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SUPPLY CHAIN MANAGEMENT

Supply chain management (SCM) is the management of a network of interconnected
businesses involved in the provision of product and service packages required by the end
customers in a supply chain. Supply chain management spans all movement and storage
of raw materials, work-in-process inventory, and finished goods from point of origin to point
of consumption.
Supply chain management encompasses the planning and management of all activities
involved in sourcing and procurement, conversion and all logistics management activities.
Importantly it also includes coordination and collaboration with the channel partners, which
can be suppliers, intermediaries, the third party service providers and customers. In
essence, supply chain integrates supply and demand management within and across
companies.

Supply Chain Management (SCM) is the combination of art and science that goes into
improving the way your company finds the raw components it needs to make a product or
service and deliver it to customers. The following are five basic components of S.C.M:

 Plan
This is the strategic portion of SCM. Companies need a strategy for managing all the
resources that go toward meeting customer demand for their product or service. A big
piece of SCM planning is developing a set of metrics to monitor the supply chain so that it is
efficient, costs less and delivers high quality and value to customers.

 Source
Next, companies must choose suppliers to deliver the goods and services they need to
create their product. Therefore, supply chain managers must develop a set of pricing,
delivery and payment processes with suppliers and create metrics for monitoring and
improving the relationships. And then, SCM managers can put together processes for
managing their goods and services inventory, including receiving and verifying shipments,
transferring them to the manufacturing facilities and authorizing supplier payment.

 Make
This is the manufacturing steps. Supply chain and logistics managers schedule the
activities necessary for production, testing, packaging and preparation for delivery. This is
the most metrics-intensive portion of the supply chain-one where companies are able to
measure quality levels, production output and worker productivity.

 Deliver
This is the part that many SCM insiders refer to as logistics, where companies coordinate
the receipt of orders from customers, develop a network of warehouses, pick carriers to get
products to customers and set up an invoicing system to receive payments.

 Return
This can be a problematic part of the supply chain for many companies. Supply chain
planners have to create a responsive and flexible network for receiving defective and

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excess products back from their customers and supporting customers who have problems
with delivered products.

SUPPLY CHAIN MANAGEMENT PROBLEMS

The goal of supply chain management is to use technology and teamwork to build efficient
and effective processes that create value for the end customer. The goal is compromised
when processes, value chain elements, and/or compromise work toward local rather than
global optimum.

PROBLEMS ADDRESSED
Supply chain management must address the following problems:
 Distribution Network Configuration:
Number of location and network missions of suppliers, production facilities, distribution
centres, warehouses, cross-docks and customers.

 Distribution Strategy:
Questions of operating control (centralized, decentralized or shared); delivery scheme, e.g.,
direct shipment, pool point shipping, cross dicking, Direct Store Delivery (DSD), closed loop.

 Shipping
Mode of transportation, e.g., motor carrier, including truckload, less than truckload (LTL),
parcel,railroad, intermodal transport, including trailer on flatcar (TOFC) and container on
flatcar (COFC), ocean freight, airfreight, replenishment strategy (e.g. pull, push or hybrid);
and transportation control (e.g. owner-operated, private carrier, common carrier, contract
carrier, or third-party logistics (3pl).

 Trade-Offs in Logistical Activities

The above activities must be well coordinated in order to achieve the lowest total logistics
cost. Trade-offs may increase the total cost if only one of the activities is optimized. For
example, full truckload (FTL) rates are more economical on a cost per pallet basis that LTL
shipments. If, however, a full truckload of a product is ordered to reduce transportation
costs, there will be an increase in inventory holding costs which may increase total logistics
costs. It is therefore imperative to take a systems approach when planning logistics
activities. These trade-offs are key to developing the most efficient and effective logistics
and SCM strategy.

 Information:
Integration of processes through the supply chain to share valuable information, including
demand signals, forecasts, inventory, transportation and potential collaboration etc.

 Inventory Management
Quantity and location of inventory, including raw materials, working-in-progress (WIP),
finished goods and merchandise.

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Inventory: Is the goods that a business has on its premises or on consignment. The
essential role of inventory is to act as a buffer, allowing for the functioning of the production
of the product and other fulfilment process. The four component of inventory are defined
as:
 raw material
 work in progress
 finished goods
 merchandise

Inventory or stock refers to the goods and materials that a business holds for the ultimate
purpose of resale (repair). Effective inventory management is all about knowing what is on
hand, where it is in use and how much finish product result.
Inventory management is the process of efficiently overseeing the constant flow of units in
and out of an existing inventory.

 Cash Flow
Arranging the payment terms and methodologies for exchanging funds across entities within
the supply chain.

Supply chain execution means managing and coordinating the movement of

materials, information and funds across the supply chain. The flow is bi-directional.

2.2 FUNCTIONS OF S.C.M

Supply chain management is a cross –function approach including in managing the
movement of raw materials into an organization, certain aspects of the internal processing
of materials into finished goods, and the movement of finished goods out of the organization
and toward the end-consumer. As organizations strive to focus on core competencies and
becoming more flexible, they reduce their ownership of raw materials sources and
distribution channels. These functions are increasingly being outsourced to other entities
that can perform the activities better or more cost effectively. The effect is to increase the
number of organizations involves in satisfying customer demand, while reducing
management control of daily logistics operations. Less control and more supply chain
partners led to the creation of supply chain management concepts. The purpose of supply
chain management is to improve trust and collaboration among supply chain partners, thus
improving inventory visibility and the velocity of inventory management.
Several models have been proposed for understanding the activities required to
manage material movements across organizational and functional boundaries. Supply
Chain Operation Reference (SCOR) is a supply chain management model promoted by the
supply Chain Council. Another model is the SCM model proposed by the Global Supply
Chain Forum (GSCF). Supply chain activities can be grouped into strategic, tactical, and
operational levels. The council of Supply Chain Management Professional (CSCMP) has
adopted the American Productivity & Quality centre (APQC) Process Classification
Frameworks a high-level, industry-neutral enterprise process model that allows
organizations to see their business processes froma cross-industry viewpoint.

 STRATEGIC LEVEL
Strategic network optimization includes:
 The number of location and size of warehousing, distribution centers, and facilities.

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 Strategic partnerships with suppliers, distributors, and customers, creating

communication channels for critical information and operational improvements such
as cross docking, direct shipping, and third-party logistics.
 Product life cycle management, so that new and existing products can be optimally
integrated into the supply chain and capacity management activities.
 Segmentation of products and customers to guide alignment of corporate objectives
with manufacturing and distribution strategy.
 Information technology chain operations.
 Where-to-make and make-buy decision.
 Aligning overall organizational strategy with supply strategy for long term and needs
resource commitment.

