Supply chain Management

Obstacles to Achieving Strategic Fit because it is impractical to react to the

changing customer demand.
• Increasing variety of products
Push-pull supply chain
• Decreasing product life cycles
In a push-pull supply chain strategy, all the
• Increasingly demanding customers
processes at the initial stages of the supply
• Fragmentation of supply chain chain system are operated in a push-based
ownership process, and all the processes at the final
stages are operated in a pull-based
• Globalization process. The interface between the push-
• Difficulty executing new strategies based and pull-based stages is referred to
as the push-pull boundary.
Push-based supply chain
Supply chain time line is the time that has
In a push-based supply chain, the customer elapsed between the procurement of raw
demand forecast forms the basis for the material, that is, the beginning of the time
business process. A manufacturing firm line, and the delivery of a finished product
can be taken as a typical example for a to the end customer, that is, the end of the
push system. Here, the goods are time line. The push-pull boundary is
manufactured based on the forecasted situated somewhere along the supply
demand and delivers the stock to the chain time line.
distribution centres to make it available at
different locations and retailer outlets.

The production and distribution decision

forms the long term forecasts in a push- Demand Forecasting for Optimal
based supply chain. Inventory Holding
Pull-based supply chain Demand forecasting is the process of
A pull-based supply system is based on real estimating the quantity of a product or
demands from the customer. The service that consumers will purchase.
production and distribution processes are Demand forecasting involves both
synchronised in accordance with customer informal methods like educated guesses
demands rather than forecast. Therefore, and quantitative methods such as the use
the firm which uses the pull-based strategy of historical sales data or current data from
produces stocks according to the order. test markets. We can use demand
Pull-based systems are very attractive and forecasting in pricing decisions, in
help the firm to: assessing future capacity requirements, or
in making decisions to enter a new market.
• decrease inventory due to the
reduction in variability Today's competitive market needs
accurate forecasts for determining the
• enhance the ability to manage future demand of each product in
resources inventory. So, we must constantly look for
• reduce the system costs ways to reduce forecasting error (that is,
the difference between a forecast and the
Another view point is, it is not very easy to resulting usage). But these efforts are
implement a pull-based supply chain, often hampered by unusual activity
imbedded in historic usage data.
Supply chain Management

Characteristics of Forecasts Inventory control involves different kinds

of policies, procedures and techniques to
• Forecasts are always wrong. Should
balance the demand and supply chain
include expected value and measure of
cycle in a business, and to have the right
error.
quantity of stock in the right place at the
• Long-term forecasts are less accurate right time.
than short-term forecasts
Inventory exists in the supply chain
• Aggregate forecasts are more accurate because of a mismatch between supply
and demand. To minimise the supply and
Forecasting Methods demand imbalances in the supply chain,
• Qualitative: primarily subjective; rely firms utilise various methods of inventory
on judgment and opinion management.

• Time Series: use historical demand Types of inventory

only The types of inventory are:
• Causal: use the relationship between Transaction inventory - Transaction
demand and some other factor to inventory is formed of those items that are
develop forecast basically needed for various transactions in
• Simulation a firm. Transaction of finished goods and
transaction of raw materials are the
– Imitate consumer choices that examples of transaction inventory. These
give rise to demand inventories help in easing the various
– Can combine time series and transactions of a firm. Transaction
causal methods inventory helps de-link production from
the purchasing department. For example,
Managing Inventory in Supply Chain if a production department needs raw
Management material to manufacture a product, the
production department can place the
The raw materials, processed goods, and
order directly to the inventory department
finished products that are ready for sale
rather than to the purchasing department.
are important assets in any business.
Inventory is the total amount of goods Speculative inventory - Some levels of
and/or materials contained in a store or speculative inventories are maintained in
factory at any given time. most firms as a measure of speculation of
an increase in the price of raw material or
Inventory management is concerned with:
an increase in the sale of finished goods. It
• the storage of inventories, is better to keep speculative inventory by
approximating the future demand and
• form and size of inventories,
conditions.
• strategies to make inventories useful
Precautionary inventory - Precautionary
and profitable,
inventory is also known as operation
• measures to ensure efficient and inventory. It is better to keep some level of
uninterrupted production and precautionary inventory to avoid
unexpected circumstances such as break
• measures to ensure sales and down of machines due to damage of parts.
customer service activities at a For example, machine parts or tools should
minimum cost.
Supply chain Management

