ADITYA GLOBAL BUSINESS SCHOOL

Surampalem, ADB Road

TEACHING NOTES
SUBJECT: Logistics and Supply Chain Management

MBA: IV Name of the Faculty: K. Pavan Kumar

UNIT-1

Introduction

Logistics is concerned with getting the products and services where they are needed when they
are desired. It is difficult to accomplish any marketing or manufacturing without logistical
support. It involves the integration of information, transportation, inventory, warehousing,
material handling, and packaging.

The operating responsibility of logistics is the geographical repositioning of raw materials,

work in process, and finished inventories where required at the lowest cost possible

The formal definition of the word ‘logistics’ is: - it is the process of planning, implementing
and controlling the efficient, effective flow and storage of goods, services and related
information from the point of origin to the point of consumption for the purpose of
conforming to customer requirements.

Within the firm the challenge is to coordinate individual job expertise into an integrated
competency focused on servicing customers. In most situations the desired scope of such
coordination transcends the individual enterprise, reaching out to include customers as well as
material and service suppliers. Ina strategic sense, the senior logistics officer leads a boundary
spanning initiative to facilitate effective supply chain relationships. The excitement of
contemporary logistics is found in making the combined results of internal and external
integration one of the core competencies of an enterprise. Throughout the history of mankind
wars have been won and lost through logistical strengths and capabilities or the lack of them.
Even though the generals of the past have understood the critical role of logistics it only in the
recent past that the big organizations have realized its role in the achievement of competitive
advantage.

Arth Shaw in 1915 pointed out that: the relations between the activities of demand creation
and physical supply… illustrate the existence of the 2 principles of interdependence and
balance. Failure to co-ordinate any one of these activities with its group-fellows and also with
those in the other group, or undue emphasis or outlay put upon any one of these activities, it is
certain to upset the equilibrium of forces which mean efficient distribution. The physical
distribution of the goods is a problem distinct from the creation of demand. There are many
ways of defining logistics but the underlying concept might be defined as follows: ‘Logistics
is the process of strategically managing the procurement, movement and storage of
materials, parts and finished inventory through the organization and its marketing
channels in such a way that current and future profitability are maximized through the
cost-effective fulfillment of orders.’

Competitive Advantage

Effective logistics management can provide a major source of competitive advantage. The
bases for successes in the marketplace are numerous, but a simple model has been based
around the three C’s – Customer, Company & Competitor. The source of competitive
advantage is found firstly in the ability of the organization to differentiate itself, in the eyes of
the customer, from its competition and secondly by operating at a lower cost and hence at
greater profit.

Seeking a sustainable competitive advantage has become the concern of every manager who
realizes the marketplace and it is no longer acceptable to assume that the goods will sell
themselves. An elemental, commercial success is derived either form a cost advantage or a
value advantage or, ideally both. The greater the profitability of the company the lesser is the
production of cost. Also a value advantage gives the product an advantage over the
competitive offerings. Successful companies either have a productivity advantage or they have
a value advantage or maybe a combination of the two.

There are two main vectors of strategic direction that need to be examined: -

 PRODUCTIVITY ADVANTAGE

In many industries there will be a competitor who will be a low cost producer and will have
greater sales volume in that sector. This is partly due to economies of scale, which enable
fixed costs to spread over a greater volume but more particularly to the impact of the
experience curve.

It is possible to identify and predict improvements in the rate of output of workers as they
become more skilled in the processes and tasks on which they work. Bruce Henderson
extended this concept by demonstrating that all costs, not just production costs, would decline
at a given rate as volume increased. This cost decline applies only to value added, i.e. costs
other than bought in supplies. Traditionally it has been suggested that the main route to cost
reduction was by gaining greater sales volume and there can be no doubt about the close
linkage between relative market share and relative costs. However it must also be recognized
that logistics management can provide a multitude of ways to increase efficiency and
productivity and hence contribute significantly to reduced unit costs.

 VALUE ADVANTAGE

It is a cliché that customers don’t buy products they buy benefits. These benefits may be
intangible i.e. they relate not to specific product features but to such things as image and
reputation. Unless the product or service that we offer can be distinguished in some way from
its competitors there is a strong likelihood that the marketplace will view it as a ‘commodity’
and so the sale will tend to go to the cheapest supplier. Value differentiation can be gained in
numerous ways. When a company scrutinizes markets closely it frequently finds that there are
distinct value segments. In other words different groups of customers attach different levels of
importance to different benefits. The importance of such benefit segmentation lies in the fact
that often there are substantial opportunities for creating differentiated appeals for specific
segments. Adding value through differentiation is a powerful means of achieving a defensible
advantage in the market. Equally powerful as a means of adding value is service. Increasingly
it is the case that markets are becoming more service sensitive and this poses a challenge in
management of logistics. It is important to seek differentiation through means other than
technology. A number of companies have responded to this by focusing upon service as a
means of gaining a competitive edge. Service in this context relates to the process of
developing relationships with customers through the provision of an augmented offer. This
augmentation can take many forms including delivery service, after sales service, financial
packages, technical support and so on.
This matrix is a useful way of examining the options available for value and productivity
advantage:

SERVICE COST &

LEADER SERVICE
LEADER

COMMODITY COST
MARKET LEADER

In commodity market situations where a company’s products are indistinguishable from their
competitors’ offerings the only strategy is to move towards being a cost leader or towards
being a service leader. Often the leadership route is not available. This particularly will be the
case in a mature market where substantial market share gains are difficult to achieve.