 TACTICAL LEVEL
 Sourcing contracts and other purchasing decision
 Production decisions, including contracting, scheduling, and planning process
definition.
 Inventory decisions, including quantity, location, and quality of inventory.
 Transportation strategy, including frequency, routes, and contracting.
 Benchmarking of all operations against competitors and implementation of best
practices throughout the enterprise.
 Milestone payments.
 Focus on customer demand and habits.

OPERATIONAL LEVEL
 Daily production and distribution planning, including all nodes in the supply chain.
 Production scheduling for each manufacturing facility in the supply chain (minute by
minute).
 Demand planning and forecasting, coordinating the demand forecast of all customers and
sharing the forecast with all suppliers.
 Sourcing planning, including current inventory and forecast demand, in collaboration with
all suppliers.
 Inbound operations, including transportation from suppliers and receiving inventory.
 Production operations, including the consumption of materials and flow of finished goods.
 Outbound operations, including all fulfilment activities, warehousing and transportation to
customers.
 Order promising, accounting for all constraints in the supply chain, including all suppliers,
manufacturing facilities, distribution centers, and other customers.
 From production level to supply level accounting all transit damage cases & arrange to
settlement at customer level by maintaining company loss through insurance company.
 Managing non-moving, short-dated inventory and avoiding more products to go short-
dated.

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2.3 INVENTORY MANAGEMENT AND RISK POOLING

Inventory management is the supervision of non-capitalized assets (inventory) and stock
items. A component of supply chain management, inventory management supervises the
flow of goods from manufacturers to warehouses and from these facilities to point of sale.
Inventory management is required at different locations within a facility or within multiple
locations of a supply network to protect the regular and planned course of production
against the random disturbance of running out of materials or goods. The scope of
inventory management also concerns the fine lines between replenishment lead time,
carrying costs of inventory, asset management, inventory forecasting, inventory valuation,
inventory visibility, future inventory price forecasting, physical inventory, available physical
space for inventory, quality management, replenishment, returns and defective goods and
demand forecasting.
Or can be defined as the left out stock of any item used in an organization business
inventory.

REASONS FOR KEEPING STOCK

 Time
The time lags present in the supply chain, from supplier to user at every stage, requires that
you maintain certain amounts of inventory to use in this lead times. However, in practice,
inventory is to be maintained for consumption during ‘variations in lead time’. Lead time
itself can be addressed by ordering many days in advance.
 Uncertainty
Inventories are maintained as buffers to meet uncertainties in demand, supply and
movements of goods.
 Economies of scale
Ideal condition of “one unit at a time at a place where a user needs it, when he needs it”
principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and
storing brings in economies of scale, thus inventory.
 Appreciation in Value
In some situations, some gains the required value when it is kept for some time to allow it
reach the desired standard for consumption, or for production. For example; beer in the
brewing industry.
N/B: all these stock reasons can apply to any owner or product.

TERMS IN INVENTORY
 Stock Keeping Unit (SKU)
Is a unique combination of all the components that are assembled into the purchasable
item. Therefore, any change in the packaging or product is a new SKU. This level of
detailed specification assists in managing inventory.
 Stock out means running out of the inventory of a SKU.
 “New Old Stock”
(Sometimes abbreviated NOS) is a term used in business to refer to merchandise being
offered for sale that was manufacture long ago but that has never been used. Such
merchandise may not be produces anymore, and the new old stock may represent the only
market source of a particular item at the present time.
 Typology: This summarises the scope of information exchange for mutual benefit of
the members of the supply chain and the range of supply chain management trading
relationships that exist between supplier and customer.
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 Safety Stock: Sometimes called bufferstock, is a term used by

inventorymanagers to describe a level of extra stock that is maintained to mitigate risk of
stockouts or (shortfall in raw material or finished goods) due to uncertainties in supply and
demand. Safety stock provides additional buffer for excess demand or delayed shipments
from your suppliers.
 Cycle stock
Portion of inventory available (or planned to be available) for the normal demand during a
given period, excluding excess stock and safety stock. It is the stock formed by items
arriving infrequently but in large quantities to meet frequent but small-quantity demands.
Also called working stock or lot size stock.(Used in batch processes, it is the available
inventory, excluding buffer stock). Cycle stock is the inventory that you plan to sell based
on demand forecast.
 De-coupling
(Buffer stock held between the machines in a single process which serves as a buffer for
the next one allowing smooth flow of work instead of waiting the precious or next machine in
the same process)
 Anticipation Stock
(Building up extra for periods of increased demand – e.g. ice cream for summer)
 Pipeline Stock
(Goods still in transit or in the process of distribution – have left the factory but not arrived at
the customer yet).
 Lead Time
It is the time required to manufacture, procure or rendered a product or service. It is the
time required before a product or service can be provided or delivered.
 Lags
It is the time a product or service was delayed before it was deliver or rendered.
 Inventory examples
While accountants often discuss inventory in terms of goods for sale, organizations –
manufacturers, service-providers and not-for-profits-also have inventories (fixtures,
furniture, supplies, etc.) that they do not intend to sell. Manufacturers’, distributor’, and
wholesaler’ inventory tends to cluster in warehouses. Retailers’ inventory may exist in a
warehouse or in a shop or store accessible to customers. Inventories not intended for sale
to customers or to clients may be held in any premises an organization uses. Stock ties up
cash and, if uncontrolled, it will be impossible to know the actual level of stocks and
therefore impossible to control them.

While the reasons for holding stock were covered earlier, most manufacturing organizations
usually divide their “goods for sale” inventory into:
o Raw materials – materials and components schedule for use in making a product.
o Work-in-progress (WIP) – materials and components that have begun their
transformation to finished goods.
o Finished goods – goods ready for sale to customers.
o Goods for resale – returned goods that are saleable.

 Distressed inventory
Also known as distressed or expired stock, distressed inventory is inventory who’s potential
to be sold at a normal cost has passed or will soon pass. In certain industries it could also
mean that the stock is or will soon be impossible to sell. Examples of distressed inventory
include products that have reached their expiry date, or have reached a date in advance of
expiry at which the planned market will no longer purchase them (e.g. 3 months left to
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expiry), clothing that is defective or out of fashion, music that is no longer popular and old
newspapers or magazines. It also includes computer or consumer-electronic equipment
that is obsolete or discontinued and whose manufacturer is unable to support it. One current
example of distressed inventory is the VHS format. In 2001, Cisco wrote off inventory worth
US $2.25 billion due to duplicate orders. This is one of the biggest inventory write-offs in
business history.

