logistic management

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Logistic management Author Neelam Yadav

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HISTORY The word logistics has originated from the Greek word logistikos and the Latin word logisticus, meaning the science of computing and calculating. In ancient times it was used more in connection with the art of moving armies and supplies of food and armaments to the war front. so we can say that logistics is the art and science of managing and controlling the flow of goods, energy, information, other resources.


Contind… Early 1960’s – physical distribution management(PDM) Late 1970’s – logistics and ‘total logistics’ Early 1990’s – logistics and business process re-engineering(BPR) Last 20 years – supply chain management(SCM) and its optimization

Introduction of logistics:

Introduction of logistics It is the management of all activities which facilitate movement and the co-ordination of supply and demand in the creation of time and place utility. Logistics is the branch of military science having to do with procuring, maintaining and transporting material, personnel. Logistics is the process of getting products and services where they are required and when they desired.


Contind…. Since the modern days customers expect the products to be available at all times and with the maximum freshness(in case of perishable goods), companies need to ensure that their logistics process matches the highest standards. Global companies operate in an intensively competitive environment and hence, they try to offer customers the best of products and services with a competitive advantage.


DEFINITON The process of planning, implementing, and controlling the efficient, cost-effective flow and storage of goods, services, and related information, from point of origin to point of consumption, for the purpose of conforming to customer requirements.

Components of logistics:

Components of logistics Components of an Integrated Logistics System External Supply: links suppliers to operations process Internal Operations: manages in-process material flow Physical Distribution: links operations process to customers

Internal operations:

Internal operations Vary by industry & firm, but might include: Processing Purchasing Production Planning & Control Quality Assurance Shipping

Physical Distribution:

Physical Distribution Getting the right material to the right place at the right time in the right quantity: Traffic Management: The selection, scheduling & control of carriers (e.g.: trucks & rail) for both incoming & outgoing materials & products Distribution Management: The packaging, storing & handling of products in transit to the end-user.

External Suppliers:

External Suppliers External suppliers provide the necessary raw materials, services, and component parts. Purchased materials & services frequently represent 50% (or more) of the costs of goods sold. Suppliers are frequently members of several supply chains often in different roles. Tier one suppliers : Directly supplies materials or services to the firm that does business with the final customer Tier two suppliers : Provides materials or services to tier one suppliers Tier three suppliers : Providers materials or services to tier two suppliers

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Marketing orientation (competitive advantage) Time and place utility Efficient movement to customer Proprietary asset Natural resources (land, facilities, and equipments) Human resources Financial resources Information resources Management actions Planning Implementation Control Logistics Activities Customer Service Demand forecasting Distribution communications Inventory control Material handling Order Processing Parts and service support Plant and warehouse site selection Procurement Packaging Return goods handling Salvage and scrap disposal Traffic and transportation Warehousing and storage Raw materials In-process inventory Finished goods Inputs into logistics Suppliers Logistics management Customers Outputs of logistics Components of logistics management :

Logistics as a part of supply chain management:

Logistics as a part of supply chain management Logistics is the management of the flow of goods, information and other resources between the point of origin and the point of consumption in order to meet the requirements of consumers frequently and originally. It involves the integration of information , transportation, inventory, warehousing, material handling and packaging, and occasionally security.


Contind…. Logistics is a channel of supply chain which adds the value of time and place utility. Different definition- logistics means having the right thing, at the right place, at the right time. Logistics is defined as a business planning framework for the management of material, service, information and capital flows. It includes the increasingly complex information, communication and control systems required in today’s business environment.(Business definition)

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Logistics - Science of managing (controlling) the movement and storage of goods (or people) from acquisition to consumption . Goods : Raw Materials  Final products, and everything in between. Logistics for services & people similar to goods logistics. Ex. Police, fire, ambulance, passenger airlines, taxi cabs, etc. Movement = Transportation (between locations). Storage = Inventory, Warehousing (at locations). Difference between acquisition and consumption is a matter of space and time. NOTE: Logistics does not deal with Technology of Production, such as the design of machines and vehicles and the design of finished products. Focus : Best way to overcome space and time that separates acquisition and consumption.