be stored to keep the system running • Service cost - Service cost refers to the
without any trouble. direct expenses that are required to
maintain the stocked inventories.
Managing Inventory
• Risk cost - All organizations are
Inventory management helps in managing
subjected to some form of risk while
inventory holdings, single or multiple
stocking inventories. The most
production orders and inventory
common is the risk of obsolescence.
replacement services. This triggers the
orders, and balances the demands of • Storage cost - Inventory holding costs
production, purchasing orders, and may be divided into storage space
optimal inventory holdings to avoid costs and material handling costs.
running out of stock.
Inventory management techniques
Inventory cost is the cost of holding goods
Economic order quantity (EOQ) model is
in stock. We can express it as a percentage
the method that provides the company
of the inventory value. Inventory cost
with an order quantity. This order quantity
includes capital, warehousing,
figure is where the record holding costs
depreciation, insurance, taxation,
and ordering costs are minimized. By using
obsolescence, and shrinkage costs.
this model, the companies can minimize
Inventory carrying costs the costs associated with the ordering and
inventory holding. In 1913, Ford W. Harris
Inventory carrying cost is the inventory
developed this formula whereas R. H.
decision cost factor that is associated with
Wilson is given credit for the application
holding an inventory. It is composed of
and in-depth analysis on this model.
several expenditures. This cost is incurred
directly from the size and value of the The economic order quantity (EOQ) is a
inventory and the amount of time the model that is used to calculate the optimal
inventory is carried. Inventory carrying quantity that can be purchased or
cost can be divided into various costs such produced to minimize the cost of both the
as capital costs, return on investment, carrying inventory and the processing of
service costs such as taxes and insurances, purchase orders or production set-ups.
risk costs such as damage and
Assumptions for the EOQ Model:
obsolescence, storage costs such as
material handling and security, stock out Following are the underlying assumptions
costs and incremental costs. for the EOQ model. Without these
assumptions, the EOQ model cannot work
to its optimal potential.
• Capital cost - The cost of the capital
• The cost of the ordering remains
tied up in the inventory is the most
constant.
important element of inventory
carrying costs. The company commits • The demand rate for the year is known
its capital to the inventory, to use this and evenly spread throughout the
capital for future investment in year.
expectation of selling the inventory at
a profit. • The lead time is not fluctuating.

• No cash or settlement discounts are

available, and the purchase price is
constant for every item.
Supply chain Management

• The optimal plan is calculated for only warehousing the inventory. However, if
one product. the seller is reasonably sure of product
sales, then bulk shipping can save a good
• There is no delay in the replenishment
deal of money.
of the stock, and the order is delivered
in the quantity that was demanded, Record keeping
i.e. in whole batch.
The basis for all inventory management is
These underlying assumptions are the key record keeping. Small companies can keep
to the economic order quantity model, and track of inventory manually. This reduces
these assumptions help the companies to the cost associated with buying and
understand the shortcomings they are maintaining a computerised inventory-
incurring in the application of this model. control system. Larger companies need to
use a dedicated inventory software
Just-In-Time
program that allows them to monitor
Just-In-Time, or JIT, is an important inventory levels among numerous
inventory system that reduces the amount products and materials.
of inventory that a company possesses. In
Physical inventory
JIT, the company purchases inventory only
a few days before it is needed for sale or Physical inventory should be performed at
manufacturing, so that the inventory least once a year, and as often as once a
arrives just in time for use. month, depending on the probability of
loss of items. Physical inventory can be
By keeping the inventory levels low, the
done in periods when items are not
company not only saves money, but is also
needed or transported.
able to introduce new technologies and
advancements to the market faster, In a computerised system, the physical
because it does not have months of inventory information is entered or
inventory stored or waiting in the supply scanned and the computer is used to
chain. compare these records. If the inventory is
handled manually, then a person needs to
The major drawback to JIT systems is that
maintain the records and compare it with
with items arriving a day or two before
the existing old records.
they are needed, a single delay in the
supply chain can grind production and Cleaning out old inventory
delivery to a halt. All the partners involved
Storing inventory is not free of charge.
in the JIT system need to be reliable and
Inventory represents an investment on a
should have contingent systems in place to
product or material. Even if the product is
correct problems quickly.
relatively inexpensive, it costs money to
Bulk shipments store and manage the inventory. A
company must try to sell its older
Bulk shipping has been a part of inventory
inventory by conducting special sales that
management for a long time. Since it is
are likely to attract buyers.
cheaper to purchase and ship goods in
bulk, sellers can plan to reload their Thus, inventory management can be one
inventory less frequently than they of the most expensive aspects of running a
normally would. Because there is fewer business, but with proper techniques, one
inflow of frequent shipments, sellers needs can reduce the inventory burden on the
to spend extra money on purchasing and organisation’s financial statement.
Supply chain Management

Inventory management includes all the Reduced demand uncertainty reduces the
aspects of inventory, from warehousing inventory needed to achieve a target
manufacturing materials to delivering service level. FMCG company like
goods to the customers. Hindustan UniLever uses the concept of
regional distributors for large geographic
Managing Inventory
areas or states. For example, one regional
Risk Pooling distributor in a place like Bangalore will
stock the entire product line and cater to
Risk pooling is an important concept in the demand of local distributors across the
supply chain management. It involves the state or large retail outlets in the region.
use of centralised inventory to gain
benefits when demand is higher than Product pooling
average at some retailers and lower than
Product pooling is a process of keeping the
average at others.
products separate, but forcing one or more
The idea behind risk pooling is to redesign of their coefficients to be same or similar.
the supply chain, the production process, Product pooling has always been used as a
or the product. This is done either to measure to deal with the risks involved in
reduce the uncertainty the firm faces or to marketing the agricultural goods.
be cautious about the uncertainty so that
This type of pooling also generates
the firm is in a better position to mitigate
potential benefits through the provision of
the consequence of uncertainty.
market power. There is an increase in the
There are several types of risk pooling interest in product differentiation and the
strategies that are used in supply chain development of value chains which is a
management. Each of these strategies can means to increase returns to the farmers.
help any firm to work effectively. A firm This method is widely used for stocking
needs to choose the strategy that is food and associated products. For
appropriate for a situation. example, different kinds of rice could be
stocked together at a common location
The four types of risk pooling are: and then supplied to customers, based on
• Location pooling the demand.