Cost leadership strategies have been based upon the economies of scale, gained through
greater volume of sales. This is why market share is considered to be so important in many
industries. This cost advantage can be used strategically to assume a position of price leader
and make it difficult for high cost competitors to survive. This cost advantage can come
through effective logistics management. In many industries logistics cost represents such a
large part of total costs that that it is possible to make major cost reductions through
fundamentally reengineering logistics processes.

The other way to come out of the commodity quadrant of the matrix is to seek a strategy of
differentiation through service excellence. Customers ion all industries are seeking greater
responsiveness and reliability from suppliers; they are looking for reduced lead times, just-in-
time delivery and value added services that help them do a better job of serving their
customers.

GAINING COMPETITIVE ADVANTAGE THROUGH LOGISTICS

A firm can gain competitive advantage only when it performs its strategically
important activities (designing, producing, marketing delivering and supporting its
product) more cheaply or better than its competitors.
Value chain activity disaggregates a firm into its strategically relevant activities in
order to understand behavior of costs and existing and potential sources of differentiation.
They are further categorized into two types

(i) Primary - inbound logistics, operation outbound logistics, marketing and sales, and
service

(ii) Support – infrastructure, human resource management, technology development and

procurement

To gain competitive advantage over its rivals, a firm must deliver value to its customers
through performing these activities more efficiently than its competitors or by performing
these activities in a unique way that creates greater differentiation.

Logistics management has the potential to assist the firm in the achievement of both a
cost/productivity advantage and a value advantage. The under lying philosophy behind the
logistics concept is that of planning and coordinating the materials flow from source to user as
an integrated system rather than, as was so often the case in the past, managing the goods flow
as a series of independent activities. Thus under a logistics management regime the goal is to
link the marketplace, the distribution network, the manufacturing process and the procurement
activity in such a way that customers are service at higher levels and yet at lower cost.

THE MISSION OF LOGISTICS MANAGEMENT

The mission is to plan and coordinate all those activities necessary to achieve desired levels of
delivered service and quality at lowest possible cost. Logistics must therefore be seen as the
link between the marketplace and the operating activity of the business. The scope of the
logistics spans the organization, from the management of raw materials through to the delivery
of the final product.

Materials flow

Suppliers Procurements Operations Distribution Customers

Requirements information flow

 REASONS FOR LOGISTICS TO EXIST

Logistics management from this total system is the means whereby the needs of customers are
satisfied through the coordination of the materials and information flows that extend from the
marketplace through the firm and its operations and beyond that to supplies.

For example for many years marketing and manufacturing have been seen as largely separate
activities within the organization. At best they have coexisted, at worst there has been open
warfare. Manufacturing priorities and objectives have typically been focused on operating
efficiency, achieved through long production runs, minimized setups, changeovers and
product standardization. On the other hand marketing has sought to achieve competitive
advantage through variety, high service levels and frequent product changes.

In today’s more turbulent environment there is no longer any possibility of manufacturing and
marketing acting independently of each other.

It is now generally accepted that the need to understand and meet customer requirements is a
prerequisite for survival. At the same time, in the search for improved cost competitiveness,
manufacturing management has been the subject of massive renaissance. The last decade has
seen the rapid introduction of flexible manufacturing systems, of new approaches to inventory
based on materials requirement planning (MRP) and just in time (JIT) methods, a sustained
emphasis on quality.
Equally there has been a growing recognition of the critical role that procurement plays in
creating and sustaining competitive advantage as part of an integrated logistics process.

In this scheme of things, logistics is therefore essentially an integrative concept that seeks to
develop a system wide view of the firm. It is fundamentally a planning concept that seeks to
create a framework through which the needs of the manufacturing strategy and plan, which in
turn links into a strategy and plan for procurement
LOGISTICAL INTEGRATION