 Stock Rotation
Stock Rotation is the practice of changing the way inventory is displayed on a regular basis.
This is most commonly used in hospitably and retail-particularity where food products are
sold. For example, in the case of supermarkets that a customer frequents on a regular
basis, the customer may know exactly where they want and where they want and where it
is. This results in many customers going straight to the product they seek and do not look
at other items on sale. To discourage this practice, stores will rotate the location of stock to
encourage customers to look through the entire store. This is in hopes the customer may
pick up items they may have not normally of seen.

 Inventory Credit
Inventory credit refers to the use of stock, or inventory, as collateral to raise finance. Banks
may be reluctant to accept traditional collateral, for example in developing countries where
land title may be lacking, inventory credit is a potentially important way of overcoming
financing constraints. This is not a new concepts; archaeological evidence suggests that it
was practice in Ancient Rome.
Effective inventory management is all about knowing what is on hand, where it is in use,
and how much finished product results. Inventory management is the process of efficiently
overseeing the constant flow of units onto and out of an existing inventory. This process
usually involves controlling the transfer in of units in order to prevent the inventory from
becoming too high, or dwindling to levels that could put the operation of the company into
jeopardy. Competent inventory management also seeks to control the costs associated
with the inventory, both from the perspective of the total value of the goods included and the
tax burden generated by the cumulative value of the inventory. Balancing the various tasks
of inventory management means paying attention to three key aspects of any inventory.
The first aspect has to do with time. In terms of materials acquired for inclusion in the total
inventory, this means understanding how long it takes for a supplier to process an order and
execute a delivery. Inventory management also demands that a solid understanding of how
long it will take for those materials to transfer out of the inventory be established. Knowing
these two important lead times makes it possible to know when to place and an order and
how many units must be ordered to keep production running smoothly.

Calculating what is known as buffer stock is also effective inventory management.

Essentially, buffer stock is additional units above and beyond the minimum number required
to maintain production levels. For example, the manager may determine that it would be a
good idea to keep one or two extra units of a given machine part on hand, just in case an
emergency situation arises or one of the units proves to be defective once installed.
Casting this cushion or buffer helps to minimize the chance for production to be interrupted
due to a lack of essential parts in the operation supply inventory.
Inventory management is not limited to documenting the delivery of raw materials and the
movement of those materials into operational process. The movement of those materials as
they go through the various stages of the operation is also important. Typically known as a
goods or work in progress inventory, tracking materials as they are used to create finished

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goods also helps to identify the need to adjust ordering amounts before the raw materials
inventory gets dangerously low or is inflated to an unfavourable level.

Finally, inventory management has to do with keeping accurate records of finished

goods that are ready for shipment. This often means posting the production of newly
completed goods to the inventory totals as well as subtracting the most recent shipments of
finished goods to buyers. When the company has a return policy in place, there is usually a
sub-category contained in the finished goods inventory to account for any returned goods
that are reclassified as refurbished or second grade quality. Accurately maintaining figures
on the finished goods inventory makes it possible to quickly convey information to sales
personnel as to what is available and ready for shipment at any given time. In addition to
maintaining control of the volume and movement of various inventories, inventory
management also makes it possible to prepare accurate records that are used for accessing
any taxes due on each inventory type. Without precise data regarding unit volumes within
each phase of the overall operation, the company cannot accurately calculate the taxa
amounts. This could lead to underpaying the taxes due and possibly incurring stiff penalties
in the event of an independent audit. Common components of an inventory management
system are:
Barcode scanner
Mobile computer
Inventory software
Barcode printer

RISK POOLING
A risk pool is one of the forms of risk management mostly practiced by insurance
companies. Under this system, insurance companies come together to form a pool, which
can provide protection to insurance companies against catastrophic risks such as floods,
earthquakes etc. The term is also used to describe the pooling of similar risks that underlies
the concept of insurance. While risk pooling is necessary for insurance to work, not all risks
can be effectively pooled. In particular, it is difficult to pool dissimilar risks in a voluntary
insurance market, unless there is a subsidy available to encourage participation.

Risk pooling is an important concept in supply chain & logistics management. Risk
pooling suggests that demand variability is reduced if one aggregates demand across
locations because as demand is aggregated across different locations, it becomes more
likely that high demand from one customer will be offset by low demand from another. This
reduction in variability allows a decrease in safety stock and therefore reduces average
inventory. For example in the centralized distribution system, the warehouse serves all
customers, which leads to a reduction in variability measured by either the standard
deviation or the coefficient of variation.

The three critical points to risks pooling are:

 Centralized inventory saves safety stock and average inventory in the system.
 When demands from markets are negatively correlated, the higher the coefficient of
variation, the greater the benefit from risk pooling.
 The benefits form risk pooling depends directly on the relative market behaviour.
This is explained as follows: if we compare two markets and when demand from both
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markets is more or less than the average demand, we say that the demands for are
positively correlated. Thus the benefits derived from risk pooling decreases as the
correlation between demands from the two markets becomes more positive.
NETWORK PLANNING
For the best results, planners should follow a standardized approach. Systematic
Network Planning provides a step – step guide.

Supply chain network planners don’t have it easy. Their job is to evaluate complex trade-
offs among supply chain components, maximizing profits and minimizing costs within the
limits of relevant and intangible considerations.
Because that is such a complex task, many planners use network-modelling software. But
having good software is just a first step, not a complete solution for one thing, modelling
result and recommendations are only as good as the user’s problem formulation,
assumptions, and data. Furthermore, if key decision makers cannot see or understand
what was done during the modelling may not accept the results and recommendations.
Network planners can avoid such problems by following a standardized, step-step planning
process that is explicit, well documented, and visual. One approach we strongly
recommend is systematic network planning (SNP), a standardized methodology for
conducting network-planning projects. SNP uses the High Performance Planning model
developed by consultant Richard Muther. This model has been used in Muther’s well-
known methods for systematic planning of supply chain facilities and material handling
systems since the 1960s. SNP is based on the three fundamental components of every
network plan:
Variables
Aspects of the network plan that can be changed in a model (for example, facility
location, product type, and demand); sensitivities.

The degrees to which modelled costs and performance vary in response to changes in
variables; and Scenarios sets of possible changes to the network that is being planned.