• Product pooling Lead time pooling

• Lead time pooling Lead time pooling risk by dividing the

replacement orders among the multiple
• Capacity pooling suppliers is a sourcing policy which has
Location pooling been in demand for the academic
researchers for more than 20 years. It has
Location pooling is used to decrease the many advantages over the other pooling
inventory while holding service constant, types. Lead time pooling is a way to reduce
or to increase service while holding the safety stock which has to meet the
inventory cost, or is used to combine service targets or the expected number of
inventory reduction and service increase. backorders for a prescribed level of safety.
Location pooling is used to broaden the
product line, since it reduces the demand It also reduces the cycle stock. In this type
uncertainty which is measured with the of pooling, the incremental ordering cost
coefficient of variation. of the second and subsequent orders may
be relatively small in a variety of settings.
Supply chain Management

This type of pooling is further divided into There are several recent trends motivating
two more types. They are: the companies to merge the capacities
which were dedicated to specific
• Delayed differentiation
customers. The focus on modularisation in
• Consolidated distribution manufacturing systems helped to redesign
the parts which are produced at the same
Delayed differentiation manufacturing capacity and therefore, the
The concept of postponement was first separate production processes for parts
suggested by Alderson in 1950. Here, the can be merged later. Let us consider the
producers can add the options or make example of a car manufacturer. The
differentiating changes to the product at manufacturer receives several orders from
the release time which is nothing but the different distributors for one particular
time of purchasing by the end use model. Instead of treating this as multiple
customer. The manufacturing orders at the production line, he can treat
postponement allows better management this as a single order, thereby saving
of forecasts and demand information by valuable time and resources.
shortening the manufacturing lead time. Purchasing Process
This seems to be a suitable approach for
innovative products with short product life A flawless inventory management process
cycle and high risk of obsolescence. is a primary requisite for carrying out
Whenever there is a variety of customer purchasing activities. At the same time, a
demand, delayed differentiation plays a proper purchasing process aids in
major role. This is used largely by high end improving inventory management.
car manufacturers who offer high level of
Purchasing is a process of acquiring all the
customisation.
materials, which an organisation needs, in
Consolidated distribution exchange for funds. This is an important
function because every organisation needs
Consolidated distribution reduces retail materials and the purchasing process
inventory by more than 50%. It is not as organises the supply of these materials.
effective at reducing inventory as location
pooling, but consolidated distribution In large organisations, the professional
keeps inventory near demand, thereby buyers, who are well versed with selecting
avoiding additional shipping costs (to product lines, familiar with the contract
customers) and allowing customers to look law, shipping and shipping regulation, are
and feel the product. It also helps in involved in negotiation with the suppliers.
reducing the inventory, even though the These buyers also work with the
total lead time increases from eight to nine engineering unit (prepares specifications),
weeks. This type of pooling helps in getting the operations unit (receives and use the
the quantity discounts in purchasing also materials), the accounting unit (processes
to scale up the economy in transportation. invoices) and other units of the
This is used in scenarios where a customer organisation.
requires more number of deliveries in less
The basic steps involved in the purchasing
quantity or when a customer is having a
process are:
constant increase in demand.
1. Request to purchase/requisition
Capacity pooling
2. Supplier selection
Supply chain Management

3. Purchase order matched with the order and quality

requested.
4. Fulfilment
Supplier invoice/payment - In this step,
5. Goods receipt
the buyer receives invoice from the
6. Supplier invoice/payment supplier and then the finance/accounts
department processes and pays the
Request to purchase/requisition - This supplier.
step identifies the need – what to buy, how
much to buy and when to buy. Basically Relationship Between Purchasing and
there are two forms of requisition. They Other Functional Areas
are as follows:
The purchasing department handles the
• Manual, which is created on a purchases of machinery, equipment or
requisition form. materials. Purchasing team has to
coordinate with different CFTs:
• Other document and Enterprise
Resource Planning (ERP) system, • Planning
where requisition form is generated
• Engineering
automatically.
• R&D
This requisition goes through an approval
process where authorisation is provided to • Marketing
purchase the required material.
• Quality – QA / QC
Supplier selection - In this step, the buyers
• Manufacturing
are aware of the supplier they have to
approach to procure the required • Warehouse
materials. If the buyers are not very sure of
whom to approach, then a tender process • Finance
is initiated to identify the supplier, price Types of Purchases
and lead time.
Purchase can be classified into four
Purchase order - After identifying the categories:
supplier, the next step is to despatch the
purchase order to the supplier. The
purchase order includes information on • Routine commodity
the items to be procured and the quantity
and the price negotiated. The purchase • Bottleneck
order also specifies the delivery address
• Leverage
and terms and conditions related to the
order. • Strategic Purchase

