistics system
3. Know about green marketing practices and greening of the supply chain.
4. Discuss the reverse logistics processes.

Logistics system, in general, moves products to customers towards the downstream of the
supply chain. However, at times there is a need for flow in the reverse direction i.e from
customers to the supplier. In the later case the material flow occurs in the reverse direction
upstream of the supply chain. This flow of products / material in the reverse direction is
known as reverse logistics. We know that as per the basic definition of supply chain which
comprises of three or more firms connected by flows of products and services, cash, and
information. It should be noted that the basic definition of supply chain encompasses flows of
products and services, information, and cash in both directions of the supply chain.

CSCMP’s definition of Logistics Management:

Logistics Management is that part of supply chain management that plans, implements, and
controls the efficient, effective forward and reverse flow and storage of goods, services and
related information between the point of origin and the point of consumption in order to meet
customers’ requirements.
It is quite clear from the CSCMP definition of logistics management that flow of products in
the reverse direction from the customer to the supplier is part of logistics management. When,
the product / material flow occurs in the reverse direction, it is given a specific name ‘reverse
logistics’.
The field of reverse logistics is attracting more interest and the businesses have started
recognizing the importance of reverse logistics in the supply chain. The material flow in the
reverse direction could either be product returns or packaging returns.
The product return in case of new products happens due to:
i. Customer has changed his mind about the product purchase
ii. Product was defective
iii. Customer perceived the product to be of poor quality
iv. Product got damaged during transit
v. Error in shipment (wrong item and / or wrong quantity)
In case of used products, the product returns could be due to:
i. Warranty claims
ii. Product recalls
The packaging material returns are meant for reuse. The packaging material returns could be
reusable plastic pallet, totes, bottles, containers, etc.

----------------------------------------------------------------------------------------------------------------
Case in Point: Toyota Hybris … Costly product recall in the corporate history
Toyota which is the largest manufacturer in the world and top manufacturer of automobiles
has been facing some serious problems in one of its products in the recent past. Some
estimates indicate that around 9 million vehicles have been recalled by Toyota since 2009-10
for two problems related to braking system in its passenger car. First, the accelerator pedal
getting stuck due to incursion of faulty floor mats; and the second, unintended acceleration of
some of Toyota cars under certain conditions especially under automatic cruise control. The
total cost of the product recall could be well beyond $ 5 billion, as per some estimates.
Nevertheless, Toyota has been facing this challenge quite successfully and keeps its flag
flying high in the world automotive manufacturing sector.
----------------------------------------------------------------------------------------------------------------

A research study has indicated that the percentage of returns in a business is generally known
to most organizations. The percentage of returns varies depending on the nature of business
and type of returns policy adopted by the organization. The percentage of returns could range
from 2% to 50% of the sales value. Returns policy has become more liberal in retail and more
so especially in direct marketing. Online marketing companies have also started to adopt
more liberal returns policies due to the very inherent nature of the business. Some of the
online companies adopt exploitive practices in the online marketing business. They might
land up in flipping the online business cart and possibly kill the golden goose.

----------------------------------------------------------------------------------------------------------------
Case in point: Sample returns percentage (sector wise)
A study indicates the following percentage of product returns for some typical products.
Hard goods 9%
Casual apparel 18%
Hi-Tech products 20%
Fashion apparel 35%

The product returns in news print is also quite high and is estimated to be around 40% in
some cases. The study further indicates that currently, 44% of product returns are sold as
new, 2% trashed, 13% liquidated, and 41% sent back to the manufacturer.
----------------------------------------------------------------------------------------------------------------
Reverse logistics could be categorized into the following broad categories:
 Quality related returns
 Warranty claims
 Packaging materials return
 Salvage of outdated products
 Green marketing practices (including recycling, remanufacturing, etc.)

Quality related returns:

Customers return products that are found defective and sometimes the manufacturer
themselves recall the products on identifying quality problems in the product. In the
beginning of year 2010 one major international automobile manufacturer recalled as many as
400,000 cars due to problems in its antilock braking system software which cost the company
approximately $2 billion.
The costs associated with new products returned due to quality problems are to be borne by
the manufacturer if the defect identified is due to faulty manufacturing. The defective product
is returned to the company for rework, if possible. When the defective product could not be
successfully repaired or reworked, the customer is either provided with the new good product
or given credit to the extent of losses incurred by him / her. The distribution channel member
i.e the logistics carrier, the distributor, or other members of the distribution channel bears the
responsibility and cost in cases where in damage has occurred during the movement of the
products and the damage has been caused due to the mistake of channel member. The retail
outlet bears the responsibility in case the source of damage could not be identified.

Used products return by customers:

Customers are encouraged to return used products and take a new one back home. A credit is
provided towards the value of the used product returned by the customer. This is a prevalent
practice in the two wheeler market and the small sized four wheeler passenger car market as
well.
Customers are also encouraged returns in case of certain automotive parts and systems,
especially during automobile car / two wheeler servicing. For example, automotive
alternators, starters, water pumps, and batteries are remanufactured from the used ones by
extracting components that are in still in good condition. The remanufactured goods are sold
through the retail outlet at a reduced price. Remanufactured laptop and desktop computers are
quite common in the very recent years.
In the passenger car industry, reverse logistics is a challenge with each of the passenger car
manufacturers introducing half a dozen models every alternative year. This challenge
becomes further more complex through exchange options, wherein the customer could return
the old model and take home a newer one after paying the difference in price (price of new
can less the value of the old used car). This trend in the automotive industry will create a
huge quantity of ‘end of life vehicles (ELV)’ and their disposal will be a problem.
Warranty claims:
Products which become defective or does not perform to the satisfaction of the customer
could be returned by the customer under warranty claims for repair / replacement. The cost
towards this is to be borne by the manufacturing company. E-commerce provides lot of
opportunities for reverse logistics.

Packaging material returns:

Packaging materials like pallets could be returned for reuse in the distribution chain. So is the
case for packaging materials like bottles used in soft drinks distribution. The bottles could be
collected and reused after proper cleaning or sterilization.
In case of packaging materials like aluminum cans, they’re collected after use and recycled.
Recycling is a process that involves conversion of the material by proper processing into
materials for different applications. The more often recycled materials are aluminum, paper,
glass, and plastics.

Salvaging outdated products:

Products that are outdated also need to be collected back and disposed off properly. Return of
products in the print media is a challenge. The return rate could be as high as 35 to 40% in
case of print media such as magazines and newspapers. The reverse logistics is a regular
activity in this business.

Green marketing practices:

Companies also collect back materials used for packaging etc., in order to keep the supply
chain more green in nature.
Reverse logistics has become a critical and a challenging activity in the computer/ electronic
industry. Approximately 325 million PCs became obsolete during the period 1985 to 2005 in
US alone. There is a lot of potential for recycling / remanufacturing in this sector.
Though a particular laptop or desktop computer has reached its ‘end of life’, some of the
components like memory chips, optical drives, and hard disk could be in good condition
having further useful life. The components which are in good condition are put back and
assembled as part of new PCs and sold at a lower price, of course maintaining transparency
of this practice and customers are provided with the information on the product. The
customer should know that the product that they are buying is a remanufactured one and the
customer should receive proper credit towards this purchase.
E-waste comprises of equipments like computers, televisions, cell phones, audio-equipment,
and batteries. E-waste contains huge amount of materials like lead, copper, aluminum, gold,
plastics, and glass. All these materials could be recovered and put in to different newer
applications through recycling.
European Union has developed stricter environmental regulations in an attempt to prevent
waste from end-of-life vehicles, and promote collection, reuse, and recycling of the
components in order to preserve the environment [ELV Directive 2000]. Many other
countries also have enacted legislations to control waste from hi-tech products and hazardous
materials like batteries, electronic gadgets, etc. United Nations has issued a directive on waste
electrical and electronic equipment [2002/96/EC; UNEP 2010] and expect member countries
to adopt waste management reduction methods - reuse, recycle, and other forms of recovery
in order to reduce electrical and electronic waste disposal problem [Kotzab et al, 2011]. The
sales of electronic products in countries like China and India as well as in African continent
and Latin America would increase sharply in the next 10 years. There should be proper
collection and recycling of electronic waste or else many of the developing countries would
have to face the spectre of e-waste mountains [UNEP 2010].
Green logistics attempts to minimize the ecological impact due to logistical activities.
Mainly, green logistics practices attempt to reduce use resources and minimize waste. For
example, green logistics attempts to reduce energy consumption and material consumption,
avoid vehicle empty runs.

Retail Industry:
Retail industry generally operates with a thin profit margin due to heavy competition and the
retail sector thrives and grows based on business volume. Goods return is very critical in this
sector of business since its impact on the profitability could be significant. Further, returns
affect the profitability of retailers more than that of manufacturers.

REVERSE LOGISTICS PROCESS

The material flow in the reverse logistics should follow a systematic approach. The reverse
logistics process comprises of the following steps:
i. Retrieve
ii. Transport
iii. Receive
iv. Inspect
v. Sort / segregate
vi. Disposal management

REVERSE LOGISTICS OPERATIONAL CHALLENGES

Retailer - Manufacturer conflict could make reverse logistics inefficient. There is a need for a
working partnership to derive mutual benefit for both.

SYMPTOMS OF POOR REVERSE LOGISTICS

The following are some of the symptoms of poor or inefficient reverse logistics:
 Returns arriving faster than processing or disposal of the returned items.
  Excess amount of returns inventory held in the warehouse
 Unidentified / unauthorized returns
 No control over costs due to product returns
 Customer losing confidence in the repair management process

REVERSE LOGISTICS INFORMATION SYSTEM

A major problem in the reverse logistics management is the information system. There is
dearth / non-availability of information on returns. A good information system for tracking
returns is very essential in order to provide higher level of customer service. A database on
returns could be established at the stores level in order to monitor the returns process.
Information with respect to returns rate, redemption, returns inventory turnover, etc., could be
very useful for managing the reverse logistics process better.

CENTRALIZED RETURN CENTERS (CRC)

A centralized return center could bring in better management of product returns and also
provide advantages in the reverse logistics system. The following are the major advantages of
centralized return centers.
 Consistency in the disposition of returns and minimization of errors in return
handling.
 Space saving for retailers as retailers could allocate the space for more salable
merchandise. Retailer space is more costly, as they are generally located in prime
trade centers.
 Specialization of returns management results in cost reduction (CRC employees can
handle returns more efficiently than retail personnel).
 Transportation costs reduction could be achieved since the trucks which have brought
in products / consignments from the manufacturer could be used for transporting
returns in the reverse trip.
 Good returns management and quicker returns disposal could be used as a selling tool
– easy disposition of returns could be appealing to the retailers and maybe used as a
deal maker for obtaining or retaining customers. Good returns management enables
the marketing process.
REMANUFACTURING / REFURBISHMENT
The advantageous of using reworked / remanufactured equipments / parts could be felt
through the reduction in cost. There are five categories of remanufacturing/refurbishment
which could be grouped into three broad classifications, as given below:

A) Making the product reusable

1. Repair
2. Refurnishing
3. Remanufacturing
B) Retrieving reusable parts (from old / broken products)
4. Cannibalization

C) Reusing parts for a different purpose

5. Recycling

Summary:
Logistics system, in general, moves products to customers. However, at times there is a need
for flow in the reverse direction i.e from customers. This flow of products in the reverse
direction is known as reverse logistics. It should be noted that basic definition of supply chain
takes into account flows of products and services, information, and cash in both directions of
the supply chain.
Reverse logistics could be categorized into the following broad categories: Quality related
returns, Warranty claims, Packaging materials return, Salvage of outdated products, Green
marketing practices (including recycling, remanufacturing, etc.)
E-waste comprises of equipments like computers, televisions, cell phones, audio-equipment,
and batteries. E-waste contains huge amount of materials like lead, copper, aluminum, gold,
plastics, and glass and these materials could be recovered and put into different newer
applications through recycling.
Green logistics attempts to minimize the ecological impact due to logistical activities. For
example, it attempts to reduce energy consumption and the material consumption in logistical
activities.
There are five categories of remanufacturing/ refurbishment which are:
1. Repair, 2. Refurnishing, 3. Remanufacturing, 4. Cannibalization, and 5. Recycling.
End Chapter Questions
1. Define reverse logistics
2. What are the main reasons for returns in the logistics system?
3. Explain the concept of “Centralized Return Centers (CRC)”
4. List the five categories of remanufacturing / refurbishment.
5. What is green logistics and what is its relationship to reverse logistics?
6. How do ‘End of life vehicles’ and ‘E-waste’ contribute towards reverse logistics?

Essay Questions
1. Discuss in detail the main categories of returns in the reverse logistics system.
2. Explain in detail the different methods of remanufacturing / refurbishment.
3. Explain the importance of reverse logistics information system, especially on product
returns.