The simplified or short form, of SNP is presented in this material. The simplified procedure
improves planners’ effectiveness on projects that use an already existing model to address
problems of modest scope, such as:
Best existing location at which to add capacity
Impact of a change in inventory policy
Effect of adding or closing a warehouse
Inventory and resource planning for seasonal or peak periods
Contingency planning for supply interruptions or loss of capacity
For larger-scale network network-planning projects, a fuller version of SNP adds phases
and additional steps but still rests on the same fundamentals of variables, sensitivities, and
scenarios. For those who already have modelling software and know how to use it, the
steps of simplified SNP can be mastered in less than a day; the steps simply standardized
sound modelling and project-management practices. (it is important to note here that while
appropriate optimization software must be used, simplified SNP is not dependent on any
specific algorithm or software product). For companies that are just developing modelling
capabilities, SNP’s standardization assures consistent service and results. Moreover,
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because SNP makes the modelling process more visible and its steps more explicit, even
experienced modellers can benefit from the improved communication and explanation of
results that it offers. For users at all levels of expertise, SNP can help avoid the pitfalls,
oversights, and rework that are all too common in the day-to-day use of network-modelling
tools.

STEPS IN NETWORK PLANNING

The article presents and explains a key document for each of the six steps of Simplified
Systematic Network Planning. These steps include:
1. Orient the project.
2. Define the variables.
3. Analyse the sensitivities.
4. Create scenarios. In this step, the company models the results for alternative network
plans relative to the baseline. Evaluate the alternatives. During this phase, the project team
will select a network plan from among the alternatives.
5. Detail and do. In this last step, the team creates a detailed protocol for implementing
the selected network plan, which is represented on the Detail and Do Worksheet.
In the following pages, we illustrate the use of Simplified SNP by the fictitious company
Mountain Trail Tonic Inc. (MTT), a growing manufacturer and distributor of organic juices.
In our example, MTT is using Simplified SNP to determine where to add manufacturing
capacity and justify the cost of the additional manufacturing line.
STEP 1:ORIENT THE PROJECT:
The objective of this step is to understand the scope of the project and schedule important
deadlines and milestones. The related document is the Orientation & Issues Worksheet.

This step organizes the project and ensures that it is well defined, clearly understood, and
realistically scheduled. The project team members begin by identifying the project’s
objectives and scope. They then try to understand all of the issues connected with the
problem to be solved and identify the elements to be modelled. Finally, they document and
rate the significance of the planning issues, and then create a schedule for the network
analysis, compete with deadlines.
SNP uses a standard, one-page form called the Orientation & Issues Worksheet to capture
all of this information. This form typically is completed during a meeting with the sponsoring
executive, appropriate subject-matter experts, and representatives from finance and from
each of the operating units that may be affected by the project. To help planners remain
focused on the critical network-planning issues ad assure that the project resolves the most
important ones, the worksheet also lists and rates the issues’ significance or importance as
follows:
A – Abnormally high
E – Especially high
I – Important
U – Unimportant
Issues or factors that are beyond the planners’ control or are outside the project’s scope are
flagged with an “X”.
In our MTT example, only one facility produces 32ounce plastic bottles. Because of
increasing sales volumes and product proliferation, this facility will not be able to meet

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expected demand. MTT’s network planners have therefore been asked to cost-justify
upgrading an existing line to add a second “big bottle” manufacturing line. The planners
must also determine which of six existing plants will be the best location for the upgrade.
The planners will use and existing sourcing model and software to find the location with the
lowest total cost. In addition, the decision must also consider other, less tangible factors
such as capacity relief, ease of implementation, and risk of line shutdown. For MTT, these
factors are as important as cost, and they vary by plant location.

STEP 2: DEFINE THE VARIABLES

The purpose of this step is to create a modelling framework for the variables and trade-offs.
These are recorded on the variables summary Sheet. Once the project has been defined
and outlined, the planners diagram the network to be modelled and gather the information
required for constructing the model, which will weigh different trade-offs among the variable.
In applications of simplified SNP, the planners typically are adapting and existing model
rather than developing and entirely new one. In our MTT example, the company has
already developed a sourcing model using a popular demand planning software packages
and will adapt it for the “big bottle” analysis by substituting relevant data. Step 2 also
involves.

Defining relevant constraints, documenting assumptions, and writing any formulas or

algebraic expressions that will be used to model the network. Constraints are physical
limitations or policies that restrict the capacities and capabilities of locations and lanes and
their resources. Assumption are descriptions of typical or anticipated conditions that are
used to clarify the model’s scope, simplify the model, and/or describe the manner in which
some variables will be treated. For example, MTT’s model is simplified by assuming that
transportation and raw material are always available. This summary assures that planners
and the ultimate decision makers agree on all aspects of the modelling exercise before it
begins. This network model in terms of the following design characteristics:
Location and lanes included
Products included and product hierarchy
Resources included
Demand data type and duration
Time buckets
Units of measure

For MTT, the locations include all of its manufacturing plants, outside bottlers, and
distribution centers (DCs). These consist of one raw material supplier, six other (contract)
bottlers, six MTT manufacturing plants, and 42 branch distribution centers. These are
represented in the diagram uses an adaptation of industry-standard, operation-process
charting symbols. (Note that in our example, the manufacturing plants are location in
fictitious towns in a six-state area of the eastern United States, and DCs are identified by
number rather than by location name.) Lanes include all transportation routes between
those locations. All of them are potentially active. Products are manufactured in certain
plants and are cross docked through other plants. In this way, a branch DC can receive
product form any of the plants. The resources to be modelled are manufacturing lines,
transportation, and storage for all juice products, whether purchased or manufactured. The
model’s results will be based on 12 months of historical demand data in weekly time
buckets, measured in cases. The 12-month historical horizon makes sense, as
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management wants to know what MTT’s reported financial results would have been with an
additional big bottle line. Weekly buckets will detect seasonal and other demand variations,
and cases are the company’s common measure of output. This will include demand-and
resource-related data as well as cost-related data. For MTT, data about products will come
from the company’s demand-planning information system. Data about resources will be
manually entered. Manufacturing cost data will come from transaction records in the
company’s Enterprise Resource Planning (ERP) system. Other cost data will come from a
variety of sources. The “model constraints” section of the sheet specifies the constraints or
limitations on the resources that are being modelled. In some cases, these constraints are
physical; for example, MTT’s manufacturing lines must run at least 80 hours but no more
than 140 hours in a week. Others are a matter of cost, such as the need to produce
minimum lots. The Variables Summary Sheet also lists formulas for expressing costs or
resource performance. In our example, MTT defines its transportation cost as:
Transportation cost = X1* (two-way private fleet cost, for example US $900 per round trip)
+X2*(one-way incentive for common carrier use, for example US $600 per one-way trip)
+X3*(backhaul incentive factor, for example US $200 per backhaul)
+X4*(reverse-logistics factor, i.e. container and damaged-goods return)
Note: X1, X2, X3, and X4 are trip frequencies for each lane, and * represents “multiplied by.”
This formula shows that the planners are using a weighted-average approach to estimate a
single transportation cost for each lane, rather than modelling each kind of transportation as
a separate resource o each lane. The latter approach would greatly increase the complexity
of the model without significantly improving the precision of the results. In MTT’s case, the
parameters include number of lines, maximum and minimum capacities expressed as hours
of operation, and storage capacity expressed as number of pallets. Manufacturing line
speeds are expressed simply as “demonstrated speed”; that is, the modeller will use the line
speeds in cases per hour that are normally used by the production planners when
scheduling each line.