Fulfilment - In this step, the supplier Routine commodity - Routine commodity

despatches the materials to the buyers. includes many standard items with low
The supplier might require lead time to price. For example, stationery, food items,
manufacture the materials or to receive fuel and so on are the routine
deliveries from their own suppliers. commodities. These commodities are
readily available in the market. Many
Goods receipt - In this step, the goods that
suppliers compete in the market by
are received from the supplier undergo the
offering the lowest possible prices for
receipting process wherein, the goods are
Supply chain Management

these commodities. The routine more efficient operations with lower unit
commodities have many purchases and costs and overheads. In turn, suppliers
hence they use a disproportionate amount must provide a high level of services that
of administration. Therefore, the focus of include managing on-site stocks, delivering
purchasing here is to minimise the the items within the specified time and
overhead costs by standardisation, flexibly responding to changing
consolidation of purchases and conditions..
substitution of standard products.
Strategic - Strategic purchasing occurs
Bottleneck - Bottleneck occurs when a when there are unique and expensive
single supplier is the only source of items that are very important for a
providing materials required by a company company’s success. Few specialised
that has stringent specifications and no suppliers sell such items. For example,
other suppliers can provide those certain chemicals, cutting edge
materials. technology, aero engines, etc., are some of
the critical items that very few specialised
For example, consider a company
suppliers sell. With such small number of
producing scanners which has strict
suppliers in the market, the purchasing
specifications for components used in the
activity tends to develop long term
scanner. This company purchases
relationship between a company and a
components from a specific supplier.
supplier. This in turn develops the
Though such materials are not expensive,
suppliers’ capabilities and thus provides
the unique specification limits the number
benefits to both the purchasing
of suppliers. Here, the suppliers who sell
organisation and suppliers.
these items have a dominant position and
they certainly exploit the purchasers. A
company can control this by changing the
specifications thereby allowing new
suppliers to partner with, moving to
standard products or scanning the market
for additional suppliers. In the above Purchasing strategies
example, if the company producing
scanners changes the specifications of the The four levels of strategic decision include
components to generic, then they can the following:
search new suppliers who provide those • A mission or vision - This level
components at a better price.
provides a definite statement of an
Leverage – organisation’s aim. It specifies what an
organisation plans to achieve in the
Leverage occurs when there is medium-to- long run.
high expenditure. In this kind of purchase,
many suppliers are involved in limiting the • A corporate strategy - This level adds
supply risk. The items purchased are of details to the mission. It shows the
industry standards that are used by every method in which an organisation
department in any organisation. This type achieves its mission.
of purchase involves combining • A business strategy - This level
requirements of each department,
determines the method in which each
negotiating a deal with a few suppliers and
business unit competes within an
ensuring significant business over an
extended period. Here, the suppliers gain
Supply chain Management

organisation to create a broader is 10% more than last year, however 5%

corporate strategy. less than the main competitor.

• A functional strategy - This level • Specificity - Sometimes a company’s

determines the method in which each objective is different from its goal. It is
of the major functions within a difficult to manage an objective which
business contributes to the business says “we will give the best customer
strategy. satisfaction” when compared to a
specific goal which says “we will
• These four strategies work together to
reduce complaints by 2% by the third
achieve the organisation’s overriding
quarter”.
aims. A purchasing strategy provides a
long term direction of purchasing, thus Time frame – An objective must be
directing an organisation to achieve its achieved within the specified time frame.
broader aims. In this case, the goal is achieved within the
specified time frame, whereas an objective
does not have a timescale. A company can
have an objective of becoming the market
leader and a goal of increasing market
share by 9% this financial year.

• Focus - A focus can be directed to the

external business environment or can
be directed to the internal business
environment, which is generally based
on the way resources are used. For
example, a company focuses on
external business environment when it
The business objectives generally include says, “we will be one of the two largest
four features. They are: providers of toothpaste” and focuses
on internal resources when it says, “we
Measurement - Quantitative aims are
will invest 5% of revenue in new
much easier to manage than the
technology”.
qualitative aims. With quantitative aims,
you can measure performance and plot • To design a purchasing strategy, you
progress whereas with qualitative aims need to analyse the business
you can only estimate based on your objectives from a purchasing
opinion. perspective. This involves a procedure
which is briefly described in the
For example, even if you know that the
following five steps:
value of your shop is Rs.25000 a square
metre, you may not know the performance • 1. Analyse the purpose of the
of your shop. Comparatively, the relative business - Analyse the set of
measures help to distinguish the objectives, procedures, performance
performance with the market. For measures and so on. This step defines
example, you can compare your shop’s the broad objective that purchasing
performance with the competitors’ should achieve.
performance. Through relative measure,
• 2. Analyse the purchasing function -
you may notice that the sales of your shop
Analyse the demand on its services,
Supply chain Management