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Logistics embodies the effort to deliver: the right product in the right quantity in the right condition to the right place at the right time for the right customer at the right cost

Objectives of logistics:

Objectives of logistics Cost reduction (variable costs) Capital reduction (investment, fixed costs) Service Improvement (may be at odds with the above two objectives). Inventory reduction Reliable and consistent performance Minimum product damages Quick responses Delivering customer services- Customers must be given more importance than the goods and services that have to be delivered. Product and services are of significance to the customers only when they are available to them exactly when customers need them.


Contind….. (c) Organizations should focus more on profitability than on sales volumes. The number of transactions is a better measure of profitability than the volume of sale. Reducing the total distribution costs Reducing the cycle time Rapid response Minimum variance Movement consolidation Quality improvement Life cycle support

Decisions in logistics :

Decisions in logistics The various decisions in logistics management that need examination for an integrated system are- Product design Plant location Choice of markets/ sources Production structure Distribution/ dealer network design Location of warehouses Plant layout


Contind…….. Allocation decisions Production planning Inventory management-stoking levels Transportation mode choice, shipment size and routing decisions and transport contracting Packaging Material handling Warehouse operations

Classification of logistics:

Classification of logistics logistics can be classified on the basis of different dimensions:- Inbound and outbound logistics Private vs. public Single vs. multiple plants Nature of the product Made to stock vs. made to order


Contind……. Inbound and outbound logistics- Most of the organization have to mange their outbound logistics( that is, physically distributing the products to the customers from the factory) Whereas inbound logistics are limited to the purchasing function. the logistics of purchased products are generally managed by the vendors.


Contind……… There are exceptions to this, like the steel industry which is backward integrated, thereby managing their inbound (raw material) logistics also. managing inbound logistics to some extent has got other benefits such as better control of production planning and reducing uncertainties. A further advantage of managing both inbound and outbound logistics is the cost savings possible when the two movements are coordinated.

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The Increased Importance of Logistics A Reduction in Economic Regulation Recognition by Prominent Non-Logisticians Technological Advances The Growing Power of Retailers Globalization of Trade

Logistics cost:

Logistics cost The performance of a supply chain can be illustrated with the help of total logistics cost. To define the logistics cost, one must define the desired outputs from the logistics system and then seek to identify the costs associated with providing those outputs. The manager must understand how the behavior of one cost differs from the behavior of another cost and for running a logistics system requires the manager to understand and use a variety of cost information. The cost of logistics varies from industry to industry.


Contind…. Cost can be divided in many ways: Fixed, variable and semi-variable, Cash and non cash, direct and indirect. Each of these costs may reveal important and information for making logistics decisions.

The important elements of logistics cost are:-:

The important elements of logistics cost are:- Product inventory at source Pipeline inventory Product inventory at warehouses and dealers Transit losses/ insurance storage losses/ insurance Handling and warehouses operations Packaging Transportation Customers’ shopping

Transport Cost Characteristics:

Transport Cost Characteristics Rail High fixed costs, low variable costs High volumes result in lower per unit (variable) costs Highway Lower fixed costs (don’t need to own or maintain roads) Higher unit costs than rail due to lower capacity per truck Terminal expenses and line-haul expenses Water High terminal (port) costs and high equipment costs (both fixed) Very low unit costs Air Substantial fixed costs Variable costs depend highly on distance traveled Pipeline Highest proportion of fixed cost of any mode due to pipeline ownership and maintenance and extremely low variable costs

Logistics functions:

Logistics functions Logistics is not a single term actually it is a blend of number of activities or functions:- Order processing Inventory management Warehousing transportation Material handling Logistical packaging Information


Contind…. Order processing - This activity consists of the following steps: Order checking for any deviations in agreed or negotiated firms. Prices, payments and delivery terms. Checking the availability of materials in stocks Production and material scheduling for shortages Acknowledging the order, indicating deviations, if any.


Contind… 2. Inventory management- IM maintaining the requisite inventory stocks to meet customer requirements while simultaneously ensuring that its carrying cost is as low as possible. The inventory is the greatest culprit in the overall supply chain of the firm because of its huge carrying cost, which indirectly eat away the profits. It consists of the cost of financing the inventory, insurance, storage, losses, damages. The average cost of inventory carrying varies from 10-25% of the total inventory per year, depending on the products.