STEP 3: ANALYZE THE SENSITIVITIES

Now that the model has been constructed, it needs to be validated. In step 3, the planners
run the model using optimization software and identify any violations of constraints or
infeasible (that is, unreasonable) results. The planners then troubleshoot the model to
eliminate infeasibilities.
Troubleshooting the model is and iterative process. The planners systematically relax the
violated “hard” constraints to make them “soft” policy constraints with high penalty costs for
violation. The model is run again to identify the location or lane with the highest cumulative
penalty costs. The planners then examine all variables, constraints, and assumptions that
might be contributing to the penalty cost. Once they have been identified, the planners
tweak the parametric value of the appropriate resources; add missing lanes. Locations, or
products; or adjust constraints and assumptions as appropriate. The model is run again
and the process repeated until all constraints have been honoured. Following simplified
SNP Steps 1 and2 will significantly reduce the number of iterations required. Next, the
planners run the model again and fine-tune it to establish a baseline that replicates current
network performance. Fine-tuning it to establish a baseline that replicates current and
slightly changing the value of the parameters until the model’s results match-either exactly
or with acceptable variances-the actual network performance for the chosen baseline
period.

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The ultimate purpose of Step 3 is to validate the model. Validation compares the model’s
results to the actual performance of the current network for the modelled period. This
exercise builds credibility: the smaller variance, the more accurate the model- and the
greater the acceptance of the model’s results. Notes and explanations on the worksheet
explain any changes that were made to the model and the reasons for the variances
between its results and the network’s actual performance.
In practice, validation is difficult and may take several days, even when the model has been
systematically defined and documented. Validation can take much longer if the planners’
approach is less systematic and the model constraints are poorly documented.

STEP 4: CREATE SCENARIOS

In step 4, the planners develop scenarios that represent alternatives network plans. Each
scenario makes one or more of the following changes to the baseline model:
Adding or deleting products or locations
Adding or deleting resources
Adding or deleting transportation lanes
Changing which locations serve which customer demand
Changing networks flows and sources of supply
Adding or relaxing constraints
The planners then collect summary statistics for each alternative plan and document the
results on a series of Scenario Summary Sheets. In our MTT example several scenarios
place the 32-ounce upgrade at different plants. As the “Setup Summary” shows,
transportation lanes to branch distribution centers are set up to receive products from
Jonesville’s or Summersville, with an added constraint that each DC order must be for a full
truckload. When the model was run, the optimizer software moved 300,000 cases of 32-
ounce production from Summersville to Jonesville. Of these cases, 200,000 formally were
cross-docked through Jonesville. To its branch DCs. In terms of resources, Summersville
was relieved of 450 hours per year of production, while 300 hours were added to Jonesville.
These results are reported in the sheet’s the newly upgraded line in Jonesville. This
scenario also showed that the distribution network would have to be reworked. Network
lane assignments were changed for three distribution centers. DC 23 could not satisfy
Jonesville’s full truckload constraint, so the modelling software reassigned it to the
Somerville plant. Meanwhile, DCs 11 and 12, along with all of the DCs in Virginia and West
Virginia, now receive all of their 32-ounce products from Jonesville. In the baseline scenario,
these DCs had been served by the Somerville plant. Some cost categories that are a
concern at the outset of modelling often prove to be insignificant once results are in hand.
In Figure 4, for example, cross-docking costs and reduced overtime are insignificant and will
not influence the choice of network plan. Those who manage the network may also be
sceptical of scenario runs that predict significant cost saving compared to current
conditions. They may challenge assumptions, parameters, or constraints and ask the
planners to make adjustments until the scenario run yields a more modest improvement-one
that they are willing to be accountable for obtaining. The wise planner anticipates this give-
and-take and budgets time to run optimistic, pessimistic, and “most likely” cases and
present them to management.

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STEP 5: EVALUATE THE ALTERNATIVES

In step 5 the planners evaluate the alternative network plans that were developed in step 4,
and those involved in decision making compare and select the most preferred plan.
Evaluation, using the Alternatives Analysis Worksheet, typically tales two forms.

Cost analysis-comparing relevant costs among the scenarios and their network plans.

Intangible analysis-considering factors that cannot be easily modelled or measured in

economic terms.

Cost analysis generally is straightforward. Modelling software typically computes each

alternative’s difference from the baseline for each element of the total cost. When
comparing alternatives, planners must decide whether to show all costs or only those that
are affected by the proposed alternatives. When the impact of proposed changes on total
cost is small, it may be preferable to present and compare only those that are affected by
the proposed alternatives. When the impact of proposed changes on total cost is small, it
may be preferable to present and compare only the costs that are actually affected. This
will magnify the cost differences among the alternatives. The four alternatives plans
compare what MTT’s annual costs would have been if 32-ounce capacity had been added
at one of four existing plants: Jonesville, Briansville, Vicksburg, and Madison. Jonesville’s
costs (Alternative I) are the lowest and would have saved about US $700,000 per year over
the current, or baseline, network. The remaining locations would have saved between US
$391,000 and US $581,000. These savings easily justify the upgrade of a production line.
Naturally MTT would like to implement the network plan with the lowest total cost. But
intangible factors must also be considered when choosing the most advantageous plan. In
this example, annual costs differ by only 1 percent among the four alternatives. With such a
small difference, cost alone should not determine which plan is best. When two or more
plans yield similar costs, comparing intangibles can identify which is best. Examples of
relevant intangibles include exposure to various types of risk, ease of implementation, ability
to respond to demand changes, fit with the organization’s structure, and labor-or facilities-
related considerations. To measure the importance of intangibles, SNP uses the weighted-
factor approach shown in the lower portion of figure 5. The planners’ list relevant factor and
managers assign weights reflecting each factor’s relative importance in the evaluation.
Next, those who will implement and operate the new network evaluate and rate the likely
effectiveness of each alternative in addressing each intangible factor. SNP uses the vowel
code convention of A,E,I,O,U and X in descending order of effectiveness, where A=4, E=3,
I=2, O=1 and U=0.

