Conceptual Model Of Supply Chain Management Business Essay


During the early twentieth Century the concept of mass production prevailed. Henry Fords assembly line had the concept of making every component ,sub-assembly and the final assembly under one roof . This resulted in the mass manufacture of the Ford T Model black car which was sold in very large numbers by Fords dealers from their various outlets. A customer could walk- in and buy the car which was available in plenty at the dealers outlet at all times

With the passage of time, Alfred Sloan of General Motors developed the concept of introducing more than one type of automobile. He offered variety of cars to suit the pocket of every customer. With product variety becoming the philosophy it became necessary for General Motors to buy components and certain subassemblies from outside suppliers. This was the beginning of the concept of Outsourcing some parts from the outside suppliers.

Now, there were three independent entities involved in the manufacture and distribution of an automobile:

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(1 ) The Supplier ( 2) the main manufacturer and (3) The dealer, who was responsible for supplying the automobile to the ultimate customer. This was the early beginning of the Supply Chain in its rudimentary form. However, it was not a seamlessly integrated supply chain. The three members of the early chain did not have trust in each other. There existed rigid walls of mistrust between the three members of the rudimentary chain. To be successful, all the members of this chain had to be integrated as business partners. It became imperative that each of the members of this chain made profit through value addition along the supply chain. The customer of today looks forward to a value- added product instead of just a product at low cost ,acceptable quality and on- time -delivery.

Customer focus in todays scenario:

Todays customer has become extremely choosy and, knowledgable His emphasis and preference has gradually shifted from On time delivery to Cost effectiveness to Superior quality and better service to ultimately upon Value for money. The customer of present times is much more value conscious than the customer of 50 years ago .The capability required for market entry by any firm and maintaining leadership has changed from just the ability to supply to ability to add more and more value to the customer At this juncture it is desirable to define what value is? Simply stated ,value is analogous to Utility which means different things to different customers .Value could mean certain desirable quality characteristics like aesthetics, ergonomic comfort ,low cost ,high level of performance and many such desirable attributes bundled together. Products in modern times need to be customized to achieve total customer satisfaction. This situation can be regarded as the basic cause of the evolution of Modern Supply Chain wherein specialized , high tech components and subassemblies have got to be outsourced from suppliers who become trading partners of the main manufacturer

It can be seen that effective final product or customer service is not achieved solely by motivated and customer oriented employees but through the supply chain that enables a consistent delivery of service through the reaching of right products, at the right time, at the right cost, of the right quality to the right customer. Hence, it has become imperative for organizations to see supply chain as part of its overall strategy. The companies, which have achieved success in this process, have already found themselves in a drivers seat vis-A�-vis the other companies, which did not realize its importance earlier. At this point it should be noted that a final product is not achieved by doing all the manufacturing under one roof as in the times of Henry Ford. A Supply chain entails purchasing and outsourcing of a very large percentage of components and sub assemblies from outside sources who form the important partners of the Supply Chain. One firm cannot claim to be core- competent in producing a large variety of components which go into the final product that is marketed by a firm to its customer. A Supply chain comprising of a large number of raw material, components and sub-assemblies as inputs is a must to meet the quality and quantity demanded by todays sophisticated customer.


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Referring to Fig 30.1 a Supply chain acts as a connecting chain of materials from the suppliers S to the manufacturer to the distributor to the retailer R to the ultimate customers .In a supply chain the flow of demand information is in a direction opposite to the flow of materials .Thus, the information flow on demand is from the customer to the retailer to the distributor to the manufacturer to the supplier .It may be noted that the supply chain is not a linear chain but takes the form of a network. It consists of a network of facilities and distribution options that perform the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers in the right time and of the right quantity and quality .The figure 30.1 highlights one more aspect of a complete supply chain which the reader should note The complete SCM has three sections at the macro level( 1)Supply Relationship Management: The segment of the chain which is concerned with the supply of raw materials ,components and sub-assemblies .This segment is called the SRM which plays the role of supplier relations. (2) The Conversion system within a factory which is done by the production and operations management function. This macro system is often called the Internal Supply Chain Management or ISCM.(3) CRM or customer relations management macro system.The CRM Sytem takes care of the market,Selling,Call centre and order management. The management of the three macro level systems have been very efficiently taken care by leading software corporations like the SAP. ,Oracle ,BAAN and other Enterprise Resource Planning Systems. Since the Customer Relationship management is focused towards the marketing ,Sales and service it is discussed in the next chapter 31 in some detail.

Supply chain management can be seen as the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory and related information flows through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost effective fulfillment of orders.

Defining Supply Chain: According to APICS (American Production and Inventory Control Society) Dictionary," Supply is understood as the quantity of goods available for use or the actual (or planned) replenishment of a product (or component). The replenishment quantities are created in response to a demand for the product r in anticipation of such a demand. Supply chain is understood as the process starting from the procurement of raw materials to the ultimate consumption of the finished product linking across supplier-user companies, or the functions inside and outside a company that enable that value chain to make products and provide services to the customer. Supply chain management means planning, organizing and controlling of supply chain activities. In a nutshell it means from the customer to the customer."

The term supply chain refers to all the activities involved in supplying an end user with a product or service. The perception of each organization that is involved - the ore refiners, the transporters, the component producers, the manufacturer, the whole-seller, the retailers, and the customer - being a link in the process makes the analogy of a chain is quite appropriate. However, it must be remembered that it is not just goods that are flowing along the chain but also information, funds, paper, people, and other such items and these items are flowing in both directions along the chain. In addition the green revolution encourages recycling, recovery, and reuse of products so even the used product may be flowing back up the chain. Moreover, the supply chain also involves other functional areas and activities such as product/service design, finance, accounting, marketing, human resources, engineering, and so on. Thus, instead of a chain, we should probably think of the supply process as more of a network, with everyone communicating with, and passing monies and items between everyone else.