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Mini Case 15.1: Nestle – Maggi product recall
Maggi has been an iconic product with so much of charm and fanfare with children
especially. Maggi is the noodles brand of Nestle, India which is a subsidiary of Swiss based
Nestle, SA. Maggi was a major brand for Nestle and accounted for 60% of noodles sales in
India. Maggi entered the Indian market as an easy-to-cook snack in the 1980s and became a
great success. But, the product is facing a credibility crisis due to the findings made by two
officials of food regulator of Uttar Pradesh, ‘Food Safety and Drug Administration (FDA)’
that Maggi instant noodles contains dangerously high levels of lead concentration.
FDA officials have informed that all the two dozen Maggi pockets that were tested in the
state-run laboratories had lead concentration of 17.2 PPM (parts per million). This lead
concentration is seven times the permissible level of lead concentration which is between
0.01 PPM and 2.5 PPM. The scientists, who tested the samples, have found high levels of
added monosodium glutamate (MSG).
MSG is a flavour enhancer which is used for Chinese food, canned vegetables, soups, and
meat. However, experts indicate that excess of MSG consumption could cause headache,
chest pain, nausea. Monosodium Glutamate (MSG), when consumed over a long period could
damage the nervous system.
Nestle India, however maintained that the company had strict safety and quality controls in
place, and the company said, “We do not add MSG to Maggi noodles, and glutamate, if
present, may come from naturally occurring sources. We are surprised with the content
supposedly found in the sample as we monitor the lead content regularly as a part of the
regulatory requirements”.
FDA ordered recall of a batch of Maggi Noodles dating back to Mach 2014. The deputy
inspector general of FDA in Lucknow D.G.Srivastava informed “Maggi instant noodles
contained dangerous amount of lead and MSG. We had to immediately issue orders against
the company”.
FDA ordered recall of Maggi noodles from the market shelves on April 30, 2015. The
government Food Safety and Standards Authority (FSSAI) subsequently collected fresh
samples and ruled that the snack to be “unsafe and hazardous”. This ruling was issued hours
after Nestle withdrawl of all varieties of noodles on June 5, 2015.
Nestle has reported in its website that the company does more testing than any other entity in
the world and 8000 people are working to assure quality and food safety in its products
worldwide. Nestle claims to have inbuilt controls from raw material selection to processing
and packaging. However, Nestle is treading the denial mode and claims that lead in the
products were within the food safety limits specified by the Indian authorities and Maggi is
safe for consumption. The Bombay high court ruled that the Maggi noodles are banned in
India, however, allowed Nestle to export the product.
Nestle has 8 factories in India, and 5 of which produce Maggi noodles. The product is stored
in 38 distribution centers and sent to 1400 distributors. The distributors sell the product to
other distributors or to retail directly. Nestle estimates that its retail network is 3.5 million
retail outlets, half of which is catered to directly by its 1400 distributors. Nestle estimates that
the quantity of Maggi to be recalled is around 27,420 tonnes. Nestle intends to withdraw all
the Maggi noodles from the market and destroy them by burning as fuel in cement kilns,
thereby avoiding environmental issues. The recall process has been approved by Indian
authorities. Nestle had to spend around $45 million to withdraw and destroy the noodles from
the Indian market. Nestle continues its Indian operations with its other brands. The company
which used to send the products in one direction to customers had to manage flow of products
in both the directions for some time.
Questions:
1. What is the problem faced by Nestle with respect to its product “Maggie”?
2. How effective Nestle was in carrying out the reverse logistics operations? Comment.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 15.2: Toyota product recall – challenges in reverse logistics:
Toyota Motor Corporation is the largest products of automobile vehicles. The company has
been making losses for quite some time and reported a profit of 1717 billion yen profit in the
year 2008. The company had to face a severe embarrassment to the tradition of quality and
safety which it claims to have been ensuring all along from its inception. Toyota Motor
Corporation has been in operation since 1937 for the part more than 75 years.
The company has to face major recalls due to problems in its braking system and the software
used in the cruise control. The company had to recall 437,000 hybrid vehicles which includes
the prestigious Prius and Lexus, and Sai models. Sai is sold primarily in Japan.
Some owners of the prestigious hybrid vehicle Prius complained that the vehicle accelerates
on its own and put the drivers on a wild ride. Steve Wozniak, the cofounder of Apple was one
of the most prominent owners of the Prius to have complained on the problem of over
speeding and wild ride with the Prius 2010 Prius hybrid model. He owns many Prius models
including the 2010 hybrid model. He ascribed the problem of wild ride on bad software and
not on the floor mat or the sticky accelerator pedal as explained by Toyota professionals.
Customers expressed that the problem is with braking under certain conditions of cruise
control. Under such conditions of wild ride, the drivers could not switch off cruise control
and were resisted even when the drivers slammed on the brakes. Similar experience of wild
ride with the Prius 2008 model was faced by Grover Walton. Herb Kuehn of Battle Creek had
the same kind of experience in 2005 on a two lane highway.
Prius hybrid recall is part of the 8.1 million vehicle recall for problems in the accelerator
pedal getting stuck on the floor mat. The accelerator pedal becomes more sticky due to more
friction in the accelerator pedal assembly as they become worn out. The excess friction in the
pedal assembly does not allow the accelerator to return to its original free position even after
the driver has released the pedal and this creates problem in driving the vehicle.
The reverse flow of vehicles to the dealerships network for the free servicing and if necessary
free replacement of the breaking pedal assembly has been managed by the company
relatively easily as the vehicles could be driven to the dealership by the owner / owner’s staff.
This feature of the product has made the flow such huge volume of products flow in the
reverse direction of the supply chain relatively easier. It is amazing to imagine the reverse
logistics efforts involved, had the product been something else like a computer, or a printing
machine. This product recall by Toyota would cost the company around $2billion.
Toyota has been facing this product quality and safety problem quite skillfully even though
the task involved was a great challenge.
Questions:
1. What do you think is the nature of problem Toyota motor company is facing?
2. How could a company like Toyota minimize /avoid product recalls?
3. Suggest methods for efficient and effective reverse logistics management in situation like
this huge product recall?
[Source: i. CNN News dated 07-02-2010; ii. CNN News dated 11-02-2010]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Mini Case 15.3: Vedanta
Vedanta is a global diversified natural resources company. The company’s strategy is to
deliver growth, long-term value and sustainable development through diversified portfolio of
large, long-life, low-cost assets. The total revenue during the year 2018-19 was Rs. 44,796
crores and profit after tax was 5,075 crores. The major businesses of the company consist of
Zinc, Oil & gas, Iron Ore, Copper, Aluminium, and Power.
Zinc-Lead_Silver: One of the largest integrated zinc-lead producer. Vedanata’s zinc
operations are located in India, Namibia, South Africa, and Ireland.
Oil & Gas: The operations are located in India, Sri Lanka, and South Africa.
Iron Ore: Iron ore business in India is located in Goa & Karnataka.
Copper: The copper business operation is located in India, Australia, and Zambia.
Aluminium: Vedanta is an integrated producer of Aluminium with mines, smelters, and
associated captive and independent power plants. Vedanta has aluminium smelters at Korba
(Chattisgarh) and Jharsuguda (Odisha) and aluminium refinery at Lanjigarh (Odisha).
Power: Vedanta operates 2400 MW power plant at Jharsuguda, 270 MW in Chattisgarh, 100
MW in Tamil Nadu. Vedanta also operates 274 MW HZL wind power at various locations in
India. Talwandi sabo Power Limited which is a 100% owned subsidiary is setting up 1,980
MW thermal power project in Punjab
The company believes in sustainable development through:
 Responsible stewardship
 Building strong relationships
 Adding and sharing value
 Community impact
The company aims to minimize risk of harm to people and environment throughout the
lifecycle of its projects. Vedanta believes in building strong relationship with all the
stakeholders including employees, shareholders, government, and community where the
company operates. The company is aware of the need for environment protection and social
development. Vedanta strongly believes in adding and sharing value for sustainable
development.
Questions:
1. What is complexity of Vedanta supply chain?
2. What efforts Vedanta has taken with respect to contributing towards environmental
protection?
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16. GOBAL LOGISTICS

Learning objectives:
1. Importance of international trade and its impact on logistics.
2. Factors that encourage international trade.
3. Types of international business.
4. Concepts of global supply chain.
5. Learn about the importance of shipping trade.
6. Difficulties faced in international logistics.
7. Role of WTO in global trade and Incoterms.

The customer is supreme in a globally competitive environment. Now, the customer can
source his requirement of products and services anywhere is the world, thereby creating a
borderless world with respect to business transactions. The advent of personal computing
systems, Information Technology, Internet, etc., have enabled the supply chains of various
organizations to be globally competitive. Globalization and liberalization in India has had its
own impact on its need for improved logistics services. The nation is responding to such
needs in terms of gauge conversion of railway tracks into all broad gauge tracks, and also by
developing a national road network of 4-lane highways.
We should also think in terms of changes around the globe like the fall of communism in
many countries and also formation of European Community. The global market place has
changed dramatically in the past two decades. The driving forces, now, behind any company
are:
 Empowered customer
 Power shift in the supply chain
 Deregulation
 Globalization
 Technology as an enabler
The customer, who is becoming more and more informed in the internet world, wants the
supply chains to deliver goods and services to him / her:
at the shortest possible time (reduced cycle time to consumer)
good quality of product and services
The increased service level that the empowered customer expects puts a pressure on logistics
function and supply chain management. Companies have to look forward for logistic
strategies and operations in order to keep them competitive through efficient and effective
supply chain operation. The organizations’ managers will have to conceptualize, design, and
implement a supply chain which will be effective globally.
GLOBAL BUSINESS
The competition has grown amongst business houses at international level. Customers have
become more sophisticated and demanding as there is more choice of products and services
available. In order to meet the tough global competition, supply chains should keep product
costs low, ensure high quality, deliver on time, and customize products and services, to meet
the individual needs of the customer.

Globalization has enabled the availability of international products and services in many
countries with diverse economic and cultural backgrounds. In fact, globalization of the world
economy has brought in a basket of opportunities and challenges for the business managers
and especially logistics managers. Globalization offers an integrated and interdependent
world economy with the following characteristics:
 Business opportunities are more leading to a border less economic word; trade and
investment barriers are disappearing.
 Distance barriers are no longer relevant in the global economy with advancements in
transportation and information and communication technology (ICT).
 World Economic order is undergoing a change.

Globalization has led to the creation of global markets and establishment of global
production. The global markets available due to the opening up of the international market is
an opportunity for the firms and provides an avenue for further growth. The global
production takes into account the firms requirements to grow in terms of its operations and
also avail of cheap inputs (labour and material) available in other countries. There are also
benefits to firms in international business because of difference in tax policies of various
countries. Special Economic Zones have made a very significant impact on the world trade.

Global markets: the globalization has opened up the individual national economies into a
unified and open global system. This has lead to a global market for the products and
services. International trade continues to grow, setting apart for short term fluctuations. For
example, the Malaysian made canned orange juice is available in a small town like Pilani
(Rajasthan, India). Similarly, a knit-wear made in a small town Thirupur (TN, India) is
available in major retail outlets in USA. Thus, globalization has opened up the market
globally and has created a huge opportunity for business houses.

Global manufacturing / production: globalization has not only created global market but
also necessitated the formation of global production or global manufacturing, in order to cater
to the needs and wants of the global market. Most business houses rely on global sourcing,
and manufacturing facilities in the various global regions. Warehouses and distribution
centers are strategically located across the globe in order to take care of the needs of their
global operations. In fact, business houses take advantage of lower cost of inputs (labor,
energy, land, and the capital) in certain nations while attempting to spread of their operations
across the globe.

Drivers of globalization process: The drivers of globalization process are

 Trade and investment barriers are on the decline (International trade treaties; ‘Most
Favoured Nation (MFN)’ status for some countries, etc.)
 Technology as an enabler of global business
 Transportation technology advancements
 Information and communication technology
Use of computers
Internet
Telecommunications
 Supply chain perspective
 Economic growth (for example, development of BRICS)

Growth of world trade, most countries tending towards a more liberalized economic system,
the advent of Information Technology have totally revolutionized the global trade. In the year
2018-19, India’s exports accounted for Rs 2.308 million crores and its imports amounted to
Rs 3.594 million crores. These macro statistics on Indian export and import throws some light
into the quantum of global logistics requirement in order to make these economic numbers a
reality. Now that India has entered the exclusive class of trillion economies in the world, the
logistics challenges are quite formidable.

GLOBAL OPERATIONS AND CHALLENGES

The global nature of firms operating in the current world requires an efficient and responsive
Supply Chain. It may be noted that it requires a synchronized Supply Chain which is agile
enough to meet the delivery and service requirements of the modern global customer. Quality
and a competitive price have become essentials to meet the expectations of customers and
continue to stay in global business. There is a power shift from the manufacturer to the other
members of the supply chain viz. wholesalers, retails, and the ultimate customer. It should
also be noted that in a properly synchronized supply chain equal attention should be paid to
the selection, development and maintenance of suppliers. The supplier management is critical
in the global supply chain with regard to:
 availability of raw materials
 timely supply
 ensuring proper quality of input raw materials
 Effort and investment involved in supplier development and installation of facilities
enabling electronic transmission of data, via. EDI, Internet, etc.,
The deregulation, New economic policy 1991, and efforts towards globalization have had and
continue to have a propound impact on the management of supply chain and its associated
efficiency and effectiveness.

Companies like DELL computers exploit the advantages of proper Supply Chain
Management to a large extent. Dell Computer's "build-to-order" models were initially based
on telephone orders by customers. Dell consolidated and placed orders on its supplier on a
weekly basis. With the advent of Internet and modern information technology tools, it places
orders for supplies on its suppliers every two hours. Dell’s suppliers have access to the
inventory levels and production plans of Dell. The suppliers are also given prompt feedback
on their supply performance. The inventory held by Dell is only for eight days requirement.
The Supply Chain of DELL is so efficient that it can supply a customer’s order of any
configuration in 18 hours within United States. Dell, in fact, allows online ordering by
individual and institutional customers.