Inventory Flow

Suppliers Physical Manufacturing Procurement

distribution support

Customers
Information Flow
UNIT-2
Logistics and the bottom line
Today’s turbulent business environment has produced an ever greater awareness amongst
managers of the financial dimension of decision making. ‘The bottom line’ has become the
driving force which, perhaps erroneously, determines the direction of the company. In some
cases this has led to a limiting, and potentially dangerous, focus on the short term. Hence we
find that investment in brands, in R&D and in capacity may well be curtailed if there is no
prospect of an immediate payback. Just as powerful an influence on decision making and
management horizons is cash flow. Strong positive cash flow has become as much a desired
goal of management as profit. The third financial dimension to decision making is resource
utilization and specifically the use of fixed and working capital. The pressure in most
organizations is to improve the productivity of capital – ‘to make the assets sweat’. In this
regard it is usual to utilize the concept of return on investment (ROI). Return on investment is
the ratio between the net profit and the capital that was employed to produce that profit, thus:

It will be seen that ROI is the product of two ratios: the first, profit/sales, being commonly
referred to as the margin and the second, sales/capital employed, termed capital turnover or
asset turn. Thus to gain improvement on ROI one or other, or both, of these ratios must
increase. Typically many companies will focus their main attention on the margin in their
attempt to drive up ROI, yet it can often be more effective to use the leverage of improved
capital turnover to boost ROI. For example, many successful retailers have long since
recognized that very small net margins can lead to excellent ROI if the productivity of capital
is high, e.g. limited inventory, high sales per square foot, premises that are leased rather than
owned and so on.

Logistics and shareholder value: One of the key measures of corporate performance today is
shareholder value. In other words, what is the company worth to its owners?
Increasingly senior management within the business is being driven by the goal of enhancing
shareholder value. There are a number of complex issues involved in actually calculating
shareholder value but at its simplest it is determined by the net present value of future cash
flows. These cash flows may themselves be defined as:
Net operating income less Taxes less Working capital investment less Fixed capital investment
= After-tax free cash flow
More recently there has been a further development in that the concept of economic value added
(EVA) has become widely used and linked to the creation of shareholder value. The term EVA
originated with the consulting firm Stern Stewart,2 although its origins go back to the economist
Alfred Marshall who, over 100 years ago, developed the concept of ‘economic income’.
Essentially EVA is the difference between operating income after taxes less the true cost of
capital employed to generate those profits. Thus:
Economic value added (EVA) = Profit after tax – True cost of capital employed
It will be apparent that it is possible for a company to generate a negative EVA. In other words,
the cost of capital employed is greater than the profit after tax.

Customer profitability analysis

One of the basic questions that conventional accounting procedures have difficulty answering
is: ‘How profitable is this customer compared to another?’ Usually customer profitability is
only calculated at the level of gross profit – in other words the net sales revenue generated by
the customer in a period, less the cost of goods sold for the actual product ix purchased.
However, there are still many other costs to take into account before the real profitability of an
individual customer can be exposed. The same is true if we seek to identify the relative
profitability of different market segments or distribution channels.

The significance of these costs that occur as a result of servicing customers can be profound in
terms of how logistics strategies should be developed. Firstly, customer profitability analysis
will often reveal a proportion of customers who make a negative contribution, as in The reason
for this is very simply that the costs of servicing a customer can vary considerably – even
between two customers who may make equivalent purchases from us.

If we think of all the costs that a company incurs from when it captures an order from a
customer to when it collects the payment, is will be apparent that the total figure could be quite
high. It will also very likely be the case that there will be significant differences in these costs
customer by customer. At the same time, different customers will order a different mix of
products so the gross margin that they generate will differ. There are many costs that need to be
identified if customer profitability is to be accurately measured.
The best measure of customer profitability is to ask the question: ‘What costs would I avoid and
what revenues would I lose if I lost this customer?’ This is the concept of ‘avoidable’ costs and
incremental revenue. Using this principle helps circumvent the problems that arise when fixed
costs are allocated against individual customers.

Direct product profitability

An application of logistics cost analysis that has gained widespread acceptance, particularly in
the retail industry, is a technique known as direct product profitability – or more simply ‘DPP’.
In essence it is somewhat analogous to customer profitability analysis in that it attempts to
identify all the costs that attach to a product or an order as it moves through the distribution
channel.
The idea behind DPP is that in many transactions the customer will incur costs other than the
immediate purchase price of the product. Often this is termed the total cost of ownership.
Sometimes these costs will be hidden and often they can be substantial – certainly big enough to
reduce or even eliminate net profit on a particular item. For the supplier it is important to
understand DPP inasmuch as his ability to be a low-cost supplier is clearly influenced by the
costs that re incurred as that product moves through his logistics system.
Similarly, as distributors and retailers are now very much more conscious of an item’s DPP, it is
to the advantage of the supplier equally to understand the cost drivers.