state of operations and capabilities of External Environment and Purchasing

operations. This step describes the Strategies
internal feature of the procurement
Purchasing strategy defines goods and
function.
services that can be purchased with a
• 3. Analyse the environment in which specified amount of money. It is an
the procurement function works - important economic consideration while
Analyse the details of the organisation evaluating cost and standard of living in
including customers, competitors and different countries.
economic conditions, particularly the
The following are some of the external
opportunity and threats.
factors that influence the purchasing
• 4. Design the supply strategy - strategy.
Determine the design policy and
• Prices
analyse the future state of
procurement. This helps the company • Real Income
to move from its present state to the
desired future state. There are many • Tax rate
strategies that help the function to • Exchange rates
move forward. Managers need to
compare and select the best strategy. Thus, before considering the purchasing
strategies, it is important for a purchaser
• 5. Implement the result - Make to know the current environmental
appropriate decisions through all conditions. The purchasing department
levels of function, check the progress must learn to anticipate and respond to
and make adjustments. any of the given situation.
Vendor Relationship Management Supplier Evaluation
VRM is a set of tools, software and services Suppliers are the middlemen between the
that help organisations to manage their manufacturers and retailers. Thus it
vendor relationship. Vendors who adapt to becomes very important to select suppliers
these tools, software and services build a who are capable of bringing value change
better relationship with their customers. to the company and its business. The
VRM enables the buyers and sellers to suppliers should be such that they are
build beneficial relationship, so that they more customer-driven and fulfil the
help each other to gather, store, share and expectations of the customers.
utilise the material/information that they Supplier selection, development, and
need to have an effective place in global integration are strategic initiatives which
market. are considered as a part of company's
With VRM, the purchasing companies can overall competitive strategy. This strategic
have control over the purchasing process. approach to procurement combines
Purchasers can reduce the purchasing internal core competencies with external
costs, increase vendor benefits and reduce capabilities. In addition, it also combines
costs of the purchased products. The main the technologies to maximise overall
aim of VRM is to free purchasers from the corporate and supply chain
control of vendors. competitiveness. To achieve these
objectives a company must determine its
current and future capability, technology,
Supply chain Management

and capacity needs. It should also map The mode of transport consists of the type
them against its current capabilities and of transport used. Each mode has different
then assess whether the resulting gaps can characteristics, and the best in any
be best filled through internal particular circumstances depends on the
development, acquisitions, or outside type of goods to be moved, locations,
suppliers. distance, value and a whole range of other
criteria.
Criteria for Supplier Evaluation
Different modes of transportation:
The general criteria for selecting suppliers
may be classified as follows: • Air Transportation

• Price - Price difference or deviation, • Surface Transportation

Discount on quantity.
• Water Transportation
• Quality - Percentage rejections,
• Intermodal Transportation
inspection methods and plans,
availability of testing equipment, • 1. Air transportation
warranty claims, adherence to total
quality management concept. • It is one of the most efficient modes of
transportation.
• Delivery - Cost of transportation,
variation in quantity, flexibility, • Air carriers offer a very fast and
frequency expensive mode of transportation.
Airlines carry a significant amount of
of delivery, reliability of delivery. freight, for products where speed of
delivery is more important than the
• Services - Service flexibility,
cost. In practise, this limits airfreight to
negotiation in price, guarantee
fairly small amounts of expensive
assurance, services given after sales,
materials. Perhaps the most common
availability of spare parts.
movements are documents and parcel
It is important to consider all the points delivery, with carriers such as Federal
while selecting suppliers. Express, Blue Dart, etc. There are few
key issues faced by airlines such as
Transportation
identifying the viable routes and
The movement of goods from one place to number of hubs, assigning planes to
another within a supply chain is known as routes, setting up maintenance
transportation. It starts from the beginning schedules for planes, scheduling
of a supply chain and ends when the crews, and managing prices and
product reaches the hands of the availability at different places.
customer. With the increasing
• Hence, even though it is expensive to
globalisation in supply chain and growth of
use this mode of transportation, it
e-commerce, the importance of
reduces the travel time from days to a
transportation has grown tremendously.
few hours. The trade-off here is
This is because the supply of products is
between money and time.
now needed for distant places. And
transportation decisions in a supply chain 2. Surface transportation
affect the profitability and influence both
• It is another basic mode of
facility and inventory decisions within a
transportation where road is the
supply chain.
Supply chain Management

medium of transport. This mode can trucks bring in many small loads
be divided into truck, rail, and pipeline. destined for the same geographic
area.
• Trucks
Larger firms enjoy the advantage in LTL
• Rails
industry given the importance of fixed cost
• Pipelines and setting up consolidation centres. Some
of the key issues of the LTL industry are
• Package carriers location of consolidation centres, assigning
Truck loads to truck, and scheduling and routing
of pickup and delivery. The objective is to
Trucks are the commonly used minimise costs through consolidation
transportation system within a State, without disturbing delivery time and
between States, or sometimes across the reliability.
country.
Rail
The trucking industry is divided into two
major segments – Truck Load (TL) and Less- Railway services are considered as the
Than-Truckload (LTL). Trucking is more ideal mode for carrying large, heavy, or
expensive than railway, but offers more high-density products over long distances.
benefits, such as door-to-door shipment This is because of the price structure and
and shorter delivery time. Another major the heavy load capability. However,
advantage of trucking is there is no transportation time by railways can be
requirement of transfer between pickup long. Therefore, railway is suitable for
and delivery. time-insensitive and heavy weight
shipments. For example, coal is a major
TL shipping is best suited for part of railway shipments.
transportation between manufacturing
facilities and warehouses or between In India, some of the key issues of railway
suppliers and manufacturers. services include vehicle and staff
scheduling, track and terminal delays, and
• LTL processes are mostly encouraged poor on-time performance. Railway
in small lots. These are usually less performance is impaired by the large
than half a TL. This is because TL tends amount of time taken at each transition.
to be cheaper for larger shipments. The travel time is usually a small fraction of
Prices are considered both on the the total time for each shipment.
quantity shipped and the distance
travelled. On-time performance of railway services
can be improved by scheduling the trains
• LTL shipments take longer time than TL instead of congesting all of them. To
shipments because of other loads that improve this on-time performance, a more
need to be picked up and dropped off. sophisticated pricing strategy that includes
• LTL shipping is advantageous when revenue management needs to be
the quantity of small packages is large, instituted for scheduled trains.
but constitutes less than half a TL. Pipeline
• The carriers reduce the consolidation Here, huge pipes are laid down (below the
of the loads in turn reducing the LTL ground or on the ground or on sea bed)
costs. There are many consolidation between a manufacturing plant and a
centres used by LTL carriers to which delivery point to transport fluids and
Supply chain Management

gases. Any chemically stable substance can routing (explained in later sections) of the
be transported through a pipeline. delivery trucks.