The advent of Information Technology has brought about shortening of distance, and time.
The advantages derived out of the twin components of Information Technology viz.,
computers and networking, for better management of global supply chains will be discussed
in a later chapter.

Global business has grown so complex and demanding that the supply chains operating at the
international level will have to be not only efficient but also responsive to meet the demands
of customers in terms of delivery and service level. The quality and competitive price aspects
are taken for granted by today’s customer and they have become essential features of global
business to stay in the market. For example, McDonalds serves 45 million customers a day at
29,000 restaurants in 120 countries. McDonalds has an efficient supply chain and provides
food stuff of consistent quality in all its outlets.

Global business is being influenced by the economic, political, social, and technological
factors. The global logistics and Supply Chain will also be influenced by all these factors.
The global business will be influenced more by the technological developments in both the
supplier and buyer countries, with respect to infrastructure development like shipping, air
cargo, rail and road network as well as telecommunications network. Further, the global
Supply Chain Management will have to take care of the international treaties and consortia,
in practice between the countries.

Global markets and the business professionals are linked through the modern
telecommunications network. The performance of today’s business houses are enabled very
much with the developments in Information Technology. The internet is one technology
which has registered the maximum growth of users in a short span of time. The number of
internet domain registrations in 1997 was 1.54 million. In a period of three years the number
of domain registrations rose to 28.2 million (an average annual increase of over 600%). The
present internet domain registration as on 2013 stands at 134.16 million; out which US alone
accounts for 80.5 million internet domain registrations.

Internet adds speed and enables accessing of information on supply position as well as
demand requirements almost on a real time basis. Companies are able to reduce time
associated with ordering and purchasing transactions by using the Internet to link directly to
suppliers, factories, distributors, and customers. The availability of information allows
companies to keep their inventory level low still keeping a higher customer service level due
to higher responsiveness of the Supply Chain enabled by Internet. Internet has made the
world almost borderless on many business frontiers. Extranet allows select business partners
of a company (i.e., their suppliers and distributors) access to a company's internal network via
the Internet. Electronic Data Interchange (EDI) has been used by many large manufacturing
units to transmit purchase orders to suppliers and invoices to the distributors. EDI provides a
secure form of transmitting business data in standardized formats over private networks. It is
estimated that the EDI transactions is currently fourteen times costlier than business-to-
business (B2B) Internet transactions. EDI is expensive and complex to install, and this keeps
many companies away from its use.

SHIPPING AND OCEAN TRANSPORT

The contribution of shipping industry to world trade is about 90% and there are 50,000
registered merchant ships operating in the global trade market. Ships could be broadly
classified into the following three categories:
1. Tramps (Chartered or leased vessels)
2. Liner carriers
3. Private carriers

Companies with shipload lot size or less than shipload engage Tramp services on chartered
trip. The chartered trip is based on the contract reached with respect to price, quantity to be
shipped, and destination. If the export consignment is smaller in size, then the exporter seeks
to make use of liner ships. Liner ships have predetermined voyage schedules, fixed reporting
ports, and almost fixed tariffs. Companies which export full shipload quantities very
frequently acquire and own their own fleet of ships. Oil companies, lumber companies
maintain their own vessels in order to take care of the special characteristics of the cargo to
be shipped.

Liner trade operations are carried out with mainly container ships, Ro-Ro (roll-on / roll-off)
carriers, and general cargo ships. Liner shipping, according to World Shipping Council, is the
most efficient mode of transportation of goods. The value of liner shipping to the global
economy exceeds USD 400 billion a year.

Mostly tankers and bulk carriers cater to the charter services market. The charter services
meet the requirements of the exporter. The loading and discharge ports and the cost of
shipping are agreed upon in the charter agreement. The cost of charter trip would be based on
demand / market conditions.

Types of ships: The major broad categories of ships and vessels are:
General cargo ship
Container ship
Ro-Ro ship (Roll-on / Roll-off)
Oil tanker
Bulk carrier

The value of world seaborne trade in USD is: Container 52%; Tanker 22%; General Cargo
20%; and Dry Bulk 6%. The world seaborne trade data (in percent) is shown as pie diagram
in Figure 16.1. The value of global seaborne trade is more than half a trillion USD.

Figure 16.1 Value of World Seaborne Trade in USD (in percent)

General cargo ship: A cargo ship or freighter ship carries loose packaged cargo, goods, and
materials from one port to another. Thousands of cargo carriers ply the world's seas and
oceans handling the bulk of international trade. Cargo ships are usually specially designed for
the task, often being equipped with cranes and other mechanisms to load and unload cargo.
The general cargo ships are constructed in all sizes and the Figure 16.2 shows a general cargo
ship (Source: World Shipping Council).
Figure 16.2 General cargo ship (Source: World Shipping Council)

Container ship: Container ships, as shown in Figure 16.3, are cargo ships that carry their
entire load in truck-size intermodal containers. This technique of transporting material in the
standard containers is called containerization. The containerized cargo enables intermodal
transport. Some large container ships can carry 11,000 containers of cargo. Container ship
capacity is measured in twenty-foot equivalent units (TEU). Typical loads are a mix of 20-
foot and 40-foot (2-TEU) ISO-standard containers. The 40 feet containers are widely used in
international trade.

Figure 16.3 Container ship (Source: World Shipping Council)

Roll-on / Roll-off ship: is used for transporting cars, trucks, semi-trailer trucks, trailers, and
railroad cars. The vehicles to be transported by Ro-Ro ships are driven on and off the ships
on their own wheels. The Roll-on / Roll-off Ship is shown in Figure 16.4.
Figure 16.4 Roll-on / Roll-off Ship (Source: World Shipping Council)

Oil tanker: An oil tanker is a merchant ship designed for the bulk transport of petroleum /
oil. There are two basic types of oil tankers: crude tankers and product tankers. Crude tankers
move large quantities of unrefined crude oil from its point of extraction to the refineries. The
product tankers are designed to move refined petroleum products from refineries to points
near consumption markets. The Figure 16.5 shows an oil tanker for ready reference.

Figure 16.5 Oil tanker

Bulk Carrier: Bulk carriers, as shown in Figure 16.6, are ships which transports cargoes in
bulk quantities. The cargo transported in such ships is loose cargo i.e. without any specific
packaging to it and generally contains items like food grains, mineral ores and coal.
 Figure 16.6 Bulk Carrier

Piracy problem
As globalization progressed during the 1990s, pirate ships again appeared on the horizon,
more than a century after their virtual disappearance. Piracy is an age-old maritime
phenomenon, often sanctioned by the state, and in some cases it is even a highly respected
profession.
Pirate attacks have come to the fore in recent years. The growing threat could lead to higher
costs such as increased insurance premiums. However, the risk of falling victim to pirates is
relatively slim. Protecting against terrorist at tacks is proving to be an obstacle to
international shipping because of the considerable costs involved in safety measures.

Container Transport
Cargo transport through containers is quite widely used because of its ability to facilitate
intermodal transportation. The container comes in standard sizes and the following are the
most widely used.
1. Length 40 feet, width is 8 feet, height 8.5 feet
2. Length 20 feet, width is 8 feet, height 8.5 feet

Type Tare Weight (kg) Payload (kg)

20 feet container 2300 25000
40 feet container 3750 27600

The containers are provided with doors at one or both ends. The container doors are provided
with standard locking system.

Container Logistics: deals with flow of goods in steel containers. The containers should be as
per ISO specifications. Container logistics involves planning, coordination and execution of
goods flow in containerized form. Containerized transportation of goods facilitates
intermodal transportation. The general movement of containers is depicted in Figure 16.7
The container is moved from the empty container depot to the manufacturer / supplier where
the container is filled with products to be transported. If the consignments inside the
container is meant for export to another country, then the loading of the consignments inside
the container is meant for export to another country, then the loading of the consignment into
the container is done in the presence of customs official. The container after filling with
consignment / goods is locked and then the customs official affixes seal on the container
locks. The customs seal fixed on the container enables it to travel across WTO (World Trade
Organization) countries without the container being opened till it reaches the destination.
This facility is available to WTO member countries for enabling smooth and trouble free
international trade.

Hinter Land Hinter Land

Transport Transport

Empty Supplier of Port of

Container goods / Origin
depot Exporter

Ocean Transport

Hinter Land Hinter Land

Transport Transport

Port of Customer Empty

Destination Container
depot

Figure 16.7 Flow of containers

----------------------------------------------------------------------------------------------------------------
World Trade Organization (WTO):
WTO deals with global rules for conducting trade between nations. The main function of
WTO is to ensure that global trade flows smoothly, predictably, and in a free manner. There
are 164 member countries and 23 observer governments to the WTO. In addition,
international intergovernmental organizations have also been given observer status. This
enables these organizations to follow discussions at WTO on matters of interest to them. The
WTO agreements negotiated and signed by the world trading countries and ratified in the
parliaments of the member countries forms the basis for WTO functioning. WTO operates a
global system of trade rules, it acts as a forum for negotiating trade agreements, it settles
trade disputes between its members, and supports the needs of developing countries.
----------------------------------------------------------------------------------------------------------------
The consignments or the products may also be loaded into the empty container at CFS
(Container Freight Station) / ICD (Inland Container Depot). CFS is a facility located nearer
the servicing port. ICD is located into the country and nearer to customer locations, away
from the servicing port. ICDs could be treated as dry ports in terms of operations in handling
containers. Similarly, unloading of laden import containers are also handled by CFS / ICDs.
The container terminals / ICDs have suitable container handling equipment like:
1. Ship-to Shore Gantry Crane (at ports only):
Rubber-Tired Gantry Crane
Rail Mounted Gantry Crane
2. Yard Cranes (ICD / CFS and Ports):
Rubber-Tired Gantry Crane
Rail Mounted Gantry Crane
3. Reachstaker
4. Forklift
5. Straddle Carrier
6. Truck-Trailer Unit (TTU)
7. Automated Guided Vehicle (AGV)
8. Multi-Trailer System (MTS)

Ship-to-shore gantry cranes are also known as Quay Cranes (QC) or simply Gantry Cranes.
The yard cranes could be used in the containers storage area at the port as well as at ICDs. It
may be noted that the design, construction and operation of Quay Cranes and Yard Cranes are
different.

Truck-Trailer Unit (TTU), Automated Guided Vehicle (AGV), and Multi-Trailer System
(MTS) are meant to be horizontal-transport machines. Horizontal-transport machines can not
lift and load or discharge the containers by themselves. They need the assistance of other
equipments for loading and discharge of containers.
Automated –Guided Vehicle is not widely used in many ports. AGVs are suitable for high
labour cost countries.

DOCUMENTATION IN INTERNATIONAL TRADE

International trade requires extensive documentation in various formats and also country
specific to some extent. The various documents used in international trade are given below:
Bill of Lading: It serves as a receipt and contract for the transportation of goods. Bill of
lading is issued by the shipping company or its agent and it also serves as a title document for
the goods being exported. There are several types of bill of lading and they are: Straight bill
(non-negotiable), Shippers order bill (negotiable), Air waybill (non-negotiable), Ocean bill
(non-negotiable), Truck bill (non-negotiable).
Certificate of origin: is used by the exporter to certify the country of origin of the exported
goods. The certificate of origin is legalized by a local chamber of commerce. Certificate of
origin denotes the country in which the goods were manufactured in order to assess tariffs
and other government imposed restrictions on trade. Certificate of origin is one of the widely
used documents in international trade. The certificate of origin will be required in the country
to which the goods are imported.

Commercial invoice: is the key accounting document for the goods from the seller to the
buyer. Commercial invoice is a document written by the exporter to precisely describe the
goods and the terms of sale (similar to shipping invoice used in domestic shipments).
Commercial invoice is the document which is used to determine the true value of the goods
for charging customs duties and to clear the shipment through customs. The commercial
invoice should be completed in full and correct number of copies submitted to the authorities.

Commercial invoice should include the following (not limited to):

1. Country of origin (Manufacturing),
2. Incoterms rule,
3. Complete description of the goods,
4. Invoice quantity,
5. Net and gross weights of the consignment,
6. Total number of packages,
7. Value of the goods exported,
8. Currency used in the invoice,
9. Destination control statement,
10. Certifications (about the goods),
11. Authorized exporter signature (The following statement plus signature)
“I hereby certify that this invoice is true and correct”.

Consular Documents: These documents are required by some foreign customs services. These
documents are special forms / certifications that confirm the value, quantities, consignor,
consignee, etc. They are certified prior to export by the foreign consulate office stationed in
the country from which the goods are exported. The embassy / consulate will legalize the
commercial invoice, certificate of origin, and other shipping documents.
Destination control statement: This is indicated in the commercial invoice and ocean bill of
lading / air waybill. Destination control statement notifies the carrier and all foreign parties
that the item can only be exported to certain destinations.

Dock Receipt: This document is issued by the shipping company to acknowledge the goods
have been received for shipment for export. Dock receipt transfers the safe custody of the
consignment from the exporter to the carrier. This document also serves as the basis for
preparation of bill of lading.

Electronic Export Information (EEI): EEI is required for all shipments. This electronic data
must be filed in the Automated Export System (AES). EEI has replaced the Shipper’s Export
Declaration (SED).