Cost drivers and activity-based costing

As we indicated earlier in this chapter there is a growing dissatisfaction with conventional cost
accounting, particularly as it relates to logistics management. Essentially these problems can be
summarized as follows:
● There is a general ignorance of the true costs of servicing different customer
types/channels/market segments.
● Costs are captured at too high a level of aggregation.
● Full cost allocation still reigns supreme.
● Conventional accounting systems are functional in their orientation rather than output
oriented.
● Companies understand product costs but not customer costs.
The common theme that links these points is that we seem to suffer in business from a lack of
visibility of costs as they are incurred through the logistics pipeline. Ideally what logistics
management requires is a means of capturing costs as products and orders flow towards the
customer. To overcome this problem it is necessary to change radically the basis of cost
accounting away from the notion that all expenses must be allocated (often on an arbitrary
basis) to individual units (such as products) and, instead, to separate the expenses and match
them to the activities that consume the resources. One approach that can help overcome this
problem is ‘activity-based costing’.9 The key to activity-based costing (ABC) is to seek out the
‘cost drivers’ along the logistics pipeline that cause costs because they consume resources.
Thus, for example, if we are concerned to assign the costs of order picking to orders then in the
past this may have been achieved by calculating an average cost per order. In fact an activity-
based approach might suggest that it is the number of lines on an order that consume the order
picking resource and hence should instead be seen as the cost driver. the ABC approach with the
traditional method. The advantage of using activity-based costing is that it enables each
customer’s unique characteristics in terms of ordering behaviour and distribution requirements
to be separately accounted for. Once the cost attached to each level of activity is identified (e.g.
cost per line item picked, cost per delivery, etc.) then a clearer picture of the true cost-toserve
will emerge. Whilst ABC is still strictly a cost allocation method it uses a more logical basis for
that allocation than traditional methods

Unit -3
Why Map Supply Chain Processes and Systems? As supply chain management technologies
mature into mainstream acceptance, they are extended or replaced by the newest applications
fueled by business necessity and technological innovation. The pace at which new “solutions”
are introduced far exceeds that in which mature “solutions” are retired. Thus, supply chain
managers in search of tools to support operations have an ever increasing number of
technologies on the active market from which to choose. The lack of holistic picture of where
and how these technologies fit into the overall Supply Chain process prompted us to design an
integrated map that coherently illustrates available technology and the process each supports.
The map strives to demonstrate the touch-points that exist between critical supply chain
processes in a cross-functional organization. Before reviewing the map in detail it is important
to stress that we approach its creation from the perspective that Business comes first. Proven
management concepts are the foundation upon which this representation has been built.
Therefore, our vision was to create a map that considers a supply chain in its desired state: -
Functions are aligned strategically and are part of the Supply Chain which is engineered to
deliver enterprise goals. - Product life cycle management occurs through the concurrent and
cross functional design of products and in order to minimize, cost, time-to-market, rework, and
delays. - There is a direct and bi-directional connection between the strategic and execution
levels within the chain. - IT (Information Technology) is used as an enabler of Supply Chain
processes by creating “Electronic proximity” between the workgroups and cross-functional
members of the chain. The Supply Chain map is a matrix of vertical aligned areas (Supply,
Product, Demand), and cross-functional (or horizontal) processes such as Product Design or
Demand Forecasting. The map is intended for use as a reference tool during a strategic review
or the design phase of supply chain architecture.
• What is benchmarking?
– Ongoing process of measuring products, services, practices & processes against
the best that can be identified in order to:
• Learn about & improve best practice.
• Achieve realistic targets.
• Integrate improvements into your strategy.
• Use best practice as inspiration for innovation.
• Be externally focused.
• Be purposeful about improvement.
• Measure improvement.
• What to Benchmark?
– Supply Chain Council suggests:
• SCOR (Supply Chain operations reference) Christopher, M. 1998 pp
106):
• Plan, Source, Make & Deliver. SCOR is designed to provide a common
framework to facilitate cross organisational benchmarking.
• Who to Benchmark with?
– Competitors
– Significant opportunities for firms in non competing industries
• One method to measure and compare the output. A form of reactive control.
 • Alternative to concentrate on the processes which requires a number of steps:
– Understand the process. Use those most closely involved and develop flowcharts
– Identify critical points
• Producing a flow chart the first step and highlighting “value adding” time and “non-
value adding time” (Christopher, M. 1998 pp 110).
– Value Adding Time:
• Time that results in increased value for the customer
– Non Value Adding Time:
Elimination of this time or activity would not reduce the perceived value of the ultimate
consumer

Setting Benchmarking Priorities

Strategic Importance
Processes that are
competitively critical

Relative impact on Organisational Readiness

business.
Processes carried out
•High total cost Benchmarking
by “ready to improve
•High revenue priorities
personnel”.
•High human input

Adapted from Walleck et al, (1991)

“Benchmarking World Class Performance”,
The McKinsey Quarterly, Cited in
Make V Buy Economics Christopher, M., (1998),
“Logistics and Supply Chain
Processes with high Management.
impact on value and Strategies for Reducing
Cost and Improving Service”,
hard to outsource Financial Times Pitman
9
Publishing, London. Pp118.