Pipelines have the advantage of moving 3. Water transportation

large quantities over long distances.
It includes cargo ships, oil tankers, and so
Unfortunately, they have the
on. It is ideally suited for carrying heavy
disadvantages of being inflexible (only
loads at low cost. In most of the countries,
transporting between fixed points), and
it is the cheapest mode for carrying such
only carrying large volumes of certain
loads. Water transport is the slowest of all
types of fluid. In addition, there is the huge
the modes of transport and significant
initial investment of building dedicated
delays might occur at ports and terminals.
pipelines. Despite this initial investment,
Therefore, short-haul trips are difficult in
pipelines are the cheapest way of moving
water transport, but Japan and some parts
liquids – particularly oil and gas – over long
of Europe use it on a daily basis.
distances.
Water transport system is limited to areas
Package carriers
that have good infrastructure and good
They are transportation companies which economic conditions.
carry small and time-critical packages.
The cost involved in building port
These carriers use airlines, trucks, and
infrastructure and maintaining is high. This
trains to transport packages.
increases the terminal cost of the
They offer customers rapid and reliable transportation. Because of this, the
delivery. waterways are preferred only for high
quantity goods transport like steel and
They also render many other value-added
petrochemicals.
services that speed inventory flow and
track order status. Tracking order statuses There are basically three types of water
help the carriers to inform customers at transport –
the earliest about their packages. They
• rivers and canals (usually called inland
also pick up packages from the origin and
waterways),
deliver it to the destination. There is lot of
demand for package carriers with the • coastal shipping (moving materials
increase in Just-In-Time (JIT) deliveries and from one port to another along the
focus on inventory reduction. Package coast)
carriers are always preferred for e-
Business transports. For example, Dell • ocean transport (across the major
sends all its small packages through seas)
package carriers. With the growth in e- • Rivers and canals
Business, there is also a significant growth
in the use of package carriers. Most of the • Coastal shipping
times package carriers are considered over • Ocean transport
air especially where tracking and other
value-added services are important to the • Water transport is usually used for
shipper. Consolidating the shipments international trades. It is used in
decreases the cost of package carriers. But situations where the manufacturer is
for the final delivery to a customer, an in one part of the world and the
important consideration is scheduling and customer is in the other part.
Transporting goods in bulk in this way
Supply chain Management

reduces the cost of transport for the involves ships and trains is beneficial
customer, but with some delay in the to the environment because of
delivery of goods. reduced emission of carbon dioxide
into the atmosphere.
• Another advantage of using water
transport is that it is much cheaper for • Hence, intermodal transportation is
a customer as compared to air the most timely, efficient, cost
transport. But if there are any effective, and environmental friendly
accidents, it not only results in a huge mode of transportation.
loss but also pollutes the water,
Factors Affecting Transportation
endangering the marine life.
Decisions
• Water transport often gets affected by
Decisions such as, which carrier to choose,
weather conditions. High fuel
which mode of transportation to be used,
consumption could add up as a
and so on form the transportation
disadvantage.
decisions in supply chain management.
• Intermodal transportation Making such decisions is not easy as it
requires the knowledge of the market,
• It is a combination of at least two or
experience in the field, and other factors.
more modes of transportation. For
example, a manufacturer using water The two major factors that affect
transport to ship goods from one transportation decisions are:
country to another, and then using the
• Carriers
road transport to get the goods to a
customer. • Customers
• It is one of the most important modes • Carriers
of transportation as it becomes
essential in situations where one mode • These are the companies or vendors
of transportation is not enough. When who transport goods from the origin to
there are more than two modes of the destination. Different carriers
transportation involved, it is called a charge different costs. One carrier may
multimodal transportation. give the required service for a low cost
when compared to another carrier.
• This mode of transportation takes a lot But the quality provided may be low as
of work to set up. This is because there well.
has to be proper coordination among
the different modes of transportation • It is important to research the local
and their coordinators. The different market to learn the different types of
modes have to be connected to each services provided by different carriers,
other to allow smooth flow of work. and then select the carrier that
provides the best service.
• The cost involved in employing
intermodal transportation is less as • This factor can be further divided as
compared to other modes.
Fluctuations in the prices rarely occur
unlike in the other modes.

• It is also proved by experts that using

intermodal transportation which
Supply chain Management

Vehicle related cost administrative costs, and so on. This

cost is not directly connected to the
• It is the cost involved in maintaining
service provided, but is needed
the vehicle used for transportation
indirectly to provide and maintain the
throughout the trip. This may vary
service. Each carrier has different
from carrier to carrier and the type of
overhead costs depending on the
vehicle used for transportation.
carrier.
Transportation of small quantity of
goods in small vehicles costs more Customers
when compared to mass
• Another factor that affects the
transportation. Hence, bigger vehicle
transportation decisions is the shipper,
with large quantity of goods provides
the party that requires the goods to be
more cost-effective service.
transported from the origin to the
Fixed operating cost destination.