Supply chain management (SCM), thus , is the process of trying to appropriately manage this network of activities and flows. More formal definitions of SCM include the following points:

SCM coordinates and integrates all the supply chain activities into a seamless process and links all of the partners in the chain, including departments within an organization as well as the external suppliers, transporters, third-party companies, and information system providers.

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SCM enables manufacturers to actively plan and collaborate across a distributed supply chain, to ensure that all parties are aware of commitments and schedules. By actively collaborating as a virtual corporation, manufacturers and their suppliers can source, produce, and deliver products with minimal lead time and expense.

The goal of SCM is to optimally deliver the right product to the right place at the right time, while yielding the greatest possible profit.

Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may differ greatly from industry to industry and firm to firm.

Using modern IT system Multi-tier partnerships


Customization Non - Core outsourcing

Third or Fourth party Logistics

Figure 30.2: Conceptual model of SCM

In sum , we can say that SCM works in a demand driven situation, encourages flow-type production with small batches, reduces idle inventory and idle time in any business by improving overall customer- centric approach.

Figure 30.2 shows the conceptual model of SCM. It is based on the five basic elements called Pillars of SCM. It includes:

Customization philosophy

Outsourcing of items in which the supplier has competency

Multi-tier supplier partnership

Third or Fourth party logistics

Use of modern IT systems


After the First Industrial Revolution most of the firms were following factory system which was acceptable at that time but with a rudimentary supply chain approach.Even within a factory every department was an isolated island and either formal or hostile relationships were observed amongst other trading organizations like suppliers, manufacturers, dealers etc. This could be represented by an equation: Old supply chain system=[Suppliers]+[Manufacturers]+[Dealers]+[Suspicion or Lack of trust] The scenario started changing only after the Second Industrial Revolution took place. The same theme was accelerated with the advent of MRP systems, MRP-2 systems and finally ERP systems. The origination started evolving as one entity and internal supply chains started becoming stronger. In fact the key deliverables expected from ERP system was the tightly integrated internal organization . The relationships between the trading organizations were improving which was referred to as partnership. This evolution ultimately resulted into the modern Awtar of supply chain management. Thus the concept of supply chain did exist long back but managing it strategically is a recent phenomenon.

As discussed above, SCM function is the outgrowth of the unified evolution of manufacturing management and logistics management functions. The concept logistics management itself evolved from unified evolution of materials management and sales and distribution management. An equation as given below can well explain the SCM in its modern form and its relationship with manufacturing and logistics coupled with mutual trust:

Modern SCM= Manufacturing +[ Inbound Logistics +Outbound Logistics]+Mutual trust = [Manufacturing] +[Logistics]+ Mutual trust and CRM

30.4 Stepwise Process of Developing Integrated Supply Chains:

Conflicting Objectives :The whole process of SCM requires cross-functional coordination efforts, which are required to balance conflicting objectives. Of various objectives avan in one firm

The marketing department, on the basis of market research and sales force feedback, forecasts the market size and potential for the present year and carries out the the forecast, or confirmed customer orders. This information is passed on to production planning department, to work out production schedules for machines and men and concurrently, to decide the priority of the job depending upon priority ,machine capacity utilization constraint

The role of purchasing enters the picture to coordinate the timely supply of raw materials and sub-assemblies. At this time, the marketing department will be interested to know the current and forthcoming schedules and also the production capabilities while processing the order to commit to realistic delivery dates with customers. The role of accounting starts from billing and payment. Problems arise if the priorities change and something unexpected happens, e.g. new developments in the market, strike, natural calamities, or sudden change in government policy etc.

Then, if adaptation is not proper, the situation may deteriorate, affecting the image of the company, overall goodwill and loss of business. Further, it is seen that policies, practices and priorities of different departments are to maximize their objectives at the cost of overall company objectives . For example, marketing would like to keep inventories high so that goods are always available to customer i.e. better customer service. Finance department would be interested to maintain low cost of working capital in the firm so it would like to minimize investment on inventory. Thus the marketing departments objectives of keeping high finished inventory clashes with the finance department. The objective of keeping a low level of finished inventory clash with the objectives of logistics department, which would prefer the shipment of the largest possible quantities to minimize transportation costs and hence, wish to wait till a large inventory, is built-up. Warehouse, on the other hand, would like to have low inventory or low investment in space. These are typical functional role conflicts which make integration in the supply chain a tough job

Integration needed to develop a Supply Chain:

Successful supply-chain management requires a high degree of functional and organizational integration. Such integration doesnt happen easily owing to the conflicting objectives mentioned earlier. Typically, firms willing to solve the problem of developing integrated supply chains have to progress through a series of phases, as Fig. 11.6 shows. In phase 1, a starting point for most firms, external suppliers and customers are considered to be outsiders ,independent of the firm. Relations with these firms are at a formal level, and there is minimal sharing of operating information and costs .Even internally, purchasing, production control, and distribution act independently, each optimizing its own activities without considering the other departments as explained in the conflicting objectives section discussed earlier. Each external and internal entity in the supply chain controls its own inventories, and often utilizes control systems and procedures that are incompatible with those of other entities. Because of organizational and functional boundaries, large amounts of inventory exists in the supply chain and the overall flow of materials and services is ineffective.

In phase 2 the firm initiates internal coordination by combining purchasing, production control, and distribution into an integrated materials management department.