By convention, SNP assigns a weight of 10 to the most important factor. A rating of “X”
disqualifies a plan unless the objectionable feature can be fixed. (The meanings of these
codes, shown in the bottom left hand corner of Figure 5, are different from those discussed
in Step 1). After the planners have rated all of the plans under consideration relative to all
of the intangible factors, they multiply the ratings’ numerical values by the factors weights
and add them together to arrive at total scores for each plan. The highest score indicates
the best network plan from an intangibles perspective. Ideally, the highest-scoring plan will
also have the lowest total cost. But if not, this procedure will still reveal the intangible
benefits of the more costly network plans. Moreover, when a cost comparison does not
indicate a clear winner, the weighted-factor calculation will help to identify which plan is best
and why. In our example, the lowest-cost alternative, Jonesville, is ruled out because it
rates “X” on the risk of line shutdown. Of the remaining alternatives, Brainsville scores
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highest at 84. It offers more capacity relief and easier implementation, and its savings are
somewhat greater than Vicksburg (Alternative III) or Madison (Alternative IV). For these
reasons, MTT selected Brainsville for the 32-ounce bottling line grade.

STEP 6: DETAIL AND DO

In the final step, representatives if the affected organizations completed a detail and Do
Worksheet.This worksheet outlines the actions that will be required to implement the
network plan selected in step 5 and schedules the implementation. (If the purpose of the
network-planning project is simply to conduct an analysis and make a presentation, no
actual changes will be made during this step).

If the company does want to make changes, the planners first prepare a Gantt chart with the
implementation schedule. A Gantt chart serves as a communication tool, outlining the tasks
and actions needed to change the network, the individual(s) responsible for each one, and
the schedule time period for conducting each task or action. The network plan must, of
course, be implemented b professionals in the field. But the network planners should be
involved: first, so they can better understand what is required to implement change, and
second, so they can confirm the effectiveness of their recommendations. During
implementation, it is a good idea to periodically measure performance against the schedule
and take action, if needed, to keep the project moving. A post-implementation captures
actual results and measures variances between projected and actual savings and costs.
Such audits typically are performed between 90 days and one year after an implementation
has been completed. During the audit, planners should seek explanations for any significant
variances. This practice provides useful lessons for future modelling and improves the
overall effectiveness of network planning. because fuel-price increase eliminated half of
MTT’s projected transportation savings, the planners will probably include fuel-price
projections in future models of this type.

SNP: The difference between good and great.

Do you need SNP, or is your current practice good enough? The 10-point Network Planning
Spot Audit may help you decide. Once you have effective modelling software in place and
know how to use it, these 10 considerations will make the difference between excellent
results and those that are simply good or perhaps even poor. By experience, SNP’s step-
by-step structure and documentation make it easy to involve operations personnel in the
planning process and help to consistently achieve excellence in all 10 of the audit areas:

Step 1 and its Orientation & Issues Worksheet assure quick start-up.

Step 2 and the Variables Summary Sheet improve visualization and model setup.

Step 3 and the Baseline validation Worksheet speed up this time-consuming task, assuring
accuracy and ready acceptance of result.

Step 4 and the Scenario summary Sheet make sure that the right alternatives are
considered and that management is offered valid choices.

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Step 5 evaluates all relevant factors in addition to supply chain costs.

Step 6 and its Gantt chart enable timely implementation and learning from actual results.

Systematic Network Planning is designed to avoid the pitfalls, oversights, and rework that
are all too common in the day-to-day use of network–modelling tools. Whether network
planners are highly experienced or new to this important function, SNP assures that
modelling projects will be both effective and accurate. Supply contracts are types of
contracts that establish the terms of a working relationship between a vendor and a
customer. A supply contract is often necessary in order to lock in discounted pricing and
other benefits that the supplier is agreeing to provide to the client for a specific period of
time. the terms of a supply contract often define everything from the means awhereby the
products are delivered, terms of payment, and any other aspect of the relationship that the
two parties have determined to be necessary.

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SUPPLY CONTRACTS
A supply contract usually defines the terms of payment, such as the different means
whereby the customer may pay an outstanding invoice. This may include terms as payment
by postal mail, online payment options, or even an electronic transfer of funds from the
customer’s bank to the supplier’s bank. This section usually also defines the options open
to the supplier in the event that the customer fails to pay invoices within terms, including
rendering the contract null and void, or revoking the discount extended to the customer off
the standard unit price. In the best of situations, the supply contract protects the rights of
both parties. The client knows what to expect in terms of the goods received and how they
will be delivered. In turn, the supplier knows what the client is likely to need and how
payment will be submitted. As long as both parties honour their responsibilities to one
another, the business relationship is likely to be a profitable one for everyone involved.

Another aspect that is very common to a supply contract is the creation of sections and
clauses that govern how the supplier will provide goods and services to the customer. This
may include the terms for shipping, or any additional charges that may apply for expedited
shipping above the terms defined in the contract. Some contracts include guarantees of
shipment within a specific time frame after the order is placed, such as within twenty-four
hours of receiving the order. While the exact form of this type of requirement contract varies
from one industry to the next, there are a few elements that are inherent for most examples
of the supply contract. The most common element is the pricing schedule that will govern
the charges for goods or services rendered to the customer. Often, this portion of the
contract will be structured to identify special pricing extended to the customer, either as a
flat rate or on a sliding scale, based on the volume of units ordered. For example, a supply
contract for teleconferencing would be structured to either extend a specific rate per minute
per connection for conference call service or include a chart that indicated a gradual
reduction in unit’s price as the customer used more conferenced minutes over the course of
the contract. The rate structure is usually in effect for whatever duration is specified in the
contract, with periods of one year, two years and five years being the most common.