Export License: This is a permit issued by the government that grants approval for the
specific commodities export, in given quantities / Values, to a named destination. In the
Indian context Import Export Code (IEC) could be obtained online by applying to the zonal
or regional DGFT which has jurisdiction over your area. IEC code can also be applied online
through dgft.gov.in along with the required fee of Rs. 250.
Export Packing List: This document is used: 1. to conducting customs examinations, 2. To
verify that all goods were shipped and received, 3. To determine the total shipment weight
and volume, and 4. For making insurance claims. This document is more detailed than a
domestic packing list or commercial invoice. Export packing list gives product description, a
reference to the relevant commercial invoice number, and the type of packages (e.g. carton,
box, vials, etc.). Export packing list, however, does not show any pricing details.

Free Trade Documentation: This document is required to receive favorable treatment and it
depends on the rules applicable for the particular origin country from which the product is
exported. NAFTA is an example of free trade between USA and Canada.

Inspection Certification: This document is requested by the importer and arranged by the
exporter of goods. This document certifies the merchandise grade, material contents, and
quantities. The inspections of the goods are carried out at the exporter’s end by a third party
agency like Bureau Veritas.

Insurance Certificate: The insurance document provides a proof to the importer that the goods
are insured against any loss, or damage while in transit. It can be in the form of a policy or
certificate. Insurance certificate explains what type of coverage is utilized (fire, theft, water,
etc.), the name of the insurer, and the exporter whose property is being insured.

Shipper’s Letter of Instruction: This document is used to control the exports and this acts as a
source document for the authorized agent to prepare the Electronic Export Information (EEI).

Major shipping routes

When we consider the global trade of all commodities, it becomes clearer that only a few
major shipping routes are used. Further, these shipping traffic makes use of only a small area
of the world ocean. The busiest shipping routes are those which touch major ports in Europe,
United States, Japan, China (Shanghai), Singapore, and Hong Kong. The East Coast of
United States in particular is a major sender and receiver of cargo.

Table 16.1 Container traffic in major shipping routes (in million TEUs)
Year Trans-Pacific Asia-Europe Trans-Atlantic
Eastbound Westbound Eastbound Westbound Eastbound Westbound
2014 15.8 7.4 6.8 15.2 2.8 3.9
2015 16.8 7.2 6.8 14.9 2.7 4.1
2016 17.7 7.7 7.1 15.3 2.7 4.3
2017 17.9 8.2 7.6 15.5 2.9 4.5

Source: UNCTAD Review of Maritime Transport 2017

The most container traffic occurs in the main sea routes: Trans-Pacific, Asia-Europe, and
Trans-Atlantic. There is imbalance in the flow of containers in these major routes. In the
Trans-Pacific sea route, eastbound container movement is significantly higher than the
movement of containers in the reverse direction. The difference in the flow of containers in
the eastbound direction and that in the westbound direction is almost 10 million TEUs (for
the year 2017). Similarly, in the Asia-Europe sea route, the movement of containers towards
Europe is much higher and the difference in flow of containers is close to 8 million TEUs. In
the Trans-Atlantic sea route, the westbound movement of containers is significantly higher
than that in the reverse direction. This pattern of world trade imbalance in the flow of
container traffic creates the need for empty container relocation among ports and this non-
productive movement of empty containers adds up to the logistics cost. The management of
container fleet in a balanced manner across international ports is a major issue.

Cargo flow imbalances are a typical feature of the traffic with Asia depending on the trade
balance of the various countries in this region. Much more cargo is being shipped from Asia
than in the opposite direction. The reason for this situation is that since the mid-1980s so
many manufacturing processes have been relocated from the traditional industrial countries to
the developing nations and emerging economies, particularly China and the countries of
South East Asia. With the prevailing exchange rates, China in particular has become the
cheap “workshop of the world”. The world map in Figure 16.8 clearly shows the major trade
routes and the flows. The thicker the line indicating the particular shipping route, then more
is the trade flow in this route.
 Figure 16.8 Major global shipping routes

Unbalanced cargo flows and the problem of empty runs:

Even more than container traffic, transport flows in the bulk sector are usually subject to
directional imbalance. Mineral resources are often geographically distant from where they are
processed. Large ore and coal freighters and crude oil tankers are therefore only transporting
cargo in one direction, from the port of shipment to the port of discharge. They usually return
empty. In many cases, therefore, the freight rate must cover the costs of returning the empty
ship. This partially explains the great disparity of freight rates on individual routes depending
on direction.

Inventory Management in the global supply chain:

Global operations or international operations involve more product variety and inventory to
be held in the global logistics network. The global logistics network may involve a number
of warehouses, distribution centers, etc. The uncertainties that are part of international trade
requires holding of inventory in the global logistics pipeline. The physical distribution in
global business that should take into account the factors like: distance involved, exchange
rate fluctuations, and the number of intermediaries involved.

Complexity of International Transportation:

The main aspects that are to be considered when selecting a particular mode of transport are:
value-to-volume ratio, the perishability of the products, cost of transportation.
Value-to-volume ratio: the products that have a higher value-to-volume ratio would be
transported using air freight. On the other hand, heavy weight and high volume products may
be sent to by ocean shipping. The choice between the different modes of transport depends
upon the cost of transportation associated with it and also the emergency level associated
with the shipment.

Perishability: the perishable nature of certain goods like vegetables, fruits, and flowers may
require air transport. Because the time duration that is available for shipping is less in case of
such products. The usage of cold storages, refrigerated pallets, and refrigerated containers
facilitates in the transportation of items like fruits, vegetables, and flowers and such facilities
are very essential in the international logistics. The choice of the mode of transport and also
usage of refrigerated facilities for transportation would depend upon the value of products
and the cost of transportation.

Cost of transportation: is a major factor in the choice of the transportation mode. The cost of
air freight is the highest and the cost of shipping lowest. The cost of road transport and rail
lies between the above two modes of transport. The cost of rail transport is cheaper than road
transport for long hauls; the rail transport is also capable of moving larger quantities of
material. Road and rail transport mainly dominate in the domestic trade.

Inter-modal transport: inter-modal transport is widely used in the international trade. The
combination of rail and ship, road and ship are widely used. In case of air freight, it is always
combined with road transport for pickup and delivery and the long haul is by air freight.
International transport by rail is minimal, as the rail gauges are different between nations, in
most cases.

Table 16.2 Export / Import data of India

in crores of rupees
Year Export Import
1997-98 129,277.69 154,176.28
1998-99 139,753.14 178,331.85
1999-00 159,561.76 215,528.04
2000-01 203,571.00 230,872.75
2001-02 209,017.96 245,199.71
2002-03 255,137.26 297,205.86
2003-04 293,366.74 359,107.61
2004-05 375,339.51 481,371.53
2005-06 456,417.85 574,190.89
2006-07 571,779.27 840,506.30
2007-08 655,863.51 1,012,311.69
2008-09 840,755.05 1,374,453.37
 2009-10 845,533.63 1,363,735.54
2010-11 1,142,921.91 1,683,466.95
2011-12 1,465,959.39 2,345,463.23
2012-13 1,633,634.79 2,675,641.37
2013-14 1,905,011.08 2,715,420.78
2014-15 1,896,348.41 2,736,676.99
2015-16 1,716,384.39 2,490,303.76
2016-17 1,849,433.54 2,577,671.14
2017-18 1,956,514.52 3,001,028.71
2018-19 2,307,663.34 3,594,372.61

Export / Import Trade by India:

The import / export trade level of India is considerable. The Table 16.2 shows import and
export by India from 1997-98 to 2018-19. The global trade data with respect to India clearly
indicates that both export and import are growing and the import is growing at a much faster
rate affecting the balance of payments.

Figure 16.9 Export and Import Data 1997-98 to 2018-19

The graph shown in Figure 16.9 indicates that there is definite growth of international trade
contribution by India and that the gap between exports and imports are widening. The
quantum of imports is much higher than the amount of exports, invariably for all the years
shown in Table 16.2. This trend needs intervention by the Indian Government in order to set
right the balance of payments and make India more competitive in the global trade.

System integration in global trade:

The increased complexity of international trade and global logistics requires proper
information integration for successful supply chain performance. The advanced electronic
technologies like electronic data interchange (EDI), ERP systems, and supply chain
management software solutions could be useful in the information integration of global
systems.

Role of alliance partners and 3PLs in global trade

Strategic alliances with other firms facilitate global operations. Alliance partners in the
international trade reduce the burden for the firm operating at global level by taking up part
of the global logistics operations. Alliance partners help in the establishment of local
distributors, wholesalers, and retailers; as well as suppliers.
Third-party logistics providers also have an important role in the global trade. They facilitate
the inter-modal operations and provide other value added services which are required for the
global business. A more elaborate coverage on third party logistics solution providers is
available in the chapter 2 titled ‘dimensions of logistics‘. The major logistics activities that
are carried out by 3PLs are value-added services, warehousing, and distribution.

GLOBAL AIR TRANSPORTATION

The speed of air transportation allows large compression of transportation time from source
to destination. The freight rates have restricted cargo to low density and high value goods.
The air cargo transportation by volume is only 1 percent; however it is 20 percent by value.
The new air freighters are capable of handling 20 feet containers.
FedEx, UPS Airlines, Korean Air, Emirates, and Cathay Pacific were the world’s largest
freight airlines for the year 2010. It may also be noted that half of the worlds’ top 15 air cargo
carriers were based in the Asia-Pacific region.
The other major players are Dubai-based Emirates, China Southern Airlines, Singapore
Airlines, etc. The top 15 airlines in terms of freight traffic in million tonnes are shown in
Table 16.3 for the year 2010.
Table 16.3: Top 15 airlines in air cargo operations
Sl No Name of Airline Freight Movement
(in million tonnes)
1 FedEx 6.949
2 UPS Airlines 4.509
3 Korean Air 1.805
4 Emirates 1.777
5 Cathay Pacific 1.579
6 United Airlines 1.555
7 China Airlines 1.347
8 Singapore Airlines 1.149
9 China Eastern Airlines 1.104
10 Air China 1.069
11 China Southern Airlines 1.055
12 Lufthansa 1.052
13 Japan Airlines 0.911
14 All Nippon Airways 0.895
15 EVA Air 0.850

Most of the airlines operating air cargo provide other value added services as well. One
significant factor to be noticed in almost all of these global logistics service providers is their
massive infrastructure.

Table 16.4: Air cargo handled – India (in million tonnes)

Year Domestic International Total air cargo
handled in India
1995-96 0.22 0.46 0.68
2000-01 0.33 0.57 0.89
2004-05 0.49 0.83 1.32
2006-07 0.57 1.03 1.59
2010-11 0.89 1.50 2.39

The Table 16.4 indicates the air cargo traffic in the Indian context. The air cargo handled (in
million tonnes) has been shown from 1995-96 to 2010-11, though not covering all the in
between years. There is clear trend in growth both in the domestic as well as international air
cargo handled in India.
World air cargo handled is expected to more than double in the next 20 years, as per ‘World
Air Cargo Forecast 2012-13’, a study made by Boeing Company

Summary
Global economy has changed and after globalization & liberalization, there is considerable
growth in international trade. The high awareness of the global customers makes it
challenging to meet their requirements. The global customers want the product at minimum
lead time, high quality, and at lowest cost. Globalization has not only created global market
but also necessitated the formation of global production or global manufacturing. The drivers
of globalization process are:
 Trade and investment barriers decline;
 High Technology - Transportation technology advancements,
 Information and communication technology
 Supply chain perspective; and Economic growth.
The types of transactions in the international trade at the global level can be grouped based on
the level of involvement and level of risk: Export / Import, Licensing & Franchising, Joint
Ventures & Strategic Alliances, Multi-National Company (MNC), and Special Economic
Zones (SEZ).
Global logistics is complex and shipping is of the following types:
 Tramp services (Charter ships)
 Liner ships
 Private carrier
Each of these shipping types caters to particular market segments in international trade.
World Trade Organization (WTO) facilitates international trade by resolving trade disputes
between countries, taking initiatives to solve the problem of piracy, ensure security & safety
in shipping. Incoterms (2010) mainly governs the terms of international trade.
There is imbalance in the movement of goods in the major shipping trade routes. The major
shipping trade routes are: Trans-Pacific, Asia-Europe, and Trans-Atlantic. The imbalance in
the movement of goods in the major routes requires relocation of containers among major
international ports.
The role of containerization in the international trade is quite significant. Containerization
enables intermodal transportation in the global trade.
International air cargo movement is still a developing market. The global air cargo movement
by volume is 1 percent of total global trade; however, by value the cargo moved by air
transport is 20 percent of the global trade and this is due to the fact that mainly high value
items are air lifted.

End Chapter Questions

1. What are the expectations of the present day customer in a globalized economy?
2. List and explain the attributes of globalized business.
3. What are the drivers of globalization process?
4. What is a ‘free trade zone’? Explain.
5. Explain in brief the importance of shipping in global trade.
6. What is the significance of air cargo in international trade?
7. What is containerization and list out its role in international trade?
8. What are Incoterms? List down the various provisions of Incoterms?
9. What are the different types of ships which cater to the needs of international trade?