Production control

PurchasingPhase 1: independent supply-chain entities

Internal supply chain Materials management department


Suppliers Phase 2: Internal integration


Production control


Phase 3: Supply-chain integration

Integrated supply chain



Internal supply chain

Fig 30.3 Formation of Integrated supply Chain

The focus is on the integration of those aspects of the supply chain directly under the manufacturing firms control to create an internal supply chain. Firms in this phase utilize a seamless information and materials control system from distribution to purchasing, integrating marketing, finance, accounting, and operations. Efficiency and electronic linkages to customers and suppliers are established. However, its suppliers and customers are still treated as independent entities .Internal integration should be achieved and stabilized before focusing upon Phase 3, external Integration

Phase 3

In phase 3, External integration, the internal supply chain is extended to include suppliers and customers as connected channel members thereby linking them to the external supply chain, which is not under the direct control of the firm. The firm, now being an important entity of the total supply chain must change its focus from a product or service orientation to a customer orientation. This new focus means that the firm must decide the right priorities for each of its market segments. For its industrial customers, the firm must develop a better understanding of their products, culture, markets, and organization. Instead of merely reacting to customer demand, the firm should now attempt to work with its customers so that both benefit from improved flows of materials and services. Likewise, the firm must develop better understanding of its suppliers organizations, capacities, and strengths and weaknesses-and include its suppliers earlier in the design process for new products or services. Phase 3 represents what is called a true supply-chain management and seeks to integrate the internal and external supply chains.

The SCM objective of attempting to manage activities that lie outside a managers normal domain of responsibility is to reduce the costs of delivering a product or service to a user and improve its value in terms of quality, functionality, and timeliness. Attempts tocut down the costs of purchasing have been traditionally going on for decades, and we see heavy emphasis on it even today. However, management has also realized that there are other costs in the supply chain that can be reduced with better information sharing and tighter management, and these costs are the ones which now take the front seat in supply chain management. For example, costs of multiple shipments, costs of poor quality, costs of late delivery - these are all costs that can be eliminated with better information sharing and managerial wisdom

Until recently, firms primarily focused essentially on managing their immediate suppliers. For example, Toyota is known for training their suppliers how to install and operate their Just- In-Time system or lean manufacturing. But the training does not stop there . Toyotas immediate first tier suppliers can gain added advantage by training their suppliers, the second tier, and so on .


Supply Chain is the current trend in manufacturing .One firm can be said as superior to another if it has a better Supply chain than another firm. The bedrock of supply chains is mutual trust between the members of a chain. There must be a very good collaboration between members of the supply chain members. The members of the chain should think in terms of total value addition to the supply chain instead of just the profits of few dominant channel members which put other members at a loss. The sharing of information regarding demand data should be transparent across the chain .Use should be made of the latest IT tools to access information which should be shared by the members. The ultimate objective should be to serve the ultimate customer to achieve his loyalty and confidence

Supply chain is not just a tactics but a full fledged strategy based on collaboration , demand information sharing, customer service strategy and technology integration strategy as depicted in figure.30.5

Demand flow information

Collaboration strategy

Customer service strategy

Supply chain strategy framework

Technology integration strategy

Figure30.4 : Supply chain strategy framework.

Opportunities for collaboration among business partners will vary depending upon the organizations perspective role in the supply chain. The three main types of collaboration are as follows:


1 Supplier Collaboration: Suppliers are the most important channel members. The manufacturer should have great trust in the supplier .He should not only be involved in supplying the right materials at right time but should be involved in the Product design process during concurrent design stage. Vendor managed Inventory and JIT 2 are the latest developments wherein the supplier is made the custodian who is given access by the manufacturer within his plant to advise on how much material should be stored by the manufacturer.

2 Customer Collaboration: In certain situations the manufacturer can take a feedback from the customer regarding demand planning and inventory replenishment. This approach ensures that the customer requirements are met efficiently.

3 Collaboration with Third Party Logistics Providers: the collaboration of companies with 3rd party logistics providers focuses on jointly planning logistics activities. It also gives the company the added advantage of better packaging which is an area of expertise of the logistics providers. .


Traditionally, in supply chain management, the key focus and scope has been in managing flow of goods from suppliers through the manufacturing and distribution chain to the customer. The key in demand management is the continuous flow of demand information from customer and end users through distribution and manufacturing to suppliers. Customers could be sometimes unpredictable but then a good demand flow strategy enables the company to simplify their supply chain operations. This is made possible through use of modern ITtools


Customer satisfaction level is directly proportional to the service provided by the company.

Good customer service is based on four Ps: Product/Service, Physical evidence ,People and Process

Customer Segmenting: a company has to strategically decide on the segments it wants to target for various commodities. It has been found that most of the successful companies serve more than one product variety.

Cost of Service: It is important to obtain an objective estimate of whether the things that the customers want are affordable to the company. The kind of support needed from the suppliers or other parties in the supply chain has to be determined in advance.

Profitability management: Determination of the appropriate response to the identified needs and expectations of each customer segment must be completed. In short, the response which maximizes the firms profitability and growth should be determined. Response is a function of type of product and its stage in the product life cycle .This aspect has bee discussed in the section on design of supply chains i.e. whether they are to be efficient or Responsive


Developments in IT has enabled the integration of business information systems,. A number of IT-based supply chain information management tools are now available to provide intelligent decision support and execution management .For example, use of special Sales Automation Tools is essential to create effective Customer Relationship Management .