Example of a supply contract

SUPPLY CONTRACT
-------------
Tis agreement made this 21st day of March, 1989 by and between New Orleans spice
Company, Inc., Louisiana corporation (“spice”), herein represented by its undersigned
officer and Biscuit Investments, Inc., a Louisiana corporation (“Biscuit”), herein represented
by its undersigned officer.
WITNESSETH
WHEREAS, Spice, by virtue of a certain agreement dated July 2, 1979, As amended
(“formula Agreement”), has the right to use a certain basic recipe and formula in the
preparation of spicy fried chicken commonly known as Pope yes Famous Fried Chicken,
any developments or improvements relating to the production of such recipe and formula
and any additional recipes for products suitable for use in Pope yes Famous chicken and
Biscuit restaurants (“Popeye Formula”),
WHEREAS, the formula Agreement and the parties’ interest therein are more fully described
in a certain amendment of the formula Agreement, Executed of even date herewith by the
parties and Alvin c. Copeland.
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WHEREAS, Biscuit owns and operates Pope yes famous Fried Chicken and Biscuits
restaurants which specialize in the sale of spicy fried chicken prepared with batter, spice
and other ingredients prepared with the Popeye Formula (such batter, spices and other
ingredients, “Product”); and

NOW THEREFORE, the parties for the mutual benefits conferred upon each other herein
the receipt and adequacy of which are acknowledge, agree:
 Spice shall sell to Biscuit directs, all of the Product required by Biscuit and Biscuit
shall purchase its requirements for the consideration hereafter stated.
 During any month, Spice shall not be obligated to supply an amount of product
disproportionate to average amounts customarily supplied for the preceding twelve
month period.
 In consultation with Biscuit, Spice shall endeavour to estimate the future requirement
of Biscuit to assure maximum compliance herewith.
 Prices for the product shall be as quoted or posted from time to time by Spice
consistent with past practices, shall be payable C.O.D. or on such other basis as
shall be mutually determined, and shall be uniform throughout the Popeye’s Famous
Fried Chicken and Biscuit system.
 The term hereof shall be fifteen years. Thereafter, this Agreement may be
terminated by the parties’ agreement, subject to an accounting for Product already
sod but not yet paid for.
 Without the other party’s written consent first obtained, neither party may assign or
encumber its rights hereunder; nor may this Agreement be assumed by any other
person.
 This Agreement may be amended only by a writing executed by the parties hereto.
 This Agreement establishes no third party beneficiary rights in any persons not
parties hereto.
 Spice hereby agrees that, upon the merger of church’s Fried Chicken, Inc.
(“church’s”) and Biscuit becoming effective, church’s shall become the company
hereunder and shall be entitled to all of the rights and benefits of biscuit hereunder,
subjects to all of the covenants, duties, obligations, promises and liabilities of Biscuit
hereunder.
 This Agreement shall be construed in accordance with the internal laws of the state
of Louisiana. Executed at New York, New York on the date first written above.

BISCUIT INVESTMENT, INC. NEW ORLEANS SPICE CO., INC.

BY: /s/ BY: /s/
-------------- ---------------
Its:V.P its:
-------------- ---------------

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PHYSICAL DISTRIBUTION STRATEGY

Product distribution (or place) is one of the four elements of the marketing mix.
Distribution is the process of making a product or service available for use or consumption
by a consumer or business user, using direct means, or using indirect means with
intermediaries.
The other three parts of the marketing mix are product, pricing and promotion show.

Physical Distribution System Introduction

Physical distribution is the movement of materials from the producer to the consumer. This
movement of materials is divided into two functions: Physical supply is the movement and
storage of goods from suppliers to manufacturing. Physical distribution is the movement and
storage of finished goods from the end of production to the customer. The particular path in
which the goods move – through distribution centres, wholesalers, and retailers – is called
the channel of distribution.

Name of the company Position in the industry CTC Freight Carriers Private Limited 1
Transocean Express Logistics 2 Velocity Logistics 3 Atlas Logistics 4 DHL 5 Global
Express Service 6 Royal Logistics 7 Blue Dart 8 Gati 9 Safe Express 10 Source:
http://www.bestindiansites.com/top-companies/logistics/
A channel of distribution is one or more companies or individuals who participate in the flow
of goods and/or services from the producer to the final user or consumer. The transaction
channel is concerned with the transfer of ownership. Its function is to negotiate, sell, and
contract. The distribution channel is concerned with the transfer or delivery of the goods or
services.
To extend markets requires a well-run distribution system. Distribution adds place value and
time value by placing goods in markets where they are available to the consumer at the time
the consumer wants them.
The specific way in which materials move depends upon many factors, some of which are
the channels of distribution that the firm is using, the types of markets served, the
characteristics of the product, and the type of transportation available to move the material.
The objective of distribution management is to design and operate a distribution system that
attains the required level of customer service and does so at least cost. To reach this
objective, all activities involved in the movement and storage of goods must be organized
into an integrated system.
In a distribution system, four interrelated activities affect customer service and cost of
providing it:
➢ Transportation, ➢ Distribution inventory, ➢ Warehouses (distribution centres), and
➢ Order processing.
Physical distribution is the set of activities concerned with efficient movement of finished
goods from the end of the production operation to the consumer. Physical distribution takes
place within numerous wholesaling and retailing distribution channels, and includes such
important decision areas as customer service, inventory control, materials handling,
protective packaging, order procession, transportation, warehouse site selection, and
warehousing.

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Physical distribution is part of a larger process called “distribution,” which includes

wholesale and retail marketing, as well the physical movement of products. Physical
distribution activities have recently received increasing attention from business managers,
including small business owners.
This is due in large part to the fact that these functions often represent almost half of the
total marketing costs of a product. In fact, research studies indicate that physical distribution
costs nationally amount to approximately 20 percent of the country’s total gross national
product (GNP).
These findings have led many small businesses to expand their costcutting efforts beyond
their historical focus on production to encompass physical distribution activities. The
importance of physical distribution is also based on its relevance to customer satisfaction.
By storing goods in convenient locations for shipment to wholesalers and retailers, and by
creating fast, reliable means of moving the goods, small business owners can help assure
continued success in a rapidly changing, competitive global market.

An earlier resource pack described the decisions that must be taken when a company
organises a channel or network of intermediaries who take responsibility for the
management of goods as they move from the producer to the consumer.
Each channel member must be carefully selected and the company must decide what type
of relationship it seeks with each of its intermediate partners. Having established such a
network, the organisation must next consider how these goods can be efficiently
transferred, in the physical sense, from the place of manufacture to the place of
consumption.