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3. Warehousing - the major decisions in warehousing are as follows: Location of warehouses Number of warehouses Size of the warehouse Warehouse layout design of the building of warehouse Ownership of the warehouse

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4. Transportation- After the order is placed, the transportation is not complete till the goods are physically moved to the customers’ place. The physical movements of goods through various transportation modes. 5. Material handling and Storage system- The speed of inventory movement across the supply chain depends on the material handling methods. The choice of storage system is important in maximizing space utilization in the warehouse. The material handling system should support the shortage system for speedy movement of goods in and out of the warehouse.

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6 . Logistical packaging- Logistical or industrial packaging is a critical element in the physical distribution of the product, which influences the efficiency of the logistical system. It differs from product packaging, which is based on marketing objectives. The utilization of load has a major bearing on logistical packaging with regard to packaging costs. 7. Information- Logistics is basically an information, based activity of inventory movement across the supply chain. The use if IT tools for information identification, access, storage, analysis, retrieval and decision support in logistics is helping business firms to enhance their competitveness.

Models in logistics management:

Models in logistics management Various quantitative models from operations research literature can be used to address the decisions areas in logistics. Forecasting models- these models allow prediction of demand based on past data or other parameters that are independently available. They enable better planning, given the lead time necessary for response. Mathematical programming models- under this model, there are three models. Location model Allocation model Distribution network design models


Contind…….. Location model- these models help in planning the optimal location of plants or warehouses, considering the inbound and outbound transportation costs and infrastructure cost at the locations. Such models can be solved as an integer programme or sometimes as a linear programme.


Contind…… (b) Allocation models- these models help in optimally allocating commodities from sources to destinations in a multi-source multi-destination environment. For ex- a product that is manufactured in 15 plants and distributed through 30 warehouses could use such a model for optimal allocation. The costs considered for optimization are production costs, transportation costs and warehousing costs. The constraints considered can be due to demand, capacity, route restriction etc.


Contind….. (c) Distribution network design models- These models are usually comprehensive in nature, deciding between a two, three or even four stage distribution network, location of warehouses and break bulk points, and sometimes even the transportation mode choice. The models optimize total distribution costs including transportation, warehousing and handling, and inventory.


contind…. 3. Inventory models- the inventories that are directly affected due to outbound logistics are: (a) buffer stocks to take care of uncertainties at finished goods, warehouse and retail (b) Shipment and batching inventories at finished goods, warehouse and retail © Pipeline inventory (primary and secondary ) Trade-offs between inventory and other decisions in logistics would be: Inventory vs. transportation cost Inventory vs. stockout cost Inventory vs. spoilage and material handling cost


Contind…. Issues like Shipment size Supplying to one or many points in one shipment Single location vs. multiple location stocking directly relate to inventory and transportation cost 4. Routing model- These models allow optimal routing on a transportation network from a given source to destination. The simplest model is called the shortest path problem.


Contind…… Decision support system (DSS) that interactively use the expertise of the decision maker by providing graphical support through a map are also very useful in such decisions. Scheduling model- These models enable allocation of resources to particular activities. Depending on the criteria of interest and number of resources, the models help evaluate appropriate rules for allocation.

Five Business Systems - Tightly Interconnected Within The Organization:

Five Business Systems - Tightly Interconnected Within The Organization Measurement Decisions Management Systems Reward Decisions Strategic Decisions Transportation Decisions Sourcing Decisions Inventory Decisions Logistics Systems { Price Decisions Promotion Decisions Marketing Systems Product Decisions Place (How, where, how much) } Production Scheduling Decisions Production Capacity Decisions Shop Floor Decisions Manufacturing Systems } Product Design Decisions Process Design Decisions Engineering Systems } Copyright 2000 - All Rights Reserved

Logistics Planning:

Logistics Planning Decide what, when, how in three levels: Strategic – long range > 1 year Tactical - < 1 year horizon Operational – frequently on hourly or daily basis Examples of Decisions Type Strategic Tactical Operational Location Transportation Order Processing (CS) #Facilities, size, location Mode Selecting order entry system Inventory positioning Seasonal Service Mix Priority rules for customers Routing Replenishment Qty and timing Expediting orders

Routes of Goods:

Routes of Goods Goods at shippers Freight forwarder warehouse Air terminal plane air Freight forwarder warehouse Goods at consignees Container terminal vessel sea May change transpor-tation modes truck land railway land barge mid-stream pier bulk goods sea let us guess

Vehicle Routing:

Vehicle Routing Find best vehicle route(s) to serve a set of orders from customers. Best route may be minimum cost , minimum distance , or minimum travel time . Orders may be Delivery from depot to customer. Pickup at customer and return to depot. Pickup at one place and deliver to another place.

Bullwhip Effect :

Bullwhip Effect The bullwhip effect is the uncertainty caused from distorted information flowing up and down the supply chain.

Who is affected? :

Who is affected? Who is affected? Nearly all industries are affected! Firms that experience large variations in demand are at risk. Firms that depend on suppliers upstream or distributors and retailers downstream may be at risk.

Results of the bullwhip effect ::

Results of the bullwhip effect : Results of the bullwhip effect Excess inventories Problems with quality Increased raw material costs Overtime expenses Increased shipping costs Results of the bullwhip effect - continued. Lost customer service Lengthened lead time Lost sales Unnecessary adjusted capacity

Causes of the bullwhip effect ::

Causes of the bullwhip effect : Causes of the bullwhip effect Un-forecasted sales promotions Sales incentives Lack of customer confidence Customers turning back sales orders Freight incentives

Moral of the story :  :

Moral of the story : Moral of the story Distorted information along the supply chain caused inventory levels to increase along the supply chain which may result in increased inventory costs, poor customer service, adjusted capacity and many other problems associated with the bullwhip effect.

Warehouse management:

Warehouse management Introduction Warehousing is the function of storing goods to bridge the time gap between their production and demand and thus, leads to time and place utility. As a part of marketing strategy, warehousing offers better customer service than competitors who rely on price competition.

Definition :

Definition As per Bombay warehouse act, 1959 Warehouse means any building, structure or other protected enclosure, which is used for the purpose of storing goods on behalf of the depositors but does include cloakroom attached to hotels, railway station and the premises of other public carrier alike .

Need for warehousing:

Need for warehousing Warehousing necessary due to the following reasons: Seasonal production Seasonal demand Large-scale production Quick supply Continuous production Price stabilization

Function of warehousing:

Function of warehousing There are following functions: Storage of goods Protection of goods Risk bearing financing Processing Grading and branding Transportation

Types of warehouses:

Types of warehouses In order to meet their requirement, various types of warehouses came into existence, which may be classified as follows: Private warehouses Public warehouses Government warehouses Bonded warehouses Co-operative wareh ouses

Characteristics of Ideal warehouses:

Characteristics of Ideal warehouses Any warehouse is said to be an ideal warehouse, if it possesses certain characteristics, which are given below: It should be located at a convenient place. Mechanical appliances should be used because this reduces the wastages in handling and also minimizes handling cost. Adequate space should be available in order to keep the goods in proper order. It should have cold storage facilities. Ex-parishable items


Contind…. Proper arrangements should be there to protect the goods from sunlight, rain, wind, dust, moisture and pests. Security should be there to avoid the theft of goods. The building should be fitted with latest fire fitting equipment to avoid loss of goods to fire. Sufficient parking space should be there inside the premises.

Importance/ benefits of warehousing:

Importance/ benefits of warehousing Economic benefits Consolidation Break bulk and cross dock Processing/ postponement stockpiling Service benefits-In this we consider the time and place capability of the overall logistics system.