30.7 LOGISTICS IN SUPPLY-CHAIN MANAGEMENT : There are three components of Logistics

1 PURCHASING INVOLVING IN- BOUND- LOGISTICS: Purchasing is the management of the acquisition process, which includes deciding which suppliers to use, negotiating contracts, and deciding whether to buy locally. Purchasing must satisfy the firms long-term supply needs and support the firms capabilities to produce goods and services. This task is crucial for any organization, whether it be a retailer, service provider, or manufacturer. It is an ideal situation to have a certified supplier .A certified supplier is one who has past experience with the firm.He knows the firms requirement so well that he will be permitted to download the demanded parts directly on the production line .There is no need to get the parts inspected prior to bringing them on the assembly line .However, in other cases a systematic acquisition procedure has to be followed as outlined in chapter on purchasing. It is outlined once again in brief

The Acquisition Process

The acquisition process involves five basic steps:

Recognize a need. The process begins when purchasing receives a request to buy outside materials or services. The request (called a purchase requisition) includes the items description, quantity and quality desired, and desired delivery date. At a manufacturing firm the purchasing department normally receives authority to buy from the production control department.

Select suppliers. This step involves identifying suppliers capable of providing the items, grouping items that can be provided by the same supplier, requesting bids on the needed items, evaluating the bids in terms of multiple criteria, and selecting a supplier. When a long-term contract has already been set up for an item, this step isnt necessary.

Place the order. The ordering procedure can be complex and time-consuming, as with expensive one-time purchases, or as simple as a phone call for a standard item routinely ordered from the same supplier. In some high-usage situations the supplier makes ship0ments daily or even shift by shift without being prompted by purchase orders. Many firms are now linked by computer to suppliers, simplifying the ordering process even more.

Track the order. Tracking includes routine follow-up of orders to avoid late deliveries or deviations from requested order quantities. Suppliers are contracted by letter, fax, telephone, or e-mail. Follow-up is particularly important for large purchases when a delay could disrupt production schedules or mean the loss of customer goodwill and future sales.

Receive the order. Incoming shipments often must be checked for quantity and quality, with notices going to purchasing, the unit placing the purchase requisition, inventory control, and accounting. If the shipment isnt satisfactory, purchasing must decide whether to return it to the supplier. Records on punctuality, quality purchasing must coordinate closely with accounting to ensure that suppliers are paid accurately and on time.


A special case of the cooperative orientation is outsourcing . The decision to outsource an activity, sometimes referred to as the make-or-buy decision, has implications for supply-chain management because it affects the number of activities under the direct control of the firm in its internal supply chain. This decision is not trivial because a firm must first have a clear understanding of its core competencies and retain them. Outsourcing has direct relevance fro supply-chain management because of its implications for control and flexibility.

Flexibility to Change the Supply Chain. A firm has a more flexible arrangement with a supplier if it has a short-term agreement with it. The firm can choose to renegotiate the terms of the contract or change suppliers frequently. These options arent available if the firm enters into ling-term arrangements with a supplier. If market needs change, or the supplier experiences business difficulties, the firm will have a more difficult time changing suppliers if it has a long-term commitment.

2 Manufacturing Planning within the factory : This is concerned with material handling and movement within the factory. This is concerned with Manufacturing and comes within the domain of the conversion process within the factory. The manufacturing planning in our country is carried with the help of the well known MRP which was developed in the USA sometime in the 1960 s with an initiative taken by Joseph Orlicky. As is well known ,the MRP process breaks the final assembly into its modules and components and determines their requirements at various levels and points in time .It works backwards in time and identifies the right batch quantities of each of these components and their subassemblies so that the final assembly is delivered exactly in right quantities at the right time schedule. Details of the working of MRP are discussed in Chapter of this book.

While MRP is known as a Push method ,the Japanese, based on an initiative by Taichi Ohno of the Toyota company have developed a method of manufacturing well known as the JIT System. In the JIT System the needed parts are pulled to the final assembly end with the help of Kanban cards which act as a signal to the upstream operation to produce just the quantity of the batch of parts pulled by the Kanban card downstream. This process of pulling the parts just when needed and in right quantity results in a minimal Inventory situation and a smooth streamlined flow of materials is created between the workstations.JIT production approach is called the Pull approach. Kanban has become very popular in US and even Indian companies like the Birla Group are impressed by it. .


Whereas purchasing deals with the inbound flow of materials, distribution deals with the outbound flow of materials. Distribution is the management of the flow of materials from manufacturers to customers and from warehouses to retailers, involving the storage and transportation of products. Distribution broadens the marketplace for a firm, adding time and place value to its products. Here, we briefly consider three types of decisions that distribution managers facet where to stock finished goods; what transportation mode to use; and how to schedule, route, and select carriers.


A fundamental decision is where to stock an inventory of finished goods. Forward placement means locating stock closer to customers at a warehouse or distribution center (DC) or with a wholesaler or retailer. Forward placement can have two advantages - fast delivery times and reduced transportation costs - that can stimulate sales. Firms using a make - to - stock strategy often use forward placement.

Finding the best way to position inventory is particularly important for international operations. Firms from around the world are trying to openDC( distribution centres) in strategic cities to support their sales activities at the International level. Placing inventory close to the customer reduces the lag time between receiving an order and delivering a product, an important competitive advantage in both domestic and international markets. Forward placement might also reduce shipping costs. Shipments from a plant can be concentrated on a few routes (to the DCs), rather than fragmented for scattered customer locations. Outbound shipments from DCs to customer destinations may be large enough to justify discount rates. For example, General Foods mixes products received from various plants at its distribution centers and reships them to large customers at reduced rates.

If competitive priorities call for customized products, storing an inventory of finished goods risks creating unwanted products, Backward placement means holding the inventory at the manufacturing plant or maintaining no inventory of finished goods. Backward placement, sometimes referred to as inventory poling, is advantageous when the demand in various regions may be unpredictably high one month and low the next. In this case, backward placement pools demand so that the highs in some regions cancel the lows in others. Demand on a centralized inventory is less erratic and more predictable than demand on regional inventories. Inventories for the whole system can be lower, and costly reshipments from one DC to another can be minimized. Managerial Practice 11.4 shows how IBM used backward placement to improve supply-chain operations.