Essay Questions
1. List and explain the various forms of global trade.
2. Explain global business operations and its associated challenges
3. What are the challenges of global logistics system? Explain.
4. Explain the role of shipping in the international trade.
5. Highlight the role of containerization and movement of goods through containers in
the international trade.
6. Explain the various documentation requirements in international trade.
7. Write in brief about the trade imbalance in the major shipping routes and its impact on
the international logistics
----------------------------------------------------------------------------------------------------------------
Mini Case 16.1: Container Corporation of India Limited (CONCOR)
Inter-modalism and containerization are byproducts of globalization and its impact on the
trade and transport business. Malcom McLean’s idea of containerization has changed the way
products are handled. Products are packed into containers of standard dimensions and this has
led to productivity improvements in handling at ports by mechanization.
Container Corporation of India Limited (CONCOR) was incorporated in the year 1988 and
commenced its operation in 1989 taking over 7 ICDs from Indian Railways. Then onwards
CONCOR has been the leader in container market having 59 ICDs / CFSs in India. It has
expanded its operation into management of port, air cargo complexes, and establishing cold
chain.
CONCOR has as its backstay the railways for handling of container transport across the
lengths and breadths of our country. The benefits of price advantage available by transporting
containers by long haul railway, is passed onto customers. CONCOR has a close liaison with
railways. In fact many of its employees are ex employees of railways or are in deputations
from railways. Also, many of CONCORs terminals are located on leased properties of Indian
Railways.
The various CONCOR terminals are located in the various divisions of railways providing a
wide coverage over the nation. The standard container sizes employed are:
 20/40 ft conventional end open containers
 20/40 ft high cube containers
 20 ft side access containers
 22 ft high cube domestic containers
Also, CONCOR operated with the following specialty containers
 20 ft / 40 ft / 40ft High Cube Refrigerated Containers
 20 ft / 40 ft / Collapsible Flat Rack and Platform containers
 20 ft/ 40 ft Open Top containers
 20 ft Tank containers
CONCOR always aims at providing multimodal transport services with innovation and
flexibility all throughout its operations.
Questions:
1. What are the strategic advantages of close liaison that CONCOR maintains with
railways?
2. Name some of the different types of containers used by COCOR in providing logistics
services.
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----------------------------------------------------------------------------------------------------------------
Mini Case 16.2: Indian Oil Corporation Limited
Indian Oil is the largest commercial enterprise with a sales turnover of Rs. 518,961.77 crores
and profit of Rs. 22,626.35 crores for the year 2017-18. Indian Oil has been meeting the
energy needs of India with a workforce of 33,000 people. Indian Oil accounts for nearly half
of India’s petroleum product market share. The company has 31 percent of national refining
capacity and operates 10 of India’s 22 refineries. Indian Oil has a refining capacity of 65.7
MMTPA (million metric tonnes per annum). The equivalent refining capacity is approx 1.31
million barrels per day. Indian Oil deals with products such as LPG cooking gas, SERVO
lubricants, petrol, diesel, petrochemicals, etc.
Indian Oil has a network of 43,000 customer touch points through which it reaches out to
every nook and corner of India. This includes 24,400 petrol & diesel stations, and 6,200
Kissan Seva Kendra Outlets (KSKs) in the rural market. The company operates 6,400
dedicated pumps to meet the needs of defence services, railways, and state transport
undertakings.
Indian Oil’s R&D centre at Faridabad is involved in developing economical and environment
friendly technology solutions. The company operates a pipeline network of 11,220 km for
transporting crude oil to refineries and finished products to high-demand centres. The
network meets the needs of customers in an efficient, economical, and environment-friendly
manner.
Questions:
1. What is the capacity of Indian Oil refineries?
2. Discuss the distribution chain of Indian Oil Corporation.
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Mini Case 16.3: Tata Motors
Tata Motors is India’s largest automobile company. Tata Motors was established in 1945 and
has its presence across the length and breadth of India. It is worth noting that over 8 million
vehicles ply on the Indian roads. Tata Motors Group has 60,000 employees engaged at its
various works and facilities.
The consolidated revenue for the year 2018-19 was Rs. 69,202.76 crores and profit after tax
was Rs. 2,020.60 crores. The company manufactures cars, utility vehicles, trucks and buses.
The company is also involved in manufacturing vehicles for defence sector.
Tata Motors has the following manufacturing facilities:
1. Commercial vehicles: Jamshedpur (Jharkhand); Lucknow (Uttar Pradesh); Pantnagar
(Uttarakhand); Dharwad (Karnataka).
2. Passenger vehicles: Pune (Maharashtra); Sanand (Gujarat).
Tata Motors operates in UK, South Korea, Thailand, South Africa, and Indonesia through its
various subsidiaries and associate companies.
Automobile supply chain is complex and the company sources direct and indirect materials
from its suppliers. Tata Motors engage its suppliers and develop the supplier’s knowledge
and capacity. The other key component of Tata Motors supply chain is its distribution
network. The company offers superior customer experience to the customers through dealers
and customer touch points.
Questions:
1. Explain the Tata Motors supply chain with regard to its products and services.
2. What are the supply chain initiatives taken by Tata Motors in building a strong supply
chain?
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----------------------------------------------------------------------------------------------------------------
Mini Case 16.4: Asian Paints Limited
Asian Paints has been India’s largest paint company for over four decades and operates in 16
countries with 27 manufacturing facilities. Asian Paints distributes its products in over 65
countries across the world. Asian Paints group’s revenue for the year 2018-19 was Rs.
16,670.59 crores and profit after tax is Rs. 2,134.76 crores. The business operations
comprises of paints (decorative and industrial coatings), chemicals, and international
operations.
Asian Paints introduced many innovations in the decorative coatings segment, and some of
the innovations are:
Small packs of paints
Exterior coatings
Colour Next (prediction of colour trends through in-depth research).
Special Effects / Textured Paints, and
Signature Store.

Note: 50% of APPG considered since it is a 50:50 joint venture (JV) with PPG Inc.
Figure 16.1 Asian Paints - operations

Asian Paints caters to the needs of Auto segment through its joint venture (JV) APPG, which
is a JV between Asian Paints and PPG Inc., USA.
Asian Paints operates in protective coatings, floor coatings, and road marking paints. It
operates the powder coatings segment through a 100% subsidiary.
Asian Paints manufactures chemicals like Phthalic Anhydride (PAN) and Pentaerythritol
(Penta). PAN and Penta are manufactured in Gujarat and Tamil Nadu respectively. Chemicals
business contributes 1% of the group’s consolidated revenue. The contribution of chemicals
business to the group’s revenue has been continuously decreasing.
Asian Paints international operations contribute 13% to the group turnover. The international
operations is spread over four regions:
Middle East
Caribbean
South Pacific Islands
Asia

Figure 16.2 Percentage sales contribution of each region, FY 2011

Decorative Business:
There has been good demand for decorative coatings across the country. Growth in smaller
towns continues to be faster than that in large cities. Interior and exterior emulsions continue
to lead growth.
The cost of input material has gone up significantly. However, the availability of Titanium
Dioxide (TiO2) was comfortable.
The company implemented a number of retailing initiatives. The total number of ‘Colour
Worlds’ have crossed 20,500. Signature Store was opened in Delhi in September 2011 and
the response was excellent.

Industrial Operations:
Industrial business including Auto, continued to face challenging conditions. The company
had been facing high pressure on margin due to increasing material cost.
In December 2011, due to the “Thane” cyclonic storm in Tamil Nadu, some equipment and
materials got damaged at the Pentaerythritol plant at Cuddalore in Tamil Nadu. The plant was
under shutdown for some days and has been restarted. The assets of the company have been
fully insured.

International operations:
International operations in Oman, Nepal, and Sri Lanka have registered good growth.
However, markets in Middle East have still not recovered from the political unrest and
recessionary conditions. Inflationary pressure has been affecting the profitability of
international operations as well.
Questions:
1. What are the initiatives introduced in the product distribution management of Asian
Paints?
2. Comment on the international operations of Asian Paints.
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17. SUPPLY CHAIN PERFORMANCE

Learning objectives:
1. Understand the importance of supply chain performance metrics.
2. Performance measures for the supply chain based on cost, quality, time, and service.
3. Different approaches to supply chain performance metrics.
4. Learn about the ‘making profits’ versus ‘reaching goals’ approach.
5. Analyze the requirements of performance metrics for agile supply chains.
6. Learn about the problems with the existing with supply chain performance metrics.
7. Enumerate the characteristics of good supply chain performance metrics.

‘If we cannot measure it, we cannot manage it’. Traditionally, the focus in Supply chain
management was to reduce cost under the not always correct premise that “lower the cost, the
better the supply chain”. Assumption that cost is a straight measure of supply chain
performance is incorrect. Every organization needs performance measures in order to
improve its performance, and more so does the supply chain. Evaluation and control
functions are very much part of the supply chain management. An understanding of what
metrics to use for performance measurement is important. The supply chain metrics should be
Specific, Measurable, Actionable, Relevant, Timely (S-M-A-R-T).
Performance measurement has been mainly concentrated on a single firm and no integrated
view has been taken to measure the overall performance of the supply chain. Further, there is
absence of multi-firm performance measurement tool or approach. Supply chain members
tend to aim at sub-optimizing their firm level objectives than to have an overall integrated
approach in achieving the objectives of the whole supply chain. In order to develop metrics
with an overall view, the supply chain functions / processes will have to be first of all defined
clearly. Then, the performance indicators could be identified and performance metrics
developed for the various supply chain functions and activities. In this chapter, we shall
attempt to understand the supply chain performance metrics through the following
approaches:
1. Supply Chain Metrics – a general approach
2. Market Qualifier and Market Winners
3. Making Profit versus Reaching Goals

SUPPLY CHAIN METRICS – A GENERAL APPROACH

According to Bower Sox D. J. et al (2002), an effective measurement system must enable
logistics managers to monitor, control, and direct logistical operations. Monitoring the
logistics operations is carried out by developing metrics and gathering data to find out the
service performance. This could include fill rate, on-time delivery, and logistics cost
(transportation and warehousing). Controlling the logistics functions could be achieved by
setting standard for the metrics developed. Directing or leading the logistics function by the
manager could be done by employee motivation and providing reward for performance. The
primary objective should focus on enhancing shareholder value through operational
excellence and asset utilization.
Logistics performance metrics has to focus on cost, customer service, quality, productivity,
and asset utilization. The metrics with respect to cost are total cost, cost per unit,
transportation cost, warehousing cost, inventory carrying cost, cost of damage to products,
and cost of returns. Another important aspect to be considered is the service failure and
associated service failure cost. The cost of service failure involves cost of malfunction
recovery or failure recovery, lost sales, and backordering cost.

Customer Service
The metrics related to customer service are stock-out ratio, fill rate, complete orders shipped,
on-time delivery, customer complaints, customer satisfaction, and single point contact order
status.
Stock-out frequency: Stock-out situation happens when there is no stock to meet a customer
order. Stock-out frequency or stock-out ratio is the probability of a stock-out occurring when
there is customer order. The stock-out frequency is calculated as an aggregate measure of
availability on all products in a super mall. This would be an indicator of how well a
particular firm is performing with respect to stock availability.
Fill Rate: is calculated on an individual product basis to reflect the availability of a particular
item. Fill rate is the number of items supplied to number of items ordered. For example, let us
consider that a car manufacturing company has to assemble 100 cars in its assembly line and
only 97 steering systems have been received by the company. In this case, the fill rate is 97%,
but the non-availability of the three items would stop the assembly line from making 100 cars
during the particular production schedule.
Orders shipped complete: This is a more stringent measure of availability. This metric view
everything a customer has ordered and even if one item is not available for the particular
customer order, then the order is considered incomplete.

Quality: The metrics on quality are product damages, order entry accuracy, order status,
invoice errors, and product returns.

Productivity: The metrics on logistics productivity are units shipped per employee, units
shipped per labour cost, orders per sales personnel, warehouse labor productivity, and
transportation labour productivity. The critical aspects to be considered are productivity
index, and equipment downtime.
Asset Utilization: The performance metrics related to asset utilization are return on total
assets (ROA), sales turnover, and profit margin. The other important consideration is the
level of inventory maintained, and pipeline inventory.

Operational performance: Operational performance could be defined in terms of cycle

time, consistency, flexibility, and malfunction recovery.

Cycle time: Cycle time is the time between when the order is received and when the product
is delivered to customer. The cycle time could be reduced considerably when the firm makes
use of information technology in order processing, and order delivery.

Consistency: Consistency in meeting the delivery schedule is much more critical to customer
than speed of delivery. Because, consistency in meeting the cycle time for delivery would
enable better planning by customer.

Flexibility: Flexibility is the ability of the firm and the supply chain to meet any special
requirements by customer. For example, the customer might have been giving full truckload
orders usually. When the customer gives an order for less than truckload, the firm should be
able to meet the customer requirement. Another situation may be that the customer makes a
request for additional items to be supplied than is normally ordered. The firm should be able
to meet the customer request for additional supply of items.

Malfunction Recovery: A malfunction free operation is difficult to achieve in logistical

performance. For example, the customer order might include an item which is not available in
stock. The availability of the particular item might be critical to customer’s operations. In
such situations, the firm should be able to make alternate arrangements. The item could be
obtained from a different source even if it involves additional cost. The particular item may
have to be airlifted from another source. Malfunction recovery in an efficient manner
increases customer’s commitment and loyalty to the firm.

MARKET QUALIFIERS AND MARKET WINNERS

The ‘market qualifiers’ and ‘market winner’ model developed by Christopher & Towill
(2000) have identified four factors of which three are market qualifiers and one is a market
winner. The cost or the service becomes the market winner depending upon whether the
supply chain is ‘lean’ or ‘agile’. The four factors considered in this model are: Lead time,
Quality, Cost, and Service. Based on the research work published by Christopher and Towill
(2000), the value delivered in the value chain or supply chain could be defined as follows:
Total value = { Quality * service level} / {Costs * lead-time}
The ‘market qualifiers’ and ‘market winners’ have been identified, from the above definition
of value, in the form of an equation. The ‘market qualifier’ and ‘market winners’ model as
proposed by Christopher and Towill (2000), is shown in Figure 17.1 for ready reference.
The four factors identified under the above model impact the value delivery by a business
(or) the supply chain as whole. It is felt prudent to develop supply chain performance metrics
based on the above major four categories.