Warehouse operating principles:

Warehouse operating principles There are three principles which are revelent: Design criteria Handling technology Storage plan

Planning the warehouse layout:

Planning the warehouse layout When a new warehouse layout is proposed, a detailed planning process should be followed to ensure the success of the project. this process should include the following six steps: Define objectives Collect information Analysis Create plan Implementation Post implementation

Distribution management :

Distribution management Introduction A vital element of supply chain management is the management and monitoring of the distribution channels. In fact, the vast majority of product manufactures are unable to sell directly to customers, as it would be way too costly for them. The bigger the producer, the more intermediaries should be used in order to have a cost effective operation. The distribution centre is a new idea at the advent of logistics and supply chain management, referring to dynamic, full service warehouse primarily related to the market.

Definition of Distribution centre:

Definition of Distribution centre The movements of goods rather than their storage and other customer oriented logistical services such as sales, market intelligence, documentation called the distribution centre.

Levels of channel distribution membership:

Levels of channel distribution membership There are three levels of channel distribution: Intensive- A large majority of resellers are stocking the product. Selective- This is a normal pattern, only suitable resellers are selling the product. Exclusive- In this only selected resellers are permitted to sell the product( this is usually one seller per geographical region)

Purchasing and Vendor Management:

Purchasing and Vendor Management

Introduction :

Introduction The new attention given to purchasing begun in the mid-1970s, when firms such as chemical manufactures experienced serious commodity shortages. Hence in the global competitive scenario, there has been a dramatic increase in the attention of the top management in the purchasing and sourcing management because outsourcing of materials have become need of the hour for sustainable growth and competitive effectiveness.

Purchasing :

Purchasing “Purchasing is the procurement of the materials, supplies, machines, tools and operation of a manufacturing plant.” Alford & Beatty

Basic concepts:

Basic concepts Purchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprises. The word purchasing is not used interchangeably with the word procurement, since procurement typically includes expediting(promptness), supplier quality and logistics in addition to purchasing.

Objectives of purchasing:

Objectives of purchasing Maintaining continuity of supply Maintenance standards quality Avoidance of duplication waste and obsolesce Maintenance of company’s good image Developing alternative sources of supply Maintenance of company’s competitive position

Factors influencing purchase decision:

Factors influencing purchase decision Alternatives Quality Price After sales service Availability of spare parts

Importance of purchasing:

Importance of purchasing Efficient administration The quality of final product Increasing in profitability Optimum utilization of capital Delivery in time

Centralized vs. Decentralized purchasing:

Centralized vs. Decentralized purchasing Introduction This topic basically deals with decisions about the purchasing policies defining the purchasing authorities and the resultant responsibilities.

Centralized purchasing:

Centralized purchasing Centralized purchasing is a method of procurement of all types of materials, supplies and equipments etc.through a single departments under the direct control and superintendence of one responsible person. He/ she is directly accountable to the top management for all the duties falling within the broad area of purchase function.


Contind… A company has to follow the centralized purchasing of materials for ensuring proper materials control as well as efficient store keeping. Under this system, the purchasing department purchases the required materials for all the departments and branches of the company In such organizations sometimes regional or branch purchasing agents are employed to make purchases in the local markets.


Contind… Under this policy of centralized purchasing all types of purchase in a single-plant organization are made by the central buying section, who are authorized to decide on the source of supply , negotiate scattered plant locations, all purchases are made by the central buying section of the head office. They are doing so under the superintendence and the control of the centralized purchasing departments.

Advantages of CP:

Advantages of CP Cost will be less and managed efficiently Tap the advantage of the skills of buying staff Take the advantage of quantity discount (Bulk quantity) Direct contact with supplier will eliminate the intermediaries Develop and maintain the good relation with the suppliers It will reduce the inventory carrying cost The receiving of large supply through consolidated orders reduces the transportation cost per unit The cost of order processing are reduced substantially due to the few orders of large quantities

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The service of an efficient , specialized and experienced purchase executive can be obtained. Transportation costs can be reduced because bulk quantity of materials purchased. Centralized purchasing discourages duplications of efforts. Centralized purchasing helps to maintain uniformity in purchasing policies. Centralized purchasing helps to minimize the investment on inventory.

Disadvantages of CP:

Disadvantages of CP Centralized standards procedures may result in delays in receiving the materials. It may be the case that centralized purchasing staff may not be specialized in buying technical items. In case of multi plants unit located at distant places, it may not be possible to tap the local resources.