The five basic modes of transportation are highway, rail, water, pipeline, and air. Providers of these services become part of a firms supply chain. Each has its own advantages and limitations, so the selection of these service providers should be made with the competitive for each of the firms products or services in mind.

If flexibility is a key competitive priority, highway transportation can be used to ship goods to almost any location in a country. No re handling is needed, as is often the case with other modes that rely on trucks for initial pickup and final delivery. Transit times are good, and rates are usually less than rail rates for small quantities and short hauls.

If cost is a major concern, rail or water transportation may be appropriate. Rail transportation can move large quantities very cheaply, but transit times are long and variable. . This mode is usually best for shipping raw materials, rather than finished goods. Rail shipments often require pickup and delivery remanding. Water transportation provides high capacity at low unit cost, but transit times are slow and large areas are inaccessible to waterborne carriers.

For transportation of certain products in high volumes at low cost, pipelines may be the choice. Pipeline transportation is highly specialized, with limited geographical flexibility. It is limited to liquids, gases, or solids in slurry for. No packaging is needed, and costs per mile are low.

Finally, if fast delivery times are important, air transportation is the fastest but most expensive mode. Air freight represents only a very small percentage of all goods move, although that proportion is rising rapidly. Air transportation is limited by the availability of airport facilities and requires pickup and delivery re handling.

In addition to these primary modes, special service modes and hybrids, such as parcel post, air express, bus service, freight forwarder, and piggyback, are available. Piggyback involves short-haul pickup and delivery by truck, with the trucks trailer loaded on a rail car for the long-haul part of the trip.

Different forms of ownership and management of transportation services are possible. A firm can become a private carrier, owning and operating its own fleet. Or it can outsource the transportation to a contract carrier, negotiating with the carrier for a specified amount, type, and frequency of shipment. A contract carrier doesnt provide service to the general public, serving only specific customers. Or the firm can select a common carrier, which by law must serve all customers. This option gives the firm the least control over carrier availability but makes sense for low-volume producers with geographically dispersed markets.


Several activities essential to the performance of the supply chain are involved in the day-to-day control of freight movement. The shipping schedule must mesh with purchasing and production control schedules. It also reflects the trade-off between transportation costs and customer response times. Delaying a shipment for another two days so as to combine it with others may make possible a full carload rate for a rail shipment or a full truckload rate for a truck shipment. Routing choices also must be made. A manufacturer can gain a lower freight rate by selecting a routing that combines shipments to multiple customers. The firm may even negotiate lower overall if it develops routings by which large volumes can be shipped regularly. The choices are complex.


Third party logistics does the out sourcing of logistics activities to a logistics service provider so that the manufacturing company can pay singular attention to its core competency. Companies decide to have third party logistics due to the following reaons :

1. Improved strategic focus on core tasks.

2. Reduce total costs.

3. Increase in range of market.

4. Improved service level due to reduced lead time.

5. Efficient inventory management.

Third-party logistics refers to the concept of outsourcing the logistics and distribution of manufacturing or service firm to a logistics service provider so that the manufacturing company can focus on its core companies of new product development manufacturing and marketing the products.

The logistics distribution activities add up to around 5 per cent to the cost to thereby increasing the final cost of the product. In addition to this the inventory costs add about 15 per cent to the cost of the product. To increase operational efficiency it is necessary for firms to cut these costs to remain competitive. So ,manufacturing firms outsource these activities to Logistics Service Providers which in co-ordination with the manufacturing firms control inventory and reduce costs.

Third party logistics is the activity of outsourcing activities related to logistics and distribution. Companies opt for third party logistics for the following additional advantages:

Improved strategic focus: Using 3PLs companies can concentrate on their core tasks and improve customer satisfaction.

Resource constraints.

Lowered costs: according to research reports companies can reduce their inventory management costs by around 15-30 percent. Also 3PL service providers invest large sums of money in developing processes that aim to achieve logistical excellence, which are unavailable to other companies.

Expansion of markets: Outsourcing logistical activities to 3PLs allow companies to get into new business, new markets or a new channel of distribution quickly and with a limited outlay of cash

For leveraging more professional and scientific approach to logistical problems.

For improvement in service levels with improved response time.

For efficient management of inventory resulting in better utilization of working capital.

Increased flexibility: A 3PL contract provides for relatively short term commitments as compared to building and maintaining the same resources by the company itself, thus freeing up these resources for other uses.

In addition to the logistics and distribution functions, 3PLs also perform functions such as fund collection, providing information of goods movement, consumer demographics, warehousing and value-added activities such as assembling, packaging flow of funds and reverse logistics.

The Evolution of 3PLs

The evolution of 3PLs is closely linked with the evolution of SCM practices. In the era of mass production, the role that Logistics Service Providers performed was confined only to the flow of goods from point of origin to the point of consumption. These types of LSPs can be called as the first generation LSPs whose primary functionality was that of a transportation activity.

With increased awareness the manufacturing firms began to closely collaborate with the LSPs to handle both inward as well as outward movement of goods and some sharing of information resulting in the birth of second generation LSPs. However the LSPs were still treated with some suspicion. The suspicion arose from the manufacturing firms fears that the LSPs may provide information related to the suppliers and consumers to their competitors. However, with the increased use of information technology that increased the visibility of goods the manufacturing company and the LSPs have come a long way to improve their relationship and now work closely to improve the business of the firm. The LSPs work in tandem with the manufacturing firm to meet their supply chain activities and help manufacturing firms tap new markets because of their efficient and timely distribution of products. The new breeds of LSPs even help the manufacturing firms in designing their SCM strategy and in some cases the IT and communication infrastructure have been closely integrated allowing both the LSPs and the manufacturing firm to share information and aid in better decision-making.

