Reading Material

Unit 1 Supply Chain Management & Logistics

INTRODUCTION TO LOGISTICS

LOGISTICS: CONCEPT, DEFINITION, ORIGIN AND EVOLUTION

Logistics management is the part of the supply chain process that plans, implements, and controls the
efficient, effective flow and storage of goods, services, and related information from the point of origin to
the point of consumption to meet customer requirements.

Logistics management may be defined as follows:

According to the Council of Logistics Management, logistics can be defined as “that part of supply chain
process that plans, implements and controls the efficient, effective flow and storage of goods, services and
related information from the point of origin to the point of consumption”.

Logistics Management is an all-inclusive term that encompasses both planning and execution of four key
aspects of logistics, i.e. transportation, distribution, warehousing and purchasing. Another pertinent factor
that logistics management takes into account is the flow of goods in forward and reverse order.

Logistics management consists of the process of planning, implementing and controlling the efficient flow
of raw-materials, work-in-progress and finished goods and related information- from point of origin to
point of consumption; with a view to providing satisfaction to the customer.

Origin and Evolution:

• Years 30 “Military logistics”

After the Second World War, the interest of business by the logistics process arises and an analogy is
established between military logistics and technical material supply and military logistics is begun to be
related to industrial production.
• Years 50 “Conceptualization of logistics”

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Logistics becomes more important due to the transition that goes through the most developed countries,
from an economy characterized by excessive demand to an economy with excess supply, with these
being their main characteristics:
• First developments of the total cost of logistics operations.
• It focuses on the concern to satisfy the customer.
• Distribution channels are of particular importance. You want to sell any product anywhere.
• Increase new products, as a result the product lines are originated.

• 60 Years “Outsourcing”
Logistics took a new approach where “outsourcing” was the most appropriate mechanism to reach
customers, since it had as its main objective the subcontracting of other companies because the flow of
goods or information was efficient and reached all parts that were within the reach of the company.

• Years 70 “The concept of trial logistics”

• Customer service becomes an indispensable requirement to continue competing with market
leaders.
• Progress in the concept of physical distribution.
• There are periods of recession and growth in the world economy.
• Development of the inventory management strategy.
• The technology for the industrial revolution that occurred during these times began to emerge, and
the cost of information technology was reduced to improve the quality, which brought about an
improved mechanism for the supply of the goods Or information accurately and precisely at the
time the customer made their order, this mechanism is called “Just in Time”, that is just in time

• Since the 80’s “Modification of preferences”

• The energy crisis of the moment drives the movement towards the improvement of transport and
storage.
• Just in Time’s approach was modified by Quick Response (QR) and Efficient Consumer Response
(ECR) with the sole purpose of seeking a precise delivery with the exact amount, when and where
needed, to meet To the customer.
• Changes in supply chain preferences where special attention is paid to suppliers, distributors and
customer service, defining the end-user’s demand.
• Inventories, total logistics costs are reduced, and delivery times are shorter.
• Logistics operations are energy-intensive: environmental-ecological concern is born.

• 1990 “Promotion of logistics”

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 Logistics went on to become a more integrated process in terms of its external and internal
environment, in other words, its internal processes within the company were managed according to the
relationships that were with its customers and suppliers.
This process of integration causes logistics management to begin with a strategic plan regarding the
design of how to reach the final customers, in order to go out and minimize competition, establishing
efficient plans for the supply of the products.
• Technology continues to position itself in conventional Logistics processes and
Distribution channels
• Outsourcing services
• Demand for logistics services expands
Day by day it is observed that to put into practice a good business logistics management is essential, it
has developed over time and is now a basic aspect. A perfectly designed logistics project is the most
strategic tool to compete with the demanding current market, achieving customer loyalty.

Classification of Logistical Activities:

Logistics (or Logistical Activities) may be broadly classified into two categories:
I. Inbound logistics; which is concerned with the smooth and cost effective inflow of materials and
other inputs (that are needed in the manufacturing process) from suppliers to the plant. For proper
management of inbound logistics, the management has to maintain a continuous interface with suppliers
(vendors).