• Highlight issues regardless of measurability that have high impact on the organisational
success.
– Articulate the strategic objectives to personnel.
– Understand measurable outcomes of success.
– Communicate importance of key processes.
– Highlight and focus attention on key performance indicators.
• Better faster Cheaper!
Unit -4
Purchasing: Also called the procurement, is the process by which companies acquire raw
materials, components, product, services or other resources from suppliers to execute their
operations.
Sourcing: The entire set of business process required to purchase goods and services. Benefits
of effective sourcing Better economies of scale can be achieved if orders within a firm are
aggregated. Reduction in the overall cost of purchasing (for items with large number of low
value transaction). Design collaboration can result in products that are easier to manufacture and
distribute, resulting in lower overall costs. ( for products that contribute a significant amount to
product cost and value) Coordination with the supplier and improve forecasting and planning.
Appropriate supplier contracts can allow for the sharing of risk, resulting in higher profits for
both the supplier and the buyer. Firms can achieve a lower purchase price by increasing
competition through the use of auctions. In-house or Outsource A firm should consider
outsourcing if the growth in supply chain surplus is large with a small increase in risk.
Performing the function in-house is preferable if the growth in surplus is small or the increase in
risk is large. How Do Third Parties Increase The Supply Chain Surplus Third parties increase
the supply chain surplus if they either increase value for the customer or decrease the supply
chain cost relative to a firm performing the task in-house. Three important factors that affect the
increase in surplus that a third party provides: scale, uncertainty, and the specificity of assets.
1. Capacity aggregation: Surplus can be created by aggregating demand across multiple firms
and gaining production economies of scale that no single firm can on its own.  The growth in
surplus from outsourcing is highest when the needs of the firm are significantly lower than the
volumes required to gain economies of scale.
2. Inventory aggregation: Surplus can be created by aggregating inventories across a large
number of customers. Aggregation allows them to significantly lower overall uncertainty and
improve economies of scale in purchasing and transportation.  The third party performing
inventory aggregation adds most to the supply chain surplus when demand from customers is
fragmented and uncertain.
3. Transportation aggregation by transportation intermediaries: Surplus can be created by
aggregating the transportation function to a higher level than any shipper can on its own. The
transportation intermediary aggregates shipments across multiple shippers, thus lowering the
cost of each shipment below what could be achieved by the shipper alone.  This is
particularly true if the shipper's transportation flows are highly unbalanced, with the quantity
coming into a region very different from the quantity leaving the region.
4. Transportation aggregation by storage intermediaries: Surplus can be created by aggregating
in bound and out bound transportation.  This form of aggregation is most effective if the
intermediary stocks products from many suppliers and serves many customers, each ordering in
small quantities.
5. Warehousing aggregation: Surplus can be created by aggregating warehousing needs over
several customers. (in terms of lower real estate cost and lower processing cost).  Savings
through warehousing aggregation arise if a supplier's warehousing needs are small or if its needs
fluctuate over time
6. Procurement aggregation: Surplus can be created if a third party if it aggregates procurement
for many small players and facilitates economies of scale in production and inbound
transportation.  Procurement aggregation is most effective across many small buyers.
7. Information aggregation: Supply chain surplus can be increased by aggregating information
to a higher level than can be achieved by a firm performing the function in-house. This
information aggregation reduces search costs for customers.  Information aggregation
increases the surplus if both buyers and sellers are fragmented and buying is sporadic.
8. Receivables aggregation: Supply Chain surplus cab be increase if third party can aggregate
the receivables risk to a higher level than the firm or it has a lower collection cost than the firm.
Collecting receivables from each retail outlet is a very expensive proposition for a
manufacturer.  Receivables aggregation is likely to increase the supply chain surplus if retail
outlets are small and numerous and each outlet stocks products from many manufacturers that
are all served by the same distributor.
9. Lower costs and higher quality: A third party can increase the supply chain surplus if it
provides lower cost or higher quality relative to the firm. If these benefits come from
specialization and learning, they are likely to be sustainable over the longer term. A specialized
third party that is further along the learning curve for some supply chain activity is likely to
maintain its advantage over the long term.
Lack of supply chain coordination and the
bullwhip effect
 Supply chain coordination improves if all stages of the chain take action that
together to increase total supply chain profits.
 Supply chain coordination requires each stage of the supply chain to take into
account the impact its actions have on other stages.
A lack of coordination occurs either because different stages of the supply chain have
objectives that conflict or because information moving between stages is delayed and
distorted.

Different stages of a supply chain may have conflicting objectives if each stages has a
different owners.
 Information is distorted as it moves across the supply chain because complete
information is not shared between stages.
 This may cause huge changes in the information that is shared at each stage of
the supply chain. As we can say there are thousands of dealers and suppliers, if
information distorts this may increase huge product verity and it’s amount. [Bullwhip
effect]
 One outcome of the lack of supply chain coordination is the bullwhip effect, in
which fluctuation in orders increase as they move up the supply chain from retailers
to wholesalers to manufacturers to suppliers.