• It is the cost that is fixed for every • This factor can be further divided as:
service provided by a carrier. This
again varies from carrier to carrier and
the type of service offered. Here, you
get quotes from different carriers and
then you can choose on the cost-
effective and useful carrier.
Transportation cost
Trip related cost
It is the cost involved in the transportation
• It is the cost involved in one trip from of goods from a source to the destination.
the origin to the destination of the A customer first thinks of this cost when
transportation. If it is long distance planning for transportation. If a carrier
transportation, the trip related cost charges too much for just the
will be high. Each carrier will have a transportation, the customer may think of
different trip related cost. Hence, it going to another carrier. This is one of the
again varies on the needs and the most important factors in transportation.
carrier chosen.
Inventory cost
Quantity related cost
It is the cost involved in holding the goods
• It is the cost involved for transporting in storage. This can become the most
a standard quantity of goods. This cost expensive part of transportation for a
depends on the quantity of goods that customer, because the rent for big
you have to transport. Here, the cost is warehouses is usually high. If there is delay
fixed for a standard quantity and in transportation, the customer has to
calculated for your quantity store the goods for the extended duration.
accordingly. This cost may sometime This is an added expenditure to the
depend on the nature of the good as customer, which is not appreciated.
well. Hence, if a supplier does not provide the
Overhead cost services in time, the customer may change
the decision and move to another carrier.
• It is the cost that is indirectly related to
the services offered. This includes the Facility cost
rent of an office building,
Supply chain Management

It is the cost involved in maintaining the anything else that can transport some kind
factory, or the workspace of the carrier. of goods.
This includes the cost involved in
The design of a transportation network is
maintaining the facility, the tools used, and
related to the configuration of the
to ensure that the facility is in proper
network, and is calculated and designed to
working condition. Facility cost has nothing
achieve optimum efficiency.
to do with the transportation of goods, but
is added to the service cost provided by the There are two options for the design of a
carrier. Facility cost varies from carrier to transportation network
carrier.
- continuous network design
Processing cost
- discrete network design.
It is the cost involved in direct labour used
in the service. Some carriers calculate Conventional network designs were
processing cost as the sum of costs of designed to lower the cost of the
direct labour and factory overhead. This transportation system. But now, even
varies from carrier to carrier. Hence, the though it is very important, there are other
customer has to decide which carrier is factors that share the importance.
more affordable. Traffic assignment
Service levels and fast delivery It is the process of assigning a set of trip
Service levels are the different levels into interchange data to a specified
which a service is divided. Different levels transportation system. The vehicular
have different offerings and the cost also movements that may be observed when
varies. The highest level has the highest demands in the trip matrices are satisfied
cost. Similarly, fast delivery is usually a are reproduced here.
premium service. If a customer wants the The major aims of traffic assignment are
goods to be delivered quickly, the supplier to:
has to pay more. Each carrier has different
levels of services and different costs for • estimate the volume of traffic on a
fast delivery. network.

Thus, both carriers and customers always • estimate cost between the origin and
have to do a lot of research on these destination of a trip.
factors before choosing the best service • obtain average network measures,
that satisfies their needs. such as total distance covered, total
Design Options for a Transportation time taken, and so on.
Network • estimate travel cost and time for a
Transportation network is a network of zone-to-zone trip.
routes available in a particular area that • obtain link flows and identify the
can be used to transport goods. Each mode congested links.
of transportation will have its own
transportation network. A general • estimate routes to be used between
definition of a transportation network can each origin-destination (O-D) pair.
be given as a network of roads, rail roads,
• analyse each O-D pair that uses a
water ways, canals, streets, pipes or
particular path or link.
Supply chain Management

• obtain turning movements for future transportation mode has its own
junction designs. advantages and disadvantages. Let us see
how choosing a transportation mode leads
Tradeoffs in Transportation Design
to a trade-off.
Designing a transportation network is a
Choosing a transportation mode is both an
challenging task. With so many options
operational decision and a planning
and factors to consider while designing,
decision. When a shipper has to decide
there may be cases when you need to
which carrier to select, this becomes a
trade-off one factor in favour of another.
planning decision. When a shipper has to
While making a decision, shippers have to decide a mode of transportation for a
consider the impact of the decision on the particular shipment, this becomes an
inventory costs, costs of cooperating operational decision.
operations, processing costs, facility costs,
Low cost mode of transportation means
and the customer service provided.
the quantity involved is high, such as
Shippers evaluate the different modes of railway transportation. This may not lower
transportation and the costs involved in the total cost involved in the supply chain.
them before finalising. They also evaluate Similarly, when the quantity to be
the revenue that may be generated by transported is less, the cost for this
implementing a particular decision, becomes high.
without compromising on any of the
If the value-to-weight ratio of a shipment
aspects mentioned.
is high, reducing the inventories becomes
The following tradeoffs need to be important. Hence, faster modes of
considered while making transportation transportation are preferred. If the value-
decisions: to-weight ratio of a shipment is low,
reducing the cost of transportation
1. Transportation and inventory cost trade- becomes important. Hence, cheaper
off. modes of transportation are preferred.
2. Transportation cost and customer Factors such as safety and in-transit
responsiveness trade-off. inventory costs are also important. The
1. Transportation and inventory cost performance of a supply chain can degrade
trade-off if inventory costs are ignored in
transportation decisions.
The trade-off between transportation cost
and inventory cost is one of the significant Inventory aggregation
tradeoffs in a supply chain. Inventory aggregation is an approach
There are two decisions involved in this where the entire inventory is aggregated in
trade-off, which are as follows: one or very few locations. Usually, the cost
of transportation increases if inventories
• Choice of transportation mode are aggregated in one location and the
• Inventory aggregation transportation is to a wider geographical
area. On the other hand, if the inventories
Choice of transportation mode are highly disaggregated, aggregating
them may reduce the cost of
This transportation mode plays a very
transportation by some percentage.
important role in the transportation
decision making. Hence, each
Supply chain Management