II. Outbound logistics (also called physical distribution management or supply chain management);
is concerned with the flow of finished goods and other related information from the firm to the
customer. For proper management of outbound logistics, the management has to maintain a continuous
interface with transport operators and channels of distribution.

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Significance (or Objectives) of Logistics Management:
Logistics management is significant for the following reasons:

(i) Cost Reduction and Profit Maximization:

Logistics management results in cost reduction and profit maximization, primarily due to:
1. Improved material handling
2. Safe, speedy and economical transportation
3. Optimum number and convenient location of warehouses etc.
(ii) Efficient Flow of Manufacturing Operations:
Inbound logistics helps in the efficient flow of manufacturing operations, due to on-time delivery of
materials, proper utilization of materials and semi-finished goods in the production process and so on.
(iii) Competitive Edge:
Logistics provide, maintain and sharpen the competitive edge of an enterprise by:
1. Increasing sales through providing better customer service
2. Arranging for rapid and reliable delivery 3. Avoiding errors in order processing;
and so on.

(iv) Effective Communication System:

An efficient information system is a must for sound logistics management. As such, logistics
management helps in developing effective communication system for continuous interface with
suppliers and rapid response to customer enquiries.
(v) Sound Inventory Management:
Sound inventory management is a by-product of logistics management. A major headache of production
management, financial management etc. is how to ensure sound inventory management; which
headache is cured by logistics management.

FUNCTIONS OF LOGISTICS:
Logistics is a process of movement of goods across the supply chain of a company. However, this
process consists of various functions that have to be properly managed to bring effectiveness and
efficiency to the supply chain of the organization.

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• Order Processing: Customers’ orders are very important in logistics management. Order
processing includes activities for receiving, handling, filing, recording of orders. Herein, management
has to ensure that order processing is accurate, reliable and fast. Further, management has to minimize
the time between receipt of orders and date of dispatch of the consignment to ensure speedy processing
of the order. Delays in execution of orders can become serious grounds for customer dissatisfaction;
which must be avoided at all costs.
• Inventory Management: The basic objective of inventory management is to minimize the amount
of working capital blocked in inventories; and at the same time to provide a continuous flow of
materials to match production requirements; and to provide timely supplies of goods to meet customers’
demands.
• Warehousing: Warehousing is the storing of finished goods until they are sold. It plays a vital role
in logistics operations of a firm. The effectiveness of an organization’s marketing depends on the
appropriate decision on warehousing. In today’s context, warehousing is treated as switching facility
rather than a storage of improper warehousing management. Warehousing is the key decision area in
logistics.
The major decisions in warehousing are:

Location of warehousing facilities

Number of warehouses
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 Size of the warehouse
Warehouse layout
Design of the building
Ownership of the warehouse

• Transportation: For movement of goods from the supplier to the buyer, transportation is the most
fundamental and important component of logistics. When an order is placed, the transaction is not
completed till the goods are physically moved to the customer’s place. The physical movement of goods
is through various transportation modes. In logistics costs, its share varies from 65 to 70 percent in the
case of massconsumed, very low unit-priced products. Firms choose the mode of transportation
depending on the infrastructure of transportation in the country or region. Cost is the most important
consideration in the selection of a particular mode of transport. However, sometimes urgency of the
good at the customer end overrides the cost consideration, and goods are sent through the fastest mode,
which is an expensive alternative.
• Material Handling and storage system: The speed of the inventory movement across the supply
chain depends on the material handling methods. An improper method of material handling will add to
the product damages and delays in deliveries and incidental overheads. Mechanization and automation
in material handling enhance the logistics system productivity. Other considerations for selection of a
material handling system are the volumes to be handled, the speed required for material movement and
the level of service to be offered to the customer. The storage system is important for maximum space
utilization (floor and cubic) in the given size of a warehouse. The material handling system should
support the storage system for speedy movement (storage and retrieval) of goods in and out of the
warehouse.
• Logistical Packaging: Logistical or industrial packaging is a critical element in the physical
distribution of a product, which influences the efficiency of the logistical system. It differs from product
packaging, which is based on marketing objectives. However, logistical packaging plays an important
role in damage protection, case in material handling and storage space economy. The utilization of load
has a major bearing on logistical packaging with regard to the packaging cost.
• Information: Logistics is basically an information-based activity of inventory movement across a
supply chain. Hence, an information system plays a vital role in delivering a superior service to the
customers. Use of IT tools for information identification, access, storage, analysis, retrieval and
decision support which is vital among the functions of logistics is helping business firms to enhance
their competitiveness.