Effect of lack of co-ordination on

performance
 A supply chain lacks coordination if each stage optimizes only it’s local
objectives, without considering the impact on the complete chain. Total supply chain
profits are thus less than what could be achieved through coordination’s.
 Each stage of a supply chain, in trying to optimize its local objectives, takes
actions that end up hurting the performance of the entire supply chain.
 Lack of coordination also results if information distortion occurs within the
supply chain. 

Consider the bullwhip effect P&G observed in the diaper supply chain. As a result of
the bullwhip effect.
Impacts are given below. 

Manufacturing cost: The lack of coordination increases manufacturing cost in the

supply chain. AAs a result, of the bullwhip effect, P&G and its suppliers must satisfy a
stream of orders that is much more variable than customer demand.

Inventory cost: The lack of coordination increases inventory cost in the supply chain.
To handle the increased variability in demand, P&G has to carry a higher level of
inventory than would be required if the supply chain were coordinated.

As a result, inventory costs in the supply chain increases. The high levels of inventory
also increase the warehousing space required and thus the warehousing cost
incurred.

Replenishment Lead Time: Lack of coordination increases replenishment lead times

in the supply chain. The increased variability as a result of the bullwhip effect makes
scheduling at P&G and supplier plants must more difficult compared to a situation
with level demand. There are times when the available capacity and inventory cannot
supply the order coming in.

Transportation cost: The lack of coordination increases transportation cost in the

supply chain. The transportation requirements over time at P&G and its suppliers are
correlated with the orders being filled.

As a result of the bullwhip effect, transportation requirements fluctuate significantly

over time. This raises transportation cost because surplus transportation capacity
needs to be maintained to cover high-demand periods.

Labor cost for shipping receiving: The lack of coordination increases labor costs
associated with shipping and receiving in the supply chain. Labor requirements for
shipping at P&G and its suppliers fluctuate with orders.

The supply chain stages have the option of carrying excess labor capacity or varying
labor capacity in response to the fluctuation in orders.

The level of product availability: Lack of coordination hurts the level of product

availability and results in more stock outs in the supply chain. This increases the
likelihood that retailers will run out of stock resulting in lost sales for the supply chain.

Obstacles to coordination in a supply chain

Some other factors need to be optimized by different stages of the supply chain, or an
increase in information delay, distortion, and variability within the supply chain Is an
obstacle to coordination’s.

The manager should identify the key obstacles and they can be avoided to
achieve coordination.
 Incentive obstacles
 Information-processing obstacles
 Operational obstacles
 Pricing obstacles
 Behavioral obstacles.
Incentive Obstacles: Incentive obstacles occur in the situation when incentives
offered to different stages or participants in a supply chain lead to action that
increases variability and reduces total supply chain profits.

a. Local optimization within functions or stages of the supply chain: Incentives

that focus only on the local impact of an action result in decisions that do not
maximize total supply chain profits.

For examples, if the compensation of a transportation manager at a firm is linked to

the average transportation cost per unit, the manager is likely to take actions that
lower transportation costs even if they increase inventory costs or hurt customer
service.

b. Sales force incentives: Improperly structured sales force incentives are a

significant obstacle to coordination in a supply chain. In many firms, sales force
incentives are based on the amount the sales force sells during an evaluation period
of amount or quarter.

The sales typically measured by a manufactured are the quantity sold to distributor or
retailers (sell-in), not the quantity sold to a final customer.

Information-processing obstacles: Information-processing obstacles occur in the

situation when demand information is distorted as it moves between different stages
of the supply chain, leading to increased variability to order within the supply chain. 

c. Foresting based on orders and not customer demand: When stages within a

supply chain make forecasts that are based on orders they receive any variability in
customer demand is magnified as order moves up the supply chain in manufacturers
and suppliers.

d. Lack of information sharing: The lack of information sharing between stages of

the supply chain magnifies the information distortion.

For example, a retailer such as Wal-Mart may increase the size of a particular order
because of a planned promotion. If the manufacturer is not aware of the planned
promotion, it may interpret the larger order as a permanent increase in demand a
place order with suppliers accordingly.

Operational obstacles: Operational obstacles occurs when the action was taken in

the course of placing and filling orders lead to an increased variability. 

e. Ordering in larger lots: When a firm places order in lot sizes that are much larger
than the lot sizes in which demand arise then variability of orders is magnified up the
supply chain. Firms may order in larger lots because there is a significant fixed cost
associated with placing receiving, or transporting an order. 

f. Large replenishment lead time: Information distortion is magnified if

replenishment lead times between stages are long. Consider a situation in which a
retailer has misinterpreted a random increase in demand as a growth trend.