Quality
Agile Supply Cost Service level
Chain Lead time

Quality
Lean Supply Lead time Cost
Chain Service level

Market Qualifiers Market winners

Figure 17.1 Market Qualifiers versus Market Winners Approach

Time related measures: The important time related performance measures are
a) Order cycle time,
b) On-time-delivery,
c) Response time,
d) Planning cycle time.

Quality related measures: The quality related measures are

i. Product defects (no. of defects, in PPM),
ii. Damage free products (damages in transit),
iii. Quality of order processing,
iv. Complaints on product quality (no. of complaints received).

Cost related measures: The following are the major cost related performance measures:
1. The number of turns of inventory (finished goods inventory turnover ratio),
2. Average collection time,
3. Cash cycle,
4. Cost of goods sold / Total investment,
5. Distribution cost:
 a. Warehousing cost
b. Transportation cost
6. Administrative cost,
7. Electronic integration investments,
8. Cost of excess capacity (cost due increased agility of the supply chain).

Service related measure: The following measures have been identified under this category:
1. Overall customer satisfaction,
2. Order fill rate,
3. Shortages / stock-outs,
4. Number of warranty claim / 1000 customers,
5. Number of complaints received,
6. Customer awareness (availability of information) on products and services.

It may be noted that the metrics identified under the four major categories viz., time, quality,
cost, and service will be affected by the different functions of supply chain. The functions of
supply chain management are: 1. Forecasting 2. Advanced planning (Capacity & Aggregate
planning) 3. Sourcing and procurement 4. Order processing 5. Production scheduling 6.
Inventory management 7. Warehousing 8. Logistics management & transportation 9.
Integrated marketing 10. Supply Chain synchronization 11. Customer service.
The efficiency or inefficiency in any one or more of the supply chain functions listed above
will get reflected in the measures that have been grouped under Lead-time, Quality, Cost, and
Service.

MAKING PROFITS VS. REACHING GOALS

According to Otto and Kotzab (2003), performance measurement can be viewed from two
alternative approaches: making profits and reaching goals. Surely more satisfying is the
profit approach by quantifying and allocating all relevant costs and benefits. In any realistic
managerial setting (multi-company, multi-site, multi-problem), it might be difficult to
allocate the costs and the benefits to the supply chain members and the supply chain as a
whole appropriately. In order to resolve this measurement problem, performance
measurement can also be based on goals set for the organization and the supply chain. An
outstanding example for the need to this approach is the case of disaster relief supply chain.
The performance of National Disaster Management Authority (NDMA) in effectively serving
the nation at times of need is case in point for the goal orientation approach.
There is problem in the goal orientation approach as well, over modest goals easily leads to
good performance; reaching goals does not guarantee net savings; and diverse goals lead to
diverse performance ratings.
Problem with Supply Chain Metrics
According to Lambert D. M. and Pohlen T. L. (2001), the many measures identified as
supply chain metrics are actually measures of internal logistics operations as against
measures of supply chain management. The performance measures are single firm logistics
measures such as fill rate, lead time, on-time performance, product damages, and
responsiveness and are not the multi-firm measures that are necessary to measure the
performance of the supply chains. Measurement across multiple firms does not exist. The
researchers have indicated that there is lack of measures that capture performance across the
entire supply chain.
The researchers have also observed that more research is needed to develop supply chain
metrics and to overcome the implementation barriers across the total supply chain. The
supply chain must be viewed as one entity and any measurement system should span the
entire supply chain. More holistic measures are required which should be able to integrate
financial and non-financial performance.
It is important to note that most supply chains are complex and makes it difficult to
understand how activities at multiple tiers are related and influence each other. Performance
measures must reflect this complexity and consider cross-company operations from original
suppliers to the end customer. Managers can no longer concentrate on optimizing their own
firm’s operation. Instead, they need to work collaboratively to generate the maximum mutual
gains and savings.

Characteristics of good performance metrics

The following are the characteristics of good behavior of performance metrics in a supply
chain:
 Should preferably be quantitative
 Easy to understand and measure
 Performance measure should motivate organizational / supply chain behavior in the
right direction
 Should be clearly defined and acceptable to all members of the supply chain
 Covers all aspects of the supply chain and should be holistic in nature.
 Benefits from performance measurement should be more than cost involved in
carrying it out.
 The performance measures should ensure integration of supply chain members and
enable maximization of total wealth of the supply chain (benefit to all members of the
supply chain).
Summary
‘If we cannot measure it, we cannot manage it’. Traditionally, the focus in supply chain
management was to reduce cost under the not always correct premise that “lower the cost, the
better the supply chain”. Assumption that cost is a straight measure of supply chain
performance is incorrect. Every firm needs performance measures in order to improve its
performance, and more so does the supply chain. Performance measurement has been mainly
concentrated on a single firm and no integrated view has been taken to measure the overall
performance of the supply chain and there is a need for development of metrics on this basis.
The first approach towards supply chain performance measurement would include metrics on
customer service, quality, productivity, asset utilization, operational performance. This
approach is much more generic in nature towards supply chain performance measurement.
The performance metrics to measure customer service could include stock-out frequency, fill
rate, complete orders shipped. The other metrics related to customer service are on-time
delivery, customer complaints, customer satisfaction, and order status information.
The metrics on quality are product damages, order entry accuracy, order status, invoice
errors, and product returns. The other metrics of importance are related to productivity, and
asset utilization.
The metrics related to operational performance are cycle time, consistency, flexibility, and
malfunction recovery. The metrics on logistics cost which comprises mainly of transportation
cost and warehousing cost should also be monitored for ensuring effective supply chain
performance.
The second approach to monitoring supply chain performance metrics could be developed
with reference to the four drivers of supply chain performance: Lead time, Quality, Cost, and
Service.
The third approach to measuring and monitoring supply chain performance is 'making profits
versus reaching goals'. We should note that there are many business scenarios wherein it is
not possible to have profit as measure of performance. The business units without its separate
accounting system and social service organizations would come under this group.
Another major classification of metrics could be: Financial metrics, and Non-financial
metrics.
Lambert D. M. and Pohlen T. L. (2001), have indicated that there is lack of measures that
capture performance across the entire supply chain; the many measures identified as supply
chain metrics are actually measures of internal logistics operations as against measures of
supply chain management. There is enormous scope for further work in supply chain
performance metrics.
End Chapter Questions
1. What are the broad categories based on which supply chain performance metrics
could be developed?
2. List down the time related measures of supply chain performance.
3. What are the performance metrics related to quality?
4. Explain in brief performance measures on cost aspects.
5. Bring out the main service oriented performance metrics.
6. What do you understand by the financial and non-financial metrics related to supply
chain performance?
7. What are the key performance indicators (KPI)?
8. Explain the performance metrics for an agile supply chain.
9. Explain the concept of efficient consumer response (ECR).
10. Highlight the limitations observed by Lambert on the supply chain metrics currently
used.
11. What are the characteristics of a good performance metrics?
----------------------------------------------------------------------------------------------------------------
Mini Case 17.1: Titan Industries
Titan is a joint venture between Tata Group and Tamil Nadu Industrial Development
Corporation (TIDCO). The retails through more than 11,000 brand outlets with more than 2
million sq. feet of retail space. Titan employs over 8000 people. The company operates 12
manufacturing and assembly units.
Titan Industries is involved in making watches, gold jewellery, and eye wear. The company
has developed various brands for different segments like luxury, premium, mid market, and
mass market. The various brands are: Watches: Titan, Fastrack, Sonata, Helios, Xylys.
Gold Jewellery: The gold jewellery brands of Titan Industries are Zoya, Tanishq, Mia, and
Gold Plus. The jewellery range manufactured by Titan Industries comprises of Earring,
Pendant, Pendant set, Bangel, Chain, Finger Ring, Neckwear, Mangal Sutra, Nose Pin, and
gold coin.
Eye Wear: The eyewear products offered by Titan Industries comprises of sunglasses, frames,
and ready readers. The brands under this category are Titan, Fastrack, and Eye+
Accessories: The products range offered under this category are bags, wallets, belts,
fragrances, and helmets.
The company has its presence in 32 countries through 2,264 outlets. Titan Industries is the
world’s 5th largest watch manufacturer and India’s leading player in jewellery. The total
income of the company from operation for the year 2018-19 was Rs. 19,248.47 crores and
profit after tax was Rs. 1374.36 crores.
Questions:
1. Is it a good strategy on the part of Titan to deal with such a wide range of product
categories? Comment on the product portfolio of Titan Industries
2. What is your opinion on the effectiveness of Titan distribution chain?
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----------------------------------------------------------------------------------------------------------------
Mini Case 17.2: Pantaloons
The fast growing garment retailer Pantaloons is a lifestyle apparel retail outlet chain in India.
The company which was started in 1997 retails over 200 brands. ABFRL owned Pantaloons
offers a wide range of brands for men, women, and kids. The categories include western
wear, ethnic wear, formal wear, party wear, active wear, and accessories. Pantaloons is a one
stop destination for all fashion needs of its customers. Pantaloons operates through a chain of
fashion stores across 78 cities and towns in India. It operates through a retail space of 1.7
million square feet in India.
Pantaloons offers 24 exclusive in-house brands and they are Rangmanch, Ajile, Akkriti,
Chalk, Annabelle, Trishaa, Alto Moda, Poppers, Chirpie Pie, etc. The retailer also displays
licensed brands such as Bare, Rig, SF Jeans, Byford, JM Sports, and Lombard. Pantaloons
also supports Madura F&L brands by hosting Louis Philippe, Van Heuson, Allen Solly, Peter
England and People under men’s category; Van Heuson and Allen Solley in Women’s wear
and Allen Solly Junior. Further, Pantaloons offers a good number of partner brands as well.
Pantaloons is now an integral part of Aditya Birla Nuvo, an Indian multinational operating in
over 36 countries. The total revenue achieved during the year 2015-16 by the company was
Rs. 2164 crores. The company operates an online store and is available on ‘pantaloons.com’
for purchasing garments and fashion style fabrics through Internet.
Questions:
1. What are the product categories offered by Pantaloons? Comment on it.
2. Is the strategy of operating online store front pantaloons.com, a good decision?
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Mini Case 17.3: Dabbawalas – Six Sigma Performance
Dabbawalas started their operation in 1890 and registered as a charitable trust in 1956. The
average literacy rate of dabbawalas is 8th grade schooling. Total area coverage by the
dabbawalas is 60 to 70 kms. With a member strength of about 5000, the dabbawalas carry
about 2,00,000 tiffin boxes (i.e 4,00,000 transactions) everyday. The time taken for the
distribution of tiffin boxes is 3 hours.
The error rate in this large distribution process is 1 in 16 million. Dabbawalas operation has
achieved six sigma perfection. The cost of service is Rs. 300 per month and the price is
standard for all (weight, distance, space). There is ‘no strike’ as each and every one
dabbawalas is a shareholder. The dabbawalas receive a bonus of one months charge.
The total operation of dabbawalas involves no fuel, no modern technology, almost no
investment; yet achieve a 99.9999% performance and 100% customer satisfaction. Absolute
discipline is maintained while on duty. No alcohol during business hours, wear white Gandhi
cap while on duty, and carry identity cards. For dabbawalas ‘work is worship’.
The dabbawalas have a simple organizational structure with a group leader for 20-25
members. The central organization comprises of only 13 members (1 president, 1 vice
president, 1 general secretary, 1 treasurer, 9 directors). The organization is very lean and flat
having 5000 members. The supply of tiffin boxes during morning hours (9:00 AM to 12:30
PM) is a war against time operation for the dabbawalas. They have a simple and unique color
coding (numbering) system using which they identify the destination of the tiffin boxes for
distribution and area identification for returning of the empties.
At around 10:30, the dabbawalas load the wooden crate filled with tiffin boxes into the
luggage or goods compartment (usually the last compartment) in Andheri station (for
example). At around 11:20AM, the rearrangement of tiffin boxes is done at the destination
station church Gate (for example) and the crates are carried further in cycles or in special
trolleys manned by 3 or 4 dabbawalas in case when the number of tiffin boxes for distribution
to a particular location is too many in numbers.
The return journey of the ‘dabbas’ start at around 1:15PM approximately 1 hour after the
distribution of the tiffin boxes. The return journey being light in weight and with less time
pressure, the dabbawallas do some merry making like jokes, and singing. At around 3:30 to
4:00 PM, the final sorting takes place at the origin station so that the empties could be
returned back area wise. Long live the services of dabbawallas!
Questions:
1. What do you think is the core strength of dabbawala’s in achieving six sigma
performance in their business?
2. Highlight the organizational structure followed by dabbawalas.
----------------------------------------------------------------------------------------------------------------
Reference:
Bober Sox Donald J. et al (2002), McGraw-Hill Higher Education, New York.
Ch18 SUSTAINABLE SUPPLY CHAIN

Learning objectives:
1. Learn the basic concepts of sustainability.
2. Understand the areas of focus with respect to greening the supply chain.
3. Learn about the sustainable practices in the upstream (supply side) supply chain.
4. Know the sustainable practices that are implemented in the internal operations.
5. Comprehend the sustainable practices in the downstream demand chain.
6. Know the good practices in supply chain sustainability.