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Logistics has gained importance due to the following trends  Rise in
transportation cost.
• Production efficiency is reaching a peak
• Fundamental change in inventory philosophy
• Product line proliferated
• Computer technology
• Increased public concern of products growth of several new, large retail chains
• Reduction in economic regulation
• Growing power of retailers
• Globalization

OBJECTIVES OF LOGISTICS:
The General objectives of the logistics can be summarized as:
1. Cost reduction
2. Capital reduction
3. Service improvement
The specific objective of an ideal logistics system is to ensure the flow of supply to the buyer, the:
Right product
Right quantities and assortments
Right places
Right time
Right cost / price and,
Right condition
This implies that a firm will aim at having a logistics system which maximizes the customer service and
minimizes the distribution cost. However, one can approximate the reality by defining the objective of
logistics system as achieving a desired level of customer service i.e., the degree of delivery support given
by the seller to the buyer. Thus, logistics management starts with as curtaining customer need till its
fulfillment through product supplies and during this process of supplies it considers all aspects of
performance which include arranging the inputs, manufacturing the goods and the physical distribution of
the products.
Supply Chain
 A supply chain is a system of organisations, people, technology, activities, information and
resources involved in moving a product or service from supplier to customer.
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 A supply chain is a network of retailers, distributors, transporters, storage facilities, and suppliers
that participate in the production, delivery and sale of a product to the consumer.
 These activities are associated with the flow and transformation of goods from the raw materials
stage to the end user, as well as the associated information and funds flows.
 Supply chain activities transform natural resources, raw materials and components into a finished
product that is delivered to the end customer.
 In simple terms, a supply chain is the link between a firm or business and its suppliers and
customers

 The supply chain, which is also referred to as the logistics network,• consists of suppliers,
manufacturing centres, warehouses, distribution centres, and retail outlets, as well as raw
materials, work-in-process inventory, and finished products that flow between the facilities.
A supply chain has three key parts:
 Supply which focuses on the raw materials supplied to manufacturing, including how, when, and
from what location.
 Manufacturing which focuses on converting these raw materials into finished products.
 Distribution which focuses on ensuring that the products reach the consumers through an
organised network of distributors, warehouses, and retailers.

 A supply chain encompasses all activities in fulfilling customer demands and requests.
 In sophisticated supply chain systems, used products may re-enter the supply chain at any point
where residual value is recyclable.
 A supply chain strategy refers to how the supply chain should operate in order to compete in the
market. The strategy evaluates the benefits and costs relating to the operation. The supply chain
strategy focuses on the actual operations of the organisation and the supply chain that will be used
to meet a specific goal.
 The supply chain integrates, coordinates and monitors the flow of materials, information, and
funds.