 If the retailers face a lead time of two weeks, it will incorporate the anticipated growth
over two weeks when placing the order. 

g. Rationing and shortage gaming: Rationing schemes that allocate limited

production in proportion to the orders placed by retailers lead to a magnification of
information distortion this can occur when a high-demand product is in short supply. 

In such a situation, manufacturers come up with a variety of machinists to ration the

scarce supply of product among various distributor or retailers. 

Pricing Obstacles: pricing obstacles arise when the pricing policies for a product lead
to an increase in variability of orders placed.

h. Lot size-based quantity discounts: Lot size-based quantity discounts increase the

lot size of orders placed within the supply chain because lower prices are offered for
larger lots.
i. Price fluctuations: Trade promotions and other short-term discounts offered by a
manufactured result in forward buying, by which a wholesaler or retailer purchases
large lots during the discounting period to cover demand during future periods.
Forward buying results in large orders during the promotion period followed by very
small orders. 

Behavioral Obstacles: Behavioral obstacles are problems in learning within

organizations that contribute to information distortion. These problems are often
related to the ay the supply chain is structured and the communication among
different stages.

a. Each stage of supply chain views its actions locally and is unable to see the
impact of its actions on other stages. 

b. Different stages of the supply chain react to the current local situation rather
than trying to identify the root causes. 

Managerial Levers to Achieve Coordination

 Aligning of goals and incentives
 Improving information visibility and accuracy
 Improving operational performance
 Designing pricing strategies to stabilize orders
 Building strategic partnership and trust
Aligning of goals and incentives: Managers can improve coordination within the
supply chain by aligning goals and incentives so that every participant in supply chain
works to maximize total supply chain profits.

Aligning goals across the supply chain: Coordination requires every stage of the
supply chain to focus on the supply chain surplus or the total size of the pie rather
than just its individual share.

In the absence of such an approach, every supply chain leaves money on the table. A
focus on the supply chain surplus is unlikely to arise from actions and incentives
across the supply chain align with this objective.

Aligning incentives across functions: One key to the coordinated decision within a

firm is to ensure that the objective any function uses to evaluate a decision is aligned
with the firm’s overall objectives. All facilities, transportation, and inventory decision
should be evaluated based on their effect on profitability, not total cost.
Pricing for coordination: A manufacturer can use lot size-based quantity discounts to
achieve coordination for commodity products if the manufacturer has large fixed costs
associated with each lot.
For products for which a firm has market power, a manager can use two-part tariffs
and volume discounts to help achieve coordination Given demand uncertainty,
manufacturers can use buy-back, revenue-sharing, and quantity flexibility contracts to
spur retailers to provide levels of product availability that maximize supply chain
profits.