INFRASTURCTURE REQUIRED FOR A Third Party Logistics Provider

The following minimal infrastructure is a requirement for a good 3PL

1. Warehouse

2. Fleet of Vehicles.

3. Computer support for efficient information exchange.

4. Advanced material handling equipment.

5. Competent team of consultant.

6. Trend workforce.

7. Geographic reach

The well known 3PL providers in India are GATI, Transport Corporation of India, Blue dart Logistics, DHL, Fed-ex.


The key components of a 4PL are as under:

1 Architect/Integrator and Change Leader : The Fourth party logistics provider should. Ascertain that the role of a 3 PL Service provider is increased on a continuous basis. The improvement could be in processes or through use of superior technologies.

2 Control Room Operations : The control room personnel comprise of expert logisticians and apart from external experts comprise of prominent channel members. An clients

3 Supply-Chain Information providers : The 4PL should gather ,collate and spread vital information to various member organizations, Use of advanced technologies like GPS, GIS etc should be made to achieve a clear visibility of goods. Web based tools should be used to convert raw data into meaningful information .

4 Resource Providers : They act as transportation asset provider, for example warehouse, cross-dock, property facility. They also help in manufacturing-outsourcing Procurement service and Co-packing service.


Though it is not deployed in India as on today Technology is one of the key components of disseminating information for being responsive to changes. And being dynamic is an important challenges of a 4PL service provider.

GPS Technology

GPS, global positioning system, is the only technology that can be used for determining the position of any object on Earth, with a high amount of accuracy and in any climate.

GPS was developed by the US Department of Defence for its military operations. GPS uses 3 main elements-space segment, user segment and the control segment, GPS uses 24 satellites that orbit in space 11,000 nautical miles above the earth, which is termed the space segment. The user segment consists or receivers ,on the earth which can be hand held or mounted on a car. The control segment consists of five earth stations, located around the globe which ensures the proper working of the satellites.

The 24 satellite takes around 12 hours to orbit the Earth once. They are positioned so that that at any given time any point on Earth can receive signals from six satellites..

Earth Control Stations : These are unmanned monitor stations located around the globe; a master ground control station in Colorado and four large ground antenna stations play the role of transmiting signal to the satellites.

GPS Receivers : GPS receivers can be hand-held or can be mounted on vehicles. The typical size of a GPS receiver is same as that of a cell phone and decode the signal sent by the satellite

The basic principle of working of GPS System

The GPS system basically works on the measurement of distance between the receiver and satellites. If we know the exact distance from any satellite in space then we surely know that we are on the imaginary horizon of the sphere having radius equal to the distance between the satellite and us. If we know the same information about another satellite we can be sure that we are on the intersection of the emitted radio signals of the two satellites .A third such measurement can verify the accuracy of our estimate.

Use of GPS in Logistics:

The use of GPS in fleet management helps to :

Know whether the vehicle has travelled out of an approved area, or entered a fenced-off zone.

Know how long the vehicle has spent in various places, or in transit, each working day.

Determine vehicle and / or cargo status according to external inputs.

Determine how long the vehicle has been in use.

Eliminate unauthorized use of vehicles.

Ensure that company vehicles are used legally.

Determine the location of the stolen asset in case of theft.

GIS System:

While the geographic positioning system tells us the location of an object on Earth, the Geographical Information System tells us what is the object and how does it look at a physical level The key components of GIS are the hardware and software. The hardware is the display or printing devices required for capturing and displaying the data. Remote sensing devices are used in capturing the images of the object of interest.

GIS in Transport Management

GPS and GIS in the transportation management system can get real time data of the traffic conditions or the conditions of weather at any place and identify the problem areas and. the data can be used for effective route optimization. The 4PL industry has a long way to go before it establishes in India and faces a lot of challenges, which may require a long time to be overcome.


Designing Efficient Supply Chains

The main objective of designing efficient supply chain is cost minimization and better asset utilization. Several essential features are necessary to achieve this objective. To achieve this, long term relationships need to be developed with the suppliers who should be involved in joint cost reduction initiatives, value engineering programmes and process improvement. efforts Likewise, it is important to invest in long-term relationship with the entities in the out-bound supply chain and improve efficiency in the transportation.

Because the demand is likely to exist for longer time, continuous replenishment inventory systems should be resorted to. Efficient information sharing across the very essential. Developing robust inventory control models to accurately fix the reorder point and order levels are important to ensure efficient supply chains. Integrating material planning and control systems using company-wide information systems ,like the ERP, is costly but essential for efficient supply chains.

Responsive supply

Responsiveness Zone of spectrum Strategic Fit

Efficient supply chain Certain Implied Uncertain Demand uncertainty Demand spectrum

FIGURE 30.5 : Designing Supply Chain for Strategic Fit

Designing Responsive Supply Chains

Responsive supply chains need to be designed because of uncertainty in demand and large forecast errors . Moreover, developing systems to quickly meet the demand when the demand is uncertain highly essential. Capturing point of sale data and immediately updating the centralized planning system using EDI and Internet linkages is an important operational feature of responsive supply chains. Cutting down lead time by drastically redesigning business processes pertaining to various components of the supply chain is also a key requirement. Recently, newer strategies related to postponement have been devised to address the twin problems of customization, increased variety and longer lead time. In a postponement strategy, variety creation is postponed as much as possible to the point of consumption. Mass customization is developing as a very useful business strategy

Firms selling innovative products practice tactics of postponement. In one method, the company delays the final packaging until the point of consumption of the product. In assembly postponement standardized sub-components are kept ready and the product is assembled to order just in time. Dell Computers .follow the strategy of eliminating the distributor and the retailer to reduce the delivery lead time. In the case of manufacturing postponement, the final stage of manufacturing is delayed until the point of consumption. Other strategies employed in configuring and efficient supply chain include changes in product design. Developing standardization, use of modular design provides several examples of these.