Usually, as the degree of aggregation Temporal aggregation of demands in a

increases, the cost of transportation also limited amount reduces the cost of
goes up. Inventory aggregation is transportation effectively. This trade-off
suggested when the inventory cost and the may lead to loss of revenue due to poor
facility cost is a large percentage of the customer responsiveness.
total supply chain cost. It is also suggested
Hence, it is very important to balance the
for high value-to-weight ratio, and when
temporal aggregation of demands and the
the demand of inventory is high.
customer responsiveness to reduce both
Hence, it is important for a shipper to the cost of transportation, and loss of
understand the transportation cost and revenue due to poor customer
inventory cost trade-off before making a responsiveness.
transportation decision.
Routing and Scheduling in Transportation
2.Transportation cost and customer
In any business that involves transporting
responsiveness trade-off
goods from one point to another, the
The trade-off between transportation cost efficiency of transportation is important.
and the customer responsiveness is Good efficiency requires good planning.
another significant trade-off in the supply Routing and scheduling are a part of this
chain. Unlike the trade-off between plan.
transportation and inventory costs, this
Routing is the process of finding the best
trade-off involves both the carrier and the
routes that cover all the required delivery
customer.
points. Scheduling is the process of
This concept employs temporal analysing the traffic and traffic signal
aggregation demand, which is aggregating changes in these routes, and calculating
the demands, or orders, for a few days the timing of vehicle movements.
before shipping the products. This is
Routing and scheduling approaches have
practised because if demands are
been researched and analysed by industry
aggregated, inventories are aggregated;
experts for a long time. Some of these
which leads to a reduction in the cost of
techniques are still used today.
transportation to a same location.
These techniques can be divided as
This reduces customer responsiveness
follows:
directly. If the demands are aggregated
over a large number of days, there is a • Heuristic approach
delay in the shipping of goods. This delays
the delivery of goods to the customer, • Exact approach
hence making the customer unsatisfied. • Interactive approach
It takes proper analysis to decide what is • Combination approach
the time required for the transportation of
a product to a particular location, and for 1. Heuristic approach:
how many days the demands can be • This approach is learnt and mastered
aggregated. If there is no aggregation of by experience and self learning. These
demands at all, the transportation cost are not proved or supported by any
increases as the cost of transporting small mathematical theories or postulates.
quantity of goods is high.
• People who are experienced in the
field take up this approach by adding
Supply chain Management

and removing stops from the route • The decision maker then evaluates
sequentially. These approaches are these alternatives. The decision maker
sometimes used by others as a thumb also refines the alternatives until a
rule. point where no further optimisation is
likely. The only drawback of this
2. Exact approach
approach is that the decision maker
It is also known as Optimal approach. Exact has the complete responsibility of
approach use mathematical programming. making the right decision. This is a
Computers are used for all the calculations problem when the calculations are too
involved in routing and scheduling. In the complex.
past, these calculations were very complex
4. Combination approach
even for fast computers. But today,
mathematical programming has advanced • These are a combination of heuristic,
with some new calculation techniques. exact, and interactive approaches. This
This has led to easy computation. combination works well in most cases.
There are two criteria used here to
There are two basic difficulties in most of
evaluate alternate solutions. These
these calculations. These are as follows:
criteria are generalisability and
• A basic routing and scheduling accuracy.
problem requires a large number of
• Generalisability is the ability to make
variables and constraints.
extensions in special situations
• The storage space and the time efficiently. These extensions include
required for calculation are high. pickup and deliveries, time windows,
multiple depots, legal driving times,
3. Interactive approach: and vehicle capacities. Accuracy is the
• This approach use tools like ability to estimate performance
simulation, cost calculation, and characteristics.
graphics. The decision making process • This approach focuses on time and
here is interactive, in the sense that money saving as a result of decreasing
the decision maker has a lot of options vehicle operating expenses, giving
to consider. The decision maker has to better services to customers, and
identify the different options, or improving productivity in fleet
alternatives, to evaluate the results. management.
The interactive decision support
system is designed to calculate the
performance characteristics.

• The decision support system uses

advanced technologies such as Global
Positioning System (GPS) to find the
shortest routes between two points.
The decisions are therefore considered
to be more accurate than the other
approaches. The decisions produced
by this system will be based on time
and cost.
Supply chain Management