1. Customer relationship management (CRM) is a model for managing a company’s

interactions with current and future customers. It involves using technology to organize,
automate, and synchronize sales, marketing, customer service, and technical support.
2. The focus is on creating value for the customer and the company over the longer term” .
When customer value the customer service that they receive from suppliers, they are
less likely to look to alternative suppliers for their needs . CRM enables organisations
to gain ‘competitive advantage’ over competitors that supply similar products or
services .
3. “Customer relationship management focuses on strategically significant markets. Not
all customers are equally important”.  Therefore, relationships should be built with
customers that are likely to provide value for services.  Building relationships with
customers that will provide little value could result in a loss of time, staff and financial
resources.
4. CRM also helps a company identify and reward its most loyal customers to retain and
expand their business via targeted marketing .Hence retaining customers becomes easier.
Retain CRM tools help keep customers happy by providing superior service from a
responsive team of sales and service specialists. Enhance CRM software tools can help
businesses acquire new customers by improving efficiency in contact management, sales
prospecting, selling and direct marketing. Acquire
5. Sales force automation SFA uses software to streamline the sales process. The core of
SFA is a contact management system for tracking and recording every stage in the sales
process for each prospective client, from initial contact to final disposition. Many SFA
applications also include insights into opportunities, territories, sales forecasts and
 workflow automation. Appointments Appointment CRMs automatically provide
suitable appointment times to customers via e-mail or the web, which are then
synchronized with the representative or agent's calendar.
6. Marketing CRM systems for marketing track and measure campaigns over multiple
channels, such as email, search, social media, telephone and direct mail. These systems
track clicks, responses, leads, deals, and revenue. Customer service and support CRMs
can be used to create, assign and manage requests made by customers, such as call
center software which help direct customers to agents. CRM software can also be used
to identify and reward loyal customers.
7. Social media Some CRMs coordinate with social media sites like Twitter, LinkedIn,
Facebook and Google Plus to track and communicate with customers who share
opinions and experiences about their company, products and services. Small business
For small businesses a CRM may simply consist of a contact manager system which
integrates emails, documents, jobs, faxes, and scheduling for individual accounts.
8. When introducing or developing CRM, a strategic review of the organisation’s current
position should be undertaken.  Organisations need to address four issues: 1. What is
our core business and how will it evolve in the future? 2. What form of CRM is
appropriate for our business now and in the future? 3. What IT infrastructure do we have
and what do we need to support the future organisation needs? 4. What vendors and
partners do we need to choose?
9. reduced costs, because the right things are being done (i.e.., effective and efficient
operation) increased customer satisfaction, because they are getting exactly what they
want (i.e.. meeting and exceeding expectations) ensuring that the focus of the
organisation is external growth in numbers of customers maximisation of
opportunities (e.g.. increased services, referrals, etc.) increased access to a source of
market and competitor information highlighting poor operational processes long
term profitability and sustainability
10. Social CRM Social media marketing remains on an uptrend and companies are paying
attention. Consumers are empowered by social networking sites to influence product or
brand image and perception. Negative feedback no longer simply routes a call to
customer service; businesses can expect feedback to reach potential markets before they
 do.  2. Centralized Data By centralizing customer data through CRM, businesses will
be able to target and engage customers more effectively. CRM data won’t end with
generating leads for the sales team but will be a continuing process that also includes
maintaining relationships with a growing customer base. (For related reading, see Using
Product Management Features in a CRM Solution.)  3. Mobility Customers are no
longer bound to PCs and are constantly accessing data on the go. Frontline employees
and customer service resources will increasingly be empowered by mobile devices for
support. On the other side of the coin, customer perception will also be shaped not only
by real-world involvement, but also by online and mobile experiences.
11. Flexibility Flexibility for CRM users is key because it allows them to customize the
software to meet their needs. Ease of integration and multichannel publishing are key
corporate considerations. As a result, a flexible and accessible CRM platform is
becoming increasingly important for users.  5. Crowdsourcing With customers gaining
voice through social media, enterprises are increasingly able take advantage of
crowdsourcing for business improvements. Tapping current customers for fresh ideas,
solutions and expectations can help employees across an organization provide the
innovation and interactive relationship that a growing number of customers now expect.
This means that CRM will no longer be just for lead generation and marketing, it will
also provide a source for new innovation.
Unit – 5
Current supply chains are growing in complexity due to several factors. We, the customers, are
demanding innovative products at the right time and at a reasonable price. This creates
challenges for companies since creating both responsive and cost-effective supply chains is
critically difficult. I find these challenges exciting and that’s why I decided to pursue a career in
the field. Let me expand on today’s main supply chain challenges.
Globalization
One of the biggest challenges that companies are facing is how to reduce their supply chain
cost. In order to satisfy customers’ price expectations, companies have opted to relocate
manufacturing to low cost countries around the world in an effort to reduce direct and indirect
costs and to minimize taxes. But, having global suppliers contributes significantly to complexity
that comes from extended delivery lead times. Customers not only want lower prices, but they
also want their products on time.
Customer Preferences
As stated above, global supply chains are complex. Add to that product features that are
constantly changing, and the challenge is even greater. A product is released and customers
rapidly pressure companies to come up with the next big thing. Innovation is important since it
allows companies to stay competitive in the market, but it’s also a challenge. To enhance a
product, companies have to redesign their supply network and meet market demand in a way
that’s transparent for customers.
Market Growth
Another factor that presents a challenge is the pursuit of new customers. The cost of a
developing a product, from R&D to product introduction, is significant. Therefore, companies
are trying to expand their distribution to emerging markets in order to grow revenues and
increase market share. Companies all around the world are expected to expand in their home
and foreign markets. The introduction to new markets is difficult due to trading policies, fees,
and government policies.
Customers’ expectations nowadays are more demanding than ever. As described here,
companies have responded with global networks, product innovation, and market expansions.
This means that companies now rely on supply chain managers to optimize their value chains in
order to stay competitive. As such, it’s no surprise that these professionals are in high demand.
So customers, rest assured - experts in supply chain management, including our own Grainger
Center graduates -  are behind the scenes tackling these complexities each and every day and are
eager to delight the customer experience.
The challenges to the Logistics and Supply Chain operations in concerned with “THE
FIVE V’s”
1) VALUE
2) VELOCITY
3) VARIABILITY
4) VISIBILITY
5) VULNERABILITY
To p 10 lo g istic s c h a lle n g e s fo r 2012
b y C liffo rd F. Lyn c h
Th e e c o n o m y m a y b e o n th e m e n d , b u t th e lo g istic s/ su p p ly c h a in c o m m u n ity w ill
still fa c e c h a lle ng e s th ro u g h o u t th e ye a r. He re 's w h a t to w a tc h fo r.
1) Th e Ec o n o m y
2) Th e Pric e o f Fu e l.
3) Risin g Tru c k Ra te s
4) C a p a c ity
5) In fra stru c tu re
6) O c e a n sh ip p in g
7) Se c u rity
8) Th e g re e n m o ve m e n t
9) In c re a se d tru c k w e ig h t lim its
10) Th e e le c tio n