It has been indicated that sustainable development has to be ensured not only at the macro or
nation level, but also necessarily at the micro or organizational level. Concerns have been
raised regarding over consumption of resources, global warming, green-house gases (GHGs),
and consumer health. The awareness, nowadays, regarding these issues is high with the
various stakeholders and also it is important to note that there is significant awareness
regarding sustainable development as well with the different stakeholders and society at
large. Sustainable development has been identified as one of the millennium development
goals by United Nations. Further, United Nations (UN) had appointed Brundtland
commission to look into the conflict between economic development and environmental
preservation. Brundtland commission in its report A/42/427 dt. 4.8.1987 ‘Our Common
Future’ gave the most appropriate and often repeated definition of sustainable development:

“… meeting the needs of the present generation without compromising the ability of future
generations to meet their needs”

The supply chain considers the interactions between a business, its customers and suppliers.
The supply chain focus should as far as possible be upstream towards raw material suppliers
and downstream towards the consumer. The supply chain activity, in fact, covers the flow of
products and waste in the reverse direction as well and this is reverse logistics.
Supply chain sustainability is to do with adopting economic, environmental, and social
practices with a view to enhance long-term interest of the supply chain. In fact, a much
broader definition of supply chain sustainability could be “Supply chain sustainability
includes all activities which enhance economic, environmental, and social performance of the
supply chain and good governance practices throughout the lifecycle of the products and
services”.

This approach ensures a sustainable approach throughout the lifecycle of product and
services, which amounts to ensuring sustainable practices ‘from concept to grave’ of the
products and / or services.
The primary reasons for adopting sustainable practices in the supply chain are:
1. Compliance with laws and regulations and adopt international best practices.
2. Firms are driven by corporate values and culture to adopt sustainable practices in its
supply chain.
3. Companies act in a manner that ensures economic, environmental, and social performance
because the society expects companies to do so and also it makes business sense to follow
sustainable practices along the supply chain since it would accrue benefits to the company.

Sustainable Development
United Nations (1992) through the Rio documents have emphasized the important role of
business towards sustainable development. India is aspiring for a higher economic growth
rate and this desire has been clearly pronounced in the 12th five year plan document as well as
the annual budgets of the central government of India. The annual budget of India for the
year 2014-15 talks about a higher economic growth and putting the economy on growth
trajectory. The plans of the government when turned into action would result in higher
production and energy consumption which would be accompanied by higher CO2 emission.
The factors responsible for environmental degradation are: industrialization, increase in per
capita and subsequent increase in consumption, increase in population, and continuous
depletion of non-renewable resources.

Sustainable supply chain

The focus areas of supply chain sustainability consists of three sub-elements of the supply
chain which are upstream supply chain towards suppliers, internal operations in the focal
company, downstream distribution chain towards the customer or the final consumer.
Procurement and sourcing: implementing and ensuring sustainable practices in the
procurement activities involving external suppliers.
Internal operations: comprises of activities involved in converting the raw materials into
products and services. Implementation of sustainability principles in the internal operations is
key to ensuring the successful performance of the focal company and the overall supply
chain.
Distribution chain: consists of all activities for efficient and effective distribution of
products and services to customer or final consumer. Ensuring sustainable practices in the
downstream distribution chain is equally important in order to achieve overall sustainability
of the supply chain.
The supply chain sustainability initiatives have been grouped into: green sourcing; inbound /
outbound logistics, internal operations, warehousing, and product design and use.

A. Green Sourcing:
The green initiatives deployed in sourcing include eco-labeling of the products, environment
audit, policy on hazardous material, materials usage reduction, and use of renewable and
recyclable material. Prevention of human rights violations and child labour at the supplier
works is an important aspect of the supply chain. Corporate history, especially in the
developed world, has indicated that human rights violations and use of child labour in the
supply chain have had profound impact on the image and/or financial performance of the
companies.

Supplier involvement and collaboration:

Enhancing information sharing with suppliers and involvement of suppliers helps realizing
the environmental goals. This act of information sharing with the suppliers would ensure
product quality in the supply chain as well.

Supplier certification:
The importance of supplier certification and self certification has been highlighted by many
research studies. Environmental management approaches range from ISO 14000 certification
to Total Quality Management (TQM). It has been indicated that the prevalence of
environmentally responsible vendors will necessitate supplier certification like ISO 14000
and supplier certification provides an assurance about the quality of incoming materials.
Firms use supplier evaluation systems and supplier certification to communicate their quality
expectations. Some buyer organizations require supplier to pass an environment assessment
in making suppliers eligible to supply material, components and parts. Further, we should
note that supplier certification and supplier development would help in making the supply
chain more sustainable.

Supplier Quality:
Supplier quality is expected to enhance product / service design. Supplier quality is critical
for ensuring sustainable supply chain performance. The variation in intra-firm supply chains
in various parts of the world could be attributed to supplier availability and supplier quality.
This indicates the necessity for supplier certification with regard to quality and environmental
friendliness. Further, it has been indicated that poor supplier quality and shipment
inaccuracies, poor environmental and social performance by a firm and its suppliers can
result in legal actions. This could prove to be a costly consequence for the company in terms
of penalties and damage to the corporate image.

Human rights at supplier works:

It has been indicated that companies like Shell are committed to ensuring human rights in
their operations. Companies should ensure good labour practices and decent work, and
human rights. Safe and ethical working conditions at supplier works. The business firms have
to keep in mind the negative impact of human right violations by an American shoe
manufacturing company on its corporate image.
B. Internal Operations and greening the supply chain:
The future of industrialization depends mainly on the degree to which firms are green and
environment friendly. Researchers have observed that production based on confirmed orders,
a ‘pull’ based concept, is a more sustainable business philosophy. The major green initiatives
in internal operations are: reduction of energy consumption and energy efficiency; use of
alternate fuels; renewable energy sources and bio-fuels; co-generation; GHG emission
reduction; natural resources consumption – material use, material substitution, reuse, and
recycling; water conservation – consumption reduction, treatment and recycling, rain water
harvesting and collection; hazardous material use reduction and elimination; waste utilization
and disposal.

Energy consumption, energy efficiency, and GHG emission:

The main focus of sustainability initiative implementation, among other aspects, appears to
be energy consumption and energy efficiency. The other initiatives with regard to energy are
alternate fuels, renewable energy and bio-fuels, and GHG emission reduction.
Efficiency improvement programs help improving the sustainable performance of the supply
chain in terms of reduction in cost and emissions. Bio fuels have been considered to be more
environment-friendly as against fossil fuels such as oil, coal, and natural gas because of their
ability to cause less emission. The advantages of using alternate fuels like ethanol and bio-
fuels have been highlighted by earlier research studies and these fuels are renewable and emit
lower CO2 when compared with petroleum based fuels. The storage and capture of CO2 helps
in preventing release of additional GHG into the atmosphere.

Renewable energy:
It has been observed that companies which promise improved energy performance would
achieve increased market share. Non-renewable energy consumption causes excess pollution
and is harmful to people. Renewable energy sources minimize pollution, and cost involved in
development of such technologies is an investment into the future. Renewable energy results
in lower greenhouse gas (GHG) emissions and the cost per unit of electricity generated is
becoming more competitive. The expanding green economy drives development and use of
renewable energy sources like wind, solar, hydro, and bio-fuel based energy. Social
acceptance of certain renewable sources like solar cells and hydro power need to be taught to
people and the various state governments could play an important role in this endeavour.

Natural resources consumption:

Renewable sources should be used at a rate equal to or less than the natural rate of
regeneration and non-renewable sources should be used keeping in mind the resource
substitutability and technology availability, and future developments. Green manufacturing
practices involves reduction in material consumption, material substitution, recycling, reuse,
and remanufacturing.
Water conservation:
Water is a critical input for sustainable development. Green initiatives with respect to
conservation and use of water are: reduction in water use, water recycling, water purification
and treatment, rain water harvesting and rain water collection.

Reduction in use and elimination of hazardous materials:

The eco-design takes care to reduce use of hazardous material and their manufacturing. The
various sustainability initiatives to be implemented with respect to hazardous materials are
reduction and elimination of hazardous material use and proper disposal of hazardous
materials.

Waste management:
The aspects considered under waste management are: waste reduction, utilization of
industrial waste, reduction in packaging, waste disposal and management. Companies should
adopt environment friendly disposal of hazardous and non-hazardous waste material.
The government could promote awareness programs for educating citizens on the need for
waste reduction and recovery. The customers should be educated on the importance of using
environment-friendly products. The price of non-renewable resources would increase with
their scarcity due to finite and limited availability of such resources. This would make
renewable and recycled resources more competitive progressively and would lead to more
importance for waste management.
Earlier research studies have indicated that environment friendly packaging, taking back the
packaging material after its use and waste management are important aspects of green supply
chain management. Companies like Apple recycle their packaging in an attempt to be more
environment-friendly. It has been indicated that there is a need to reduce packaging waste in
the supply chain. Companies like Baxter collect empty cartons for returning to its suppliers
for reuse and such carton waste so collected is processed into paper.

C. Inbound / Outbound Logistics:

The logistics managers should adopt a more holistic view of the supply chain and make use
of energy efficient low carbon technologies in the supply chain. Researchers have indicated
that transport is a major consumer of energy and its CO2 emissions are quite considerable.
Green initiatives in logistics include fuel efficient vehicles, emission reduction by proper
vehicle maintenance, freight consolidation, mode of transport, vehicle utilization including
backhaul, and vehicle routing. Proper logistics network design, carrier selection, shipment
consolidation, cross dock, backhaul, travel distance optimization, alternate fuel use, driver
skill improvement, end-of-life vehicle disposal are important green logistics initiatives.
Outbound logistics involves products transportation, receiving, storing, and distribution to
customers. Activities involved in distribution with high potential for green initiatives
implementation are warehousing, material handling, order processing, and vehicle
scheduling. Environment-friendly packaging would significantly enhance green performance
of logistics.
The right selection of mode of transport could significantly improve logistics performance,
especially in terms of CO2 emission reduction. Intermodal transportation could contribute
phenomenally towards emission reduction. Sea ports offer economies of scale in operating
intermodal transportation over long distance. The carriers need to be linked with less
polluting modes of transportation in an intermodal scenario in order to achieve the targeted
environmental goals. Backhaul management both in the inbound as well as outbound logistics
could contribute to the green supply chain performance.
Reverse logistics focus on the first order as well as second order supply chain. The extended
coverage brings into picture end-of-life product disposal. In recent times, products are not
completely made of non-renewable resources anymore, but comprise of considerable amount
reused, recycled parts. Remanufacturing is prevalent in automotive and computer hardware
sector. Refurbishing, repair, and remanufacturing are important key aspects of sustainable
supply chain. Percentage of remanufactured products, product recalls and customer returns
have been considered as a measure sustainable practices in supply chain. European
Commission has defined the level of recycling in electronic goods (e-waste recycling).

D. Warehousing and green initiatives:

Energy efficient lighting could be used in the various facilities of the companies. Energy-
efficient lighting and day lighting, use of variable frequency drive in HVAC have been
recommended for making the facilities and buildings more ‘green’ on environment. Further,
it has been indicated that centralized warehouses might increase distance travelled and
associated CO2 emissions. Fuel efficient and hi-tech material handling equipments could be
deployed in the warehousing, keeping in mind the greening requirements.

E. Product design and use:

Companies, in fact, would be generating intangible assets when they make use of
technologies for developing socially responsible, economically inclusive, and environment
friendly products and services. Supplier management enhances cooperation between buyers
and suppliers by allowing supplier involvement and participation in both the design and
production processes. Companies could promote supplier involvement in enhancing product
design and development by making use of concurrent engineering and design. It has been
observed that an able top management leadership is positively related to effective product
design.
Sustainable decisions in the supply chain would result in reduced material use, reduction in
energy consumption, recycling. For example, Hewlett Packard (HP) introduced a program for
producing energy efficient, hazardous free and recyclable products. On similar lines, Nokia
also ensured that restricted materials are not used in their new products. Dell Corporation
introduced a program to make their products more energy-efficient, with a higher degree of
reuse and recycling. Green products, product safety are important aspects of sustainable
supply chain. Earlier research has indicated that impact on the environment should be
considered in the product design stage itself and the ultimate product responsibility stays with
the company. Eco-design aims at aspects like reduced consumption of material / energy,
reuse, recycle, recovery of component materials and parts, reduce the use of hazardous
products. The products are designed for reuse, recycle, recovery of materials / components
with a view to enhance sustainability. Minimization of environmental effect throughout the
product life by green design, resource saving, harmful material reduction, and product
recycling are recommended sustainable practices.