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Supply Chain Management
 Supply chain management (SCM) is the oversight of materials, information, and finances
distributed from supplier to consumer. The supply chain also includes all the necessary stops
between the supplier and the consumer. Supply chain management involves coordinating this flow
of materials within a company and to the end consumer.
 The Council of Supply Chain Management Professionals defines supply chain management as
follows: “Supply chain management encompasses the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics management activities”.
Importantly, it also includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain
management integrates supply and demand management within and across companies.
 Supply chain management is an integrating function with primary responsibility for linking major
business functions and business processes within and across companies into a cohesive and high-
performing business model. It includes all of the logistics management activities noted above, as
well as manufacturing operations, and it drives coordination of processes and activities with and
across marketing, sales, product design, and finance and information technology.
 SCM is also called the art of management of providing the right product, at the right time, right
place and at the right cost to the customer.
 Supply chain management can be divided into three main flows:
 The Product flow includes moving goods from supplier to consumer, as well as dealing
with customer service needs.
 The Information flow includes order information and delivery status.
 The Financial flow includes payment schedules, credit terms, and additional arrangements.
 Supply chain management is a set of approaches utilised to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right
quantities, to the right locations, and at the right time, in order to minimise system-wide costs
while satisfying service level requirements.
Objective of Supply Chain Management

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 A supply chain is a global network of organisations that cooperate to improve the flows of material
and information between suppliers and customers at the lowest cost and the highest speed. The
final objective of a supply chain is customer satisfaction.
 The supply chain management takes into consideration every facility that has an impact on cost
and plays a role in making the product match to customer requirements: from supplier and
manufacturing facilities through warehouses and distribution centres to retailers and stores.
 The main purpose of the supply chain is to maximise overall value generated. Value is the
difference between what the cost supply chain incurs and the worth end product has to the
customer. Value of the commercial supply chain is correlated with its profitability generally known
as supply chain surplus.
 Supply chain surplus can be defined as the total profit shared by all the stages and intermediaries
of a supply chain. The greater the supply chain surplus the more successful is supply chain. But,
Supply chain success is measured by its overall surplus not by the profit at each stage.
 The supply chain management has to be efficient and cost-effective across the entire system; from
transportation and distribution to inventories of raw materials, work in process, and finished
goods, are to be minimized. The emphasis is not on simply to minimise transportation cost or
reducing inventories but, rather, on taking a systems approach to supply chain management.
 The objectives of supply chain management can be listed below:
 enhancing customer service
 expanding sales revenue
 reducing inventory cost
 improving on-time delivery
 reducing order to delivery cycle time
 reducing lead time
 reducing transportation cost
 reducing warehouse cost
 reducing supplier base
 expanding depth of distribution

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Challenges of Logistics & Supply Chain Management

Globally, supply chains have faced headwinds from unforeseen demand and limited logistics capacity. The
key challenges faced in supply chain management include:

• Rising risks in the supply chain

Risks in the supply chain primarily arise from volatility in the markets. Changing consumer demand, trade
wars, raw material shortages, climate change, stricter environmental regulations, economic uncertainties and
policy changes, industrial unrest, etc., contribute to supply chain management risks and challenges.

• Unexpected delays

Global supply chains inevitably involve large distances and many steps, making them vulnerable to delays.
Long lead times for goods make the shipments susceptible to unexpected delays.

• Cost control

Costs of raw materials, energy, freight, and labor have seen a spike around the globe. To ensure operations
without production interruptions and continued delivery of quality goods at reasonable rates - businesses
must tighten cost control.

• Collaboration and syncing of data across the supply chain

Access to supply chain data is key to the efficient management of supply chains. Due to the multitude of
data points in global supply chains, data management is a key challenge in supply chain management.

• Increasing freight prices

The rise in energy prices and the increased demand for container shipping have pushed freight prices.
Container shipping demand experienced an increase from the e-commerce surge seen during the pandemic.

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• Difficult demand forecasting

The pandemic and the consequent supply chain disruption made demand forecasting difficult and nearly
impossible to estimate numbers for manufacturing and the inventory to be stocked.

• Digital transformation

Digital transformation through adopting technologies such as IoT, AI, drones and robotics is necessary to
improve supply chain operations. However, the major challenge of supply chain management lies in
implementing these technologies across existing supply chain operations.

• Port congestion

The pandemic led to restricted freight loading/unloading operations, causing port congestion. This, in turn,
led to delayed dispatches and deliveries.
Supply chain challenges in the recent past have compelled businesses of all sizes to redesign their
operational strategies to maintain healthy bottom lines and retain their customer base.

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