Efficient Versus Responsive Supply Chains

Even though extensive technologies such as EDI, the Internet, computer-assisted design, flexible manufacturing, and automated warehousing have been applied to all stages to of the supply chain, the performance of many supply chains has been unsatisfactory.

The nature of demand for the firms products or services is a key factor in the best choice of supply-chain design. Efficient supply chains work best in environments where demand is highly predictable, such as demand for staple items purchased at grocery stores or demand for a package delivery service. The focus of the supply chain is on the efficient flows of markets the firms serve, product or service designs last a long time, new introductions are infrequent, and variety is small. Such firms typically produce for markets in which price is crucial to winning an order; therefore contribution margins are low and efficiency is important. Consequently, the firms competitive priorities are low-cost operations, consistent quality, and on-time delivery.

Responsive supply chains work best when firms offer a great variety of products or services and demand is low and uncertain and the stakes are high. The firms may not know what products or services they need to provide until customers place orders. In addition, demand may be short-lived, as in the case of fashion goods. The focus of responsive supply chains is minimum lead time so as to avoid keeping costly inventories that ultimately must be sold at high discounts. Such is the operating environment of mass customizers or firms utilizing the assemble-to-order operations strategy . To be competitive, such firms must frequently introduce new products or services. Nonetheless, because of the innovativeness of their products or services, these firms enjoy high contribution margins. Typical competitive priorities are development speed, fast delivery times, customization, volume flexibility, and high-performance design quality. It should be remembered that product life cycle is a crucial factor which distinguishes a new product with low demand and the same product becoming a stable product with fairly good demand. Initially a quick response strategy is desirable and later on an efficient strategy has to be resorted. Figure 30.7 Shows the zone of efficient frontier advocated by Chopra et al.







Figure 30.6 Bullwhip effect in supply chains (Adapted from Lee, et al)

The figure30.6 indicates in a block diagram manner a supply chain consisting of supplier manufacturer, distributor, retailer and customer. It has been observed that the demand for items goes on increasing as we move up the supply chain from the retailer to distributor to manufacturer. This increase in magnitude and fluctuation in the demand where work- in -process inventories as we move upstream the supply chain termed as Bullwhip effect .The word bullwhip has been so called because it resembles the action of a whip where each segment further down the whip goes faster than the one above it. It has harmful effect on the performance of the supply chain. This is because the work- in- process goes on increasing backwards along the supply chain and needlessly increases the work in process level and money blocked the inventory.

Causes of Bullwhip Effect : A simple logical reason for the bullwhip effect can be conjectured. What happens is that a small increase in retailers orders due to his desire to keep some safety stock, which the authors call "squirrel complex" despite a steady demand from the customer, results in the distributor increasing his orders to the manufacturer by an amount greater than the retailer for reasons of keeping a safety stock, just in case the demand has an increasing trend .The manufacturer then sees a jump in demand Due to this the manufacturer increases his level of materials ,to be procured from the supplierin adition to increasing an increase in machines and labour. The effect of this increase in production results in too many goods are fed into the pipeline. However the retailer refuses the excessive flow which forces the distributor to also cut back his pseudo increase in demand. Seeing this drop in demand ,the manufacturer has no way but to attempt selling the goods at a lowered price to the retailer. through the distributor.

Apart from the above simple logical explanation, research workers like Forrester ,Lee and Padmanabhan have analyzed the bullwhip effect. The authors now present their interpretion

of the Lee-Padmanabhan model.

There are four major causes of the bullwhip effect :.

1. Demand Forecast Updating :

One of the methods of forecasting used widely is known as exponential smoothing. In this technique, the next weeks forecast is calculated by adding to the earlier forecast an amount of correction factor to update the new forecast.

Ft= Ft-1 + 𝛂( Dt-1 - Ft-1) . Though the process of adding the error( e ) seems to be logical the weak point of exponential smoothing lies in the choice of a rational value of alpha.

The value of 𝛂 varies from 0 to 1. If a manager uses a value of 𝛂 which is too high say .6 he might overestimate the Forecast and send a bloated figure of his forecast up the supply chain. This might upset the supply plans of the upstream member.

Every company in a supply chin usually does product forecasting for its production scheduling; When a downstream operation places an order, the upstream manager processes that piece of information as a signal about future product demand. Based on this signal, the upstream manager readjusts his or her demand forecasts and, in turn, the orders placed with the suppliers of the upstream operation. Some authorities contend that demand signal processing is a major contributor to the bullwhip effect

For example, if you are a manager who has do determine how much to order from a supplier, you use a simple method, such as exponential smoothing. The order you send to the suppler reflects the amount you need to replenish the stocks to meet the requirement of future demands, as well as the necessary safety stocks. With long lead times, it is common to have weeks of safety stocks. The results are the fluctuation in the order quantities over time can be much greater than those in the demand data.

2. MRP Based Order Placement:

The well known tool of Material Requirements Planning is based on the premise that order should be placed with the supplier in discrete batches with certain lead times. MRP thus breaks up continuous demand into lumpy demand.. MRP systems are often run monthly, resulting in monthly ordering with supply. A company with slow-moving items may prefer to order on a regular cyclical basis

One common obstacle for a company that wants to order frequently is the economics of transportation. There are substantial differences between full truckload (FTL) and less-than-truck-loads rates, so companies have a strong incentive to fill a truckload when they order from a supplier. For most items, a full truckload could be a supply of a month or more. . When a company faces periodic ordering by its customers, the bullwhip results.