Summary:
Sustainable development is key to economic prosperity at the national level as well as at the
micro level or company level. The main reasons for implementation of sustainable practices
in the supply chain are:1. Compliance, 2. Driven by corporate values and culture, 3. It makes
business sense to do so.
The implementation of sustainable practices in the supply chain could be focused with
respect to: upstream supply chain, internal operations of the focal company, and downstream
demand chain.
The sustainable practices implemented in the upstream supply chain include: supplier
development, technical inputs to suppliers, supplier certification, environment audit, policy
on hazardous material use, prevention of human rights violations and child labour.
Sustainable practices implemented in the internal operations of the focal company include:
energy consumption, energy efficiency, alternate fuels, renewable sources of energy and bio-
fuels, GHG emission reduction, natural resources consumption, material substitution, reuse,
and recycling, water conservation, water treatment and recycling, rain water harvesting and
collection, hazardous material use reduction and elimination, waste utilization and disposal.
Sustainable supply chain practices that are implemented in the downstream demand chain
would include use of fuel efficient vehicles, vehicle maintenance, freight consolidation, right
mode of transport, vehicle utilization including backhaul, vehicle routing, travel distance
optimization, alternate fuel use, driver skill improvement, ELV disposal. The sustainable
supply chain practices need to be implemented in areas like warehousing, material handling,
and packaging.
Sustainable practices with respect to product design and use are: product design for less
material and energy consumption during manufacturing; less energy consumption during the
useful life of the product; reuse, recycle, and recovery of component materials and parts; and
reduce use of hazardous materials.

End chapter questions:

1. What is sustainable development?
2. What is supply chain sustainability?
3. Where all in the supply chain, sustainable practices need to be implemented?
4. What are the green initiatives that could be implemented in the supply side of the supply
chain?
5. List the green initiatives that could be implemented in the internal operations of the focal
company.
6. What are the principles related to sustainable practices that could be implemented in the
distribution chain?

Essay questions
1. Explain as to how the principle of sustainability could be deployed along the various
phases of supply chain.
2. How could you implement sustainable practices in the internal operations of the focal
company?
3. Explain ‘green sourcing’ practices implemented in the supply chain.
4. How will you implement sustainable practices in the inbound/outbound logistics? Explain
in detail.
5. How can sustainable practices be implemented in the downstream demand chain?
----------------------------------------------------------------------------------------------------------------
Mini Case 18.1: Godrej Consumer Products Limited
Godrej Industries is part of Godrej Group has five companies in its fold. These companies are
involved in real estate, FMCG, agriculture, chemicals, and gourmet retail. Godrej Group was
established in 1897 and has grown since then to become a multibillion dollar company. The
company claims that 1.15 billion customers globally use its products. The Godrej Industries
has presence in 18 countries.
Godrej Consumer Products Limited is in the FMCG business sector. The stand alone total
income of the company during the year 2018-19 was Rs. 5,773.76 crores and the profit after
tax for the same period was Rs. 1,754.98 crores. Godrej Consumer Products is a leading
company in the FMCG sector. The company provides innovative, superior quality products at
affordable prices. The company provides its products under three categories: home care,
personal care, and hair care.
Home care: The brands under this category are Good Knight, aer, Ezee, Hit, Air Freshner
Stella.
Personal Care: The various brands offered under the personal care category are: No.!,
Cinthol, protect, Mitu, Pamela Grant Beauty, and Villenenve.
Hair care: The product brands offered under this category are: Godrej expert, Darling, Ilicit
Color, BBlunt, Issue, Inecto, renew, and Roby.
Sustainability initiatives of the company are Good & Green, Volunteering, Sustainable
Packaging, Godrej Trusts, and Conclaves. The Godrej Group of companies actively involves
in CSR activities. This could be well understood by the fact that 23 percent of the Group’s
equity shares are held in a trust which invests in CSR initiatives that support environment,
education and healthcare. The company’s basic principles could be well understood from its
pronounced ‘Good & Green’ approach which is more inclusive and preserve the
environment.
Questions:
1. What are the products dealt by Godrej Industries supply chain?
2. Comment on the plant locations of Godrej Consumer Products Limited. Take the
support of company website.
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----------------------------------------------------------------------------------------------------------------
Mini Case 18.2: Reliance Industries Limited
Reliance Industries Limited is a Fortune 500 company and is the largest private sector
corporation in India. The company’s operations comprises of exploration and production of
oil & gas, and manufacture of petroleum products, polyster products, polyster intermediates,
plastics, polymer intermediates, chemicals, synthetic textiles and fabrics.
The company’s business include: exploration and production of oil and gas, petroleum
refining and marketing, petrochemicals, Retail, and Jio – information technology solutions.
The company has manufacturing facilities located at Nagothane, Patalganga, Silvassa, Hazira,
dahej, Vadodara, Naroda, Jamnagar, Hoshiarpur, Barabanki, Allahabad, and Nagpur.
Jamnagar plant facility is an outstanding example of its manufacturing capability. The sales
turnover of the company was Rs. 4,30,731 crores and net profit was Rs. 36,075 crores for the
year 2017-18.
The company has a clear strategy for sustainable development by focusing on:
 Energy management
 Environment responsibility
 Product stewardship
 Occupational Health and Safety
 Social Institution Building
The company aims to reduce environmental impact and increase its contribution to society
by making investments in meaningful endeavours.
Questions:
1. What are the businesses in which Reliance Industries operates and what are its
products?
2. What are the initiatives taken by Reliance towards sustainable development of the
company?
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Mini Case 18.3: Hindustan Zinc Limited
Hindustan Zinc is a Vedanta Group company in zinc, lead, and silver business. Hindustan
Zinc is one of the largest integrated producer of zinc, and the company is also a leading
producer of lead and silver. The core business of the company consists of mining and
smelting of zinc and lead. The company owns a captive power plant of capacity 474 MW in
order to support the company’s metallurgical operations. The company began its operation in
1966 as a public sector undertaking. Sterlite Opporunities and Ventures Limited (SOVL) own
64.92% of shares as of July 2015. The Government of India has ownership of 29.54%.
The company operates mines at Rampura Agucha, Rajpura Dariba, Sindesar Khurd, Zawar,
Kayad. The smelter facilities of the company are located at Chanderiya Lead-Zinc smelter,
Debari Zinc smelter, Dariba smelting complex, Zinc smelter at Vizag.
The company produced 3,380 million units (MU) of electricity from its captive power plants.
The company is also one of the largest producer of wind power in India and has a generation
capacity of 273.5 MW. The company produced and sold 444 million units to the state grid.
The wind power initiatives have been registered under UNFCCC Kyoto Protocol for Clean
Development Mechanism (CDM) and have certified emission reduction (CER) potential of
497,000 MT of CO2 per annum.
Questions:
1. What are the businesses in which Hindustan Zinc is involved and what effect do you
think the business activities will have on the environment?
2. What are the steps that this company has taken towards protection of the
environment?
----------------------------------------------------------------------------------------------------------------

Reference and Bibliography

Gore, A., (1991), “Earth in the Balance”, Houghton-Mifflin, Boston, MA
IPCC (2007), Climate Change 2007: Impacts, Adaptation and Vulnerability,
http://www.ipcc.ch/publications_and_data/ar4/wg2/en/contents.html
United Nations (1992), “Report of the United Nations Conference on Environment and
Development”, Rio de Janeiro, United Nations, New York, NY, 3-14 June, volume 3, p.125
 Annexure -I
Benchmarking supply chain sustainability
A sample of 200 leading Indian companies has been considered for analyzing the supply
chain sustainability initiatives implementation in India. The sample taken for analysis, as
shown in figure 1, comprises of companies from various sectors: Banking (23), Chemical
(13), Finance (17), FMCG (10), Infrastructure (15), Manufacturing (28), Mining (6), Oil and
Gas (14), Pharmaceuticals (17), Power (14), Service (26), Steel / Non Ferrous (11), and
Automotive (6). The chart also shows the Forbes top 100 companies which have been
considered for benchmarking supply chain sustainable practices.

Figure 1: Sample companies – top Group ‘A’ 200 & Forbes 100

Supply chain sustainability initiatives have been reported as standalone reports and as web
pages in the corporate website [Rajagopal, 2012]. The present study has been carried out by
making an analysis of the sustainability reports published by the companies for the year
2011-12. There are forty six companies which have published sustainability reports for the
analysis period and these reports have been analyzed with respect to the implementation of
supply chain sustainability initiatives. The secondary data required for analysis has been
obtained from BSE website, sample company’s website, and other reliable sources like
reports by consultancy organizations and various government agencies. The standalone
sustainability reports in portable document format have been downloaded from the corporate
web sites of the companies. Apart from the standalone sustainability reports, companies have
also published economic, environment, and social performance information on their corporate
web sites [Rajagopal, 2012].

Benchmarking Supply Chain Sustainability:

The supply chain sustainability initiatives have been analyzed in the various phases of the
supply chain and the results of the sustainability initiatives implementation analysis are
shown in Table 1. The analysis has been done with respect to: green sourcing; inbound
logistics; internal operations; outbound logistics; warehousing; product design and use. The
data on sustainability initiatives implementation has been collected through a detailed
analysis of the sustainability reports as well as the website of the sample companies.
Supply chain sustainability implementation by the global top 100 companies has been
analyzed in order to benchmark the sustainability initiatives implementation by the Indian
companies. The analysis showed that 94 of the global top 100 companies have published
sustainability reports. It is evident from Table 1, in terms of number of green initiatives
implemented across the various phases of the supply chain, the performance of global top 100
companies is significantly higher than that of the top 200 Indian companies (t = 11.231,
degrees of freedom = 298, p-value = 0.000). However, the pattern of sustainability initiatives
implementation across the various phases of the supply chain by global top 100 companies is
similar to that of the Indian companies, with more focus on ‘internal operations’, moderate
focus on ‘green sourcing’ and ‘product design and use’, and less number of initiatives
implemented in the ‘inbound / outbound logistics’. Test of independence has been done to
find out whether the pattern of sustainability initiative implementation across the phases of
the supply chain by top 200 Indian companies and that by global top 100 companies are
same. The test results (Chi-square = 9.596, degrees of freedom = 5, p-value = 0.088) shows
that the pattern of sustainability initiatives implementation by the Indian top 200 companies
and that by the global top 100 companies are similar.
Table 1: Supply chain – sustainability Initiatives
----------------------------------------------------------------------------------------------------------------
Sl no Variable name No of companies
-----------------------------
India200 Global100
----------------------------------------------------------------------------------------------------------------
A) Green Purchasing:
1. Renewable and / or recycled materials 2 0
2. Environmental collaboration with suppliers (inputs and technology) 10 13
3. Suppliers involvement at product development stage 4 4
4. Requirement of environmental certification like ISO 14000 by suppliers 5 4
5. Health and safety / human rights of employees, at suppliers’ works 9 15
6. Code of conduct for suppliers / business ethics 9 62
7. Hazardous material / waste disposal 4 4
8. Environmental audit of suppliers works 7 27
9. Good manufacturing and quality practices 5 8

B) Inbound Logistics:
10. Environmental friendly mode of transport 5 7
11. Efficient vehicle routing and supply consolidation 3 3
12. JIT inventory management, ensuring lean manufacturing 1 0
13. Modern eco friendly vehicle fleet 1 1
14. Packaging design with due consideration for logistics 1 0
C) Internal operations:
15. Production and final assembly on confirmed orders 2 0
16. Energy efficiency improvement (bio-fuels, alternate fuels, etc.,) 40 91
17. Renewable energy sources 35 80
18. Closed loop water system / Recycle water 35 42
19. Water purification before being let out into the public domain 29 42
20. Recyclable / reusable materials 24 55
21. Emission and pollution reduction - treatment and control 33 83
22. CO2 refrigeration system – CO2 capture and storage 38 5
23. Hazardous wastes - treatment and recycling / disposal 29 44
24. ISO 9000 Certification 23 11
25. ISO14001 Certification 30 38
26. Other Standards against which accreditation obtained 26 41
27. Health and Safety Performance 38 79
28. Hazardous material – phasing out 16 16
29. Human rights policies 26 50
30. Risk management 27 66
31. Waste reduction 36 80
32. Utilization of industrial waste materials 30 58
33. Reduction of natural resources consumption 29 69
34. Reduction of water consumption 42 84

D) Outbound Supply Chain

Vehicle maintenance:
35. Hi-tech vehicles with lesser carbon footprint (cleaner trucks) 5 12
36. Efficient vehicle maintenance leading to emission reduction 3 10
37. End-of-life vehicle disposal (fact sheet for disposal) 0 0
38. Alternative fuels (bio-fuel and fuel cell) 1 4
39. Carrier selection (mode of transport) 5 10
Inter-modal transportation:
40. Road and rail intermodal transportation 1 1
41. Road and sea intermodal transportation 1 1
42. Rail and sea intermodal transportation 1 1
Logistics optimization:
43. Consolidation of finished goods shipments 2 1
44. Backhaul movements – vehicle utilization 1 1
45. Logistics network design for optimizing distance traveled 4 15

E) Warehousing and storage:

46. Energy-efficient lighting / use of day light 3 16
47. Efficient insulation for cold storages and air-conditioning 1 6
48. Renewable energy sources (solar and photovoltaic, and wind) 0 0
49. Rainwater collection systems (water harvesting) 0 5
50. Proper location of consignments to minimize distance traveled 0 1
51. Container / pallet – recycle or reuse 2 2
52. Energy-efficient material handling equipment 4 0
53. Health and Safety Performance 1 3

F) Product design and use:

54. Design for low material / energy consumption in manufacturing 15 12
55. Longer life of product (lesser footprint) 8 10
56. Product design – lesser components and tools for assembly 1 2
57. Product design for low weight – leads to less transport 2 9
58. Design for disassembly and recycle at product end-of-life 5 10
59. Low energy consumption – during product use 7 12
60. Product design to avoid or reduce the use of hazardous materials 3 2
61. Packaging reduction / reuse / recycling …. Green Packaging 14 27
62. Health and Safety performance – incorporate in product design 5 20
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