Decentralized purchasing :

Decentralized purchasing Decentralized purchasing refers to purchasing materials by all departments and branches independently to fulfill their needs. Such a purchasing occurs when departments and branches purchase separately and individually. Under this purchasing, there is no one purchasing manger who has the right to purchase materials for all departments and divisions. This type of purchasing can overcome the defects of centralized purchasing because it helps to purchase the materials immediately in case of an urgent situation.

Advantages of DP:

Advantages of DP Materials can be purchased by each department locally as and when required Materials are purchased in right quantity of right quality for each department easily No heavy investment is required initially Purchase orders can be placed quickly The replacement of defective materials takes little time

Disadvantages of DP:

Disadvantages of DP Organization losses the benefit of a bulk purchase. Specialized knowledge may be lacking in purchasing staff. There is a chance of over and under purchasing of materials. Less chances of effective control of materials. Lack of proper co-ordination and co-operation among various departments.

Purchasing policies:

Purchasing policies The purchasing function is influenced by certain policies: the policies are- Ancillary development Make or buy decision Speculative buying Vendor rating Ethics in purchasing Reciprocity Purchasing for employees Gifts Value analysis

Functions of purchase department :

Functions of purchase department Checking of requisition Procurements of stores Selection of suppliers Issuing tenders and obtaining quotations Negotiating contracts Checking legal conditions of the contracts Verification and passing of suppliers Maintenance of purchase records Maintenance of vendor performance records Developments of reliable and alternate sources of supply.

Vendor management:

Vendor management In today’s competitive market place, many companies have moved from a single vendor to a multi-vendor platform. Managing the numerous individuals and companies you do business with is crucial for developing valuable relationships. Two major points of vendor management: To improve the vendor management process, it is important to track and evaluate vendors on a regular basis. It will also allow you to proactively take measures to seize opportunities.

Vendor selection process:

Vendor selection process Step 1- Analyze the business requirements Step 2- Vendor search Step 3- Request for proposal and Request for quotation Step 4- Proposal evaluation and vendor selection Step 5- Contract negotiation strategies Step 6- Contract negotiation mistakes

Single vendor concept:

Single vendor concept Why do some organizations adopt a single vendor approach while others are more comfortable with multiple vendors?

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Their decision to have a single vendor or multiple ones depends on the concerned areas of operations, services or procurement. For some of the products and services (for example, hardware AMC and facilities management), companies have the policy of appointing a single vendor But, at the same time, there are those who follow the multi-vendor approach in majority of areas like hardware procurement, software development, and other services.

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T G Dhandapani, CIO, Sundaram-Clayton Ltd (SCL) Adaptive & TVS Motors said, “ We generally prefer to move with a single (strategic) vendor concept and follow it for many of the product procurement and services. It helps in building strategic relationship with the vendor that will pay in the long run.” Further commenting on this, Madhusudhan Mendu R, (WT01-CIO Office & Operations) Wipro said, “ We follow both single vendor as well as multi-vendor (mostly dual) strategies”.

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There are some fundamental principles that generally govern the vendor selection and management policy. Firstly, the company needs to decide the specific areas where they should adopt a single or a multi-vendor approach before engaging new vendors. Secondly, rating of the performance and success of any particular project is a must. Thirdly, the decision-makers should try to see what can bring some amount of innovation and value addition through the vendors they work with.

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We evaluate the vendors on technical parameters first, where price does not figure at all and then subsequently, only the proposals of technically qualified vendors are further evaluated on commercial terms" - Shubhojit Roy IT-Head, SBI Mutual Fund

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We generally prefer to move with single (strategic) vendor concept and follow it for many of the product procurement and services. It helps in building strategic relationship with the vendor that will pay in the long run" - T G Dhandapani CIO, Sundaram-Clayton Ltd (SCL) Adapative & TVS Motors

Pros of single and multiple vendors:

Pros of single and multiple vendors A single vendor helps in standardization, less transactions and reduces operations overhead. On the other hand, multiple vendors build competitiveness and is meant for specific business requirements

Methods of vendor rating:

Methods of vendor rating Point method Cost ratio method

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