3. Manufacturers offerings of low prices:

Manufacturers and distributors periodically have special promotions like price discounts, quantity discounts, coupons, rebates and so on. All these promotions result in price fluctuation. In addition, manufacturers offer trade deals like special discounts ,delayed payment terms) to the distributors and wholesalers, .

Such promotions can be costly to the supply chain. When a products price is low through direct discount or promotional schemes, a customer buys in bigger quantities than needed. When the products return to normal, the customer stops buying until it has depleted its inventory. As a result the customers buying pattern does not reflect its normal consumption pattern and the variation of the buying quantities is much bigger than the variation of the consumption rate which occurs normally ,-resulting in the bullwhip effect.

4. Curtailing of supply during production shortage

When demand exceeds supply, a manufacturer often reduces the quantity of supply of its product to customer. In such a situation, the manufacture allocates the amount in proportion to the amount ordered. Knowing that the manufacturer will reduce the supply when the product is in short supply, customers exaggerate their real needs when they order. Later on, when demand reduces, orders will suddenly disappear and cancellations of orders takes place resulting in inventory oscillation


1. Avoid Demand Forecast Updates

Ordinarily, every member of a supply chain conducts some sort of forecasting in connection with its planning. Bullwhip effects are created when supply chain members process the demand input from their immediate downstream member in production. Demand input from the immediate downstream member, is the outcome of result of input from his own downstream member.

One remedy to the repetitive processing of consumption data in a supply chain is to make demand data at a downstream site available to the upstream site. Hence, both sites can update their forecasts with the same raw data , although the data are not as complete as point-of-sale (POS) data from resellers which is most authentic

Another remedy is the direct selling program which eliminates the distributor as well as the retailer from the system who are main culprits causing the bullwhip effect. Dell Computers sells its products directly to consumers without going through the distribution channel. Since long supply lead times can aggravate the bullwhip effect, just-in-time replenishment is an effective way to eradicate the effect.

2. Introduce a JIT type system:

Since order batching contributes to the bullwhip effect, companies need to devise strategies that lead to smaller batches or more frequent resupply,.the way the Japanese do .

One reason for large order batches is the cost of transportation. The difference in the costs of full truckloads and less-than-truckloads are so great that some manufacturers use a technique called tailored aggregation and induce their distributors to order assortments of different products. Hence a truckload may contain different products from the same manufacturer instead of a full load of the same product. The effect is that, for each product, the order frequency is much higher, the frequency of deliveries .A case study of multi item transportation using" tailored aggregation of products" has been taken in a Case study in the book.

3. Stabilize Prices

The simplest way to control the bullwhip effect caused by price canges offered by the manufacturer whatsoever the cause.. The manufacturer can reduce the incentives for retail forward buying by establishing a uniform wholesale pricing policy. The grocery has moved to an everyday low price (EDLP) or value pricing strategy.

Activity-based costing (ABC) provide explicit accounting of the costs inventory, storage, special handling, premium transportation, and so on that previously were hidden and expose o the false benefit of promotions. ABC therefore helps companies to implement the EDLP strategy.

4. Eliminate the need for Reducing supply in Shortage period:

Situations when a supplier faces a shortage, instead of allocating products based on orders, it can allocate in proportion to past sales records. Customers then cannot hype their demand unnecessarily The sharing of capacity and inventory information helps to reduce customers anxiety and, consequently, do not order incorrectly. Some manufactures work with customers to place orders well in advance of the sales season. Thus they can adjust production capacity or scheduling with better knowledge of product demand.


1 Vendor Managed Inventory (VMI)

Vendor Managed Inventory (VMI) is basically evolved to facilities the operations at retail stores. It involves a continuous replenishment program that uses the exchange of information between the retailer and the supplier to allow the supplier to mange and replenish merchandise stock at the store or warehouse level. In this program, the retailer supplies the vendor with the information necessary to maintain just enough merchandise stock to meet customer demand. This enables the supplier to bettor project and anticipate the amount of product it needs to produce or supply. The manufacturer has access to the suppliers inventory data and is responsible for generating purchase orders. VMI was first applied to the grocery industry, between companies like Procter % Gamble (supplier) and Wal-Mart (distributor), But if applied provide the benefited of smoother demand; increased sales, lower inventories and still reduced costs of lost sales to the other industries.

VMI Business Model

In the fulfillment process using VMI, typically the activities of forecasting and creating the purchase orders are performed by the vendor/supplier and note by the retailer. Electronic data interchange (EDI) is an integral part of VMI process and takes a vital role in the process of data communication. The retailer sends the sales and inventory data to the vendor via EDI or other B2B collaboration facilities and the supplier creates the purchase orders based on the established inventory levels and fill rates. VMI process, the retailer is free of forecasting and creating the orders as the vendor generates the orders. The vendor is responsible for creating and maintaining the stoke plan for the retailer. The vendor sends the shipment notices before shipping the product to the retailers store / warehouse. Soon after this, the vendor sends the invoice to the retailer. Upon receiving the product, the retailer does the invoice matching and handles payment through their account payable system.

From above we can say that VMI is a backward replenishment model where the supplier does the demand creation and demand fulfillment. In fact it a methodical way to transfer the ownership of the inventory to the vendors but still ascertaining the smooth material flow as and when required.

In VMI, the vendor tracks the numbers of products shipped to distributors and retail outlets. Tracking tells the vendor whether if not the distributor needs more suppliers. Products are a