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Demand Forecasting

Purchasing Materials
Management
Requirements Planning
Production Inventory
Manufacturing Planning

warehousing
Warehousing
Materials Handling Supply Chain
Materials Handling Logistics
Management
Packaging
Packaging
Inventory

Distribution Planning

Order Processing
Physical
Transportation Distribution

Customer Service

Evolution of Supply Chain Management

Physical distribution management (PDM) is concerned with ensuring the product is in the
right place at the right time.
‘Place’ has always been thought of as being the least dynamic of the ‘4Ps’. Marketing
practitioners and academics have tended to concentrate on the more conspicuous aspects
of marketing. It is now recognised that PDM is a critical area of overall marketing
management. Much of its expertise is ‘borrowed’ from military practice.
During the Second World War and the Korean and Vietnam wars, supplies officers had to
perform extraordinary feats of PDM, in terms of food, clothing, ammunition, weapons and a
whole range of support equipment having to be transported across the world. The military
skill that marketing has adopted and applied to PDM is that of logistics. Marketing
management realised that distribution could be organised in a scientific way so the concept
of business logistics developed, focusing attention on and increasing the importance of
PDM.
As marketing analysis became increasingly sophisticated, managers became more aware of
the costs of physical distribution. Whilst the military must win battles, the primary aim of
business is to provide customer satisfaction in a manner that result in profit for the
company. Business logistical techniques can be applied to PDM so that costs and customer
satisfaction are optimised.
There is little point in making large savings in the cost of distribution if, in the long run, sales
are lost because of customer dissatisfaction. Similarly, it does not make economic sense to
provide a level of service that is not really required by the customer and leads to an erosion
of profits. This cost/service balance is a basic dilemma that faces physical distribution
managers.
A final reason for the growing importance of PDM as a marketing function is the increasingly
demanding nature of the business environment. In the past it was not uncommon for
companies to hold large inventories of raw materials and components. Although industries
and individual firms differ widely in their stockholding policies, nowadays, stock levels are

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kept to a minimum wherever possible. Holding stock is wasting working capital for it is not
earning money for the company.
A more financially analytical approach by management has combined to move the
responsibility for carrying stock onto the supplier and away from the customer. Gilbert and
Strebel (1989) pointed out that this has a ‘domino’ effect throughout the marketing channel,
with each member putting pressure on the next to provide higher levels of service.
Logistical issues facing physical distribution managers today is the increasing application by
customers of just-in-time management
techniques or lean manufacturing. Hutchins (1988) stresses that companies who demand
‘JIT’ service from their suppliers carry only a few hours’ stock of material and components
and rely totally on supplier service to keep their production running.
This demanding distribution system is supported by company expediters whose task it is to
‘chase’ the progress of orders and deliveries, not only with immediate suppliers, but right
along the chain of supply (called ‘supply chain integration’).
Lean manufacturing has been widely adopted throughout the automotive industry where
companies possess the necessary purchasing power to impose such delivery conditions on
their suppliers. Their large purchasing power also necessitates stringent financial controls,
and huge financial savings can be made in the reduction or even elimination of stockholding
costs where this method of manufacturing is employed.
To think of the logistical process merely in terms of transportation is much too narrow a
view. Physical distribution management (PDM) is concerned with the flow of goods from the
receipt of an order until the goods are delivered to the customer.
In addition to transportation, PDM involves close liaison with production planning,
purchasing, order processing, material control and warehousing. All these areas must be
managed so that they interact efficiently with each other to provide the level of service that
the customer demands and at a cost that the company can afford.
Importance of Physical Distribution
Buying a computer in the post, petrol at a supermarket, mortgages over the phone and
phones themselves from vending machines are just some innovations in distribution which
create competitive advantage as customers are offered newer, faster, cheaper, safer and
easier ways of buying products and services.
Without distribution even the best product or service fails. Author Jean-Jacques Lambin
believes a marketer has two roles:
(1) To organise exchange through distribution and (2) To organise communication.
Physical distribution, or Place, must integrate with the other ‘P’s in the marketing mix. For
example, the design of product packaging must fit onto a pallet, into a truck and onto a
shelf; prices are often determined by distribution channels; and the image of the channel
must fit in with the supplier’s required ‘positioning’. You can see how Coca Cola further
integrate the timing of distribution and promotion in the Hall Of Fame later. In fact, they see
distribution as one of their “core competencies”.
Marketing Logistics: Managing Supply Chains
Distribution is Important Because
Firstly, it affects sales - if it’s not available it can’t be sold. Most customers won’t wait.
Secondly, distribution affects profits and competitiveness since it can contribute up to 50
percent of the final selling price of some goods. This affects cost competitiveness as well as
profits since margins are squeezed by distribution costs.

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Thirdly, delivery is seen as part of the product influencing customer satisfaction. Distribution
and its associated customer service play a big part in relationship marketing.
Decisions about physical distribution are key strategic decisions. They are not short term.
Increasingly it involves strategic alliances and partnerships which are founded on trust and
mutual benefits. We are seeing the birth of strategic distribution alliances. You can see
Cavinkare as a marketing and distribution company how it is providing solutions for its
customers.
Channels change throughout a product’s life cycle. Changing lifestyles, aspirations and
expectations along with the IT explosion offer new opportunities of using distribution to
create a competitive edge.
Controlling the flow of products and services from producer to customer requires careful
consideration. It can determine success or failure in the market place.
The choice of channel includes choosing among and between distributors, agents, retailers,
franchisees, direct marketing and a sales force.
Deciding between blanket coverage or selective distribution, vertical systems or multi-
channel networks, strategic alliances or solo sales forces, requires strong strategic thinking.
Decisions about levels of stock, minimum order quantities, delivery methods, delivery
frequency and warehouse locations have major cash flow implications as well as customer
satisfaction implications.
Functions of Distribution Channels
Distribution channels perform a number of functions that make possible the flow of goods
from the producer to the customer. These functions must be handled by someone in the
channel. Though the type of organization that performs the different functions can vary from
channel to channel, the functions themselves cannot be eliminated. Channels provide time,
place, and ownership utility. They make products available when, where, and in the sizes
and quantities that customers want. Distribution channels provide a number of logistics or
physical distribution functions that increase the efficiency of the flow of goods from producer
to customer. Distribution channels create efficiencies by reducing the number of
transactions necessary for goods to flow from many different manufacturers to large
numbers of customers. This occurs in two ways. The first is called breaking bulk.
Wholesalers and retailers purchase large quantities of goods from manufacturers but sell
only one or a few at a time to many different customers. Second, channel intermediaries
reduce the number of transactions by creating assortments—providing a variety of products
in one location—so that customers can conveniently buy many different items from one
seller at one time.
Channels are efficient. The transportation and storage of goods is another type of physical
distribution function. Retailers and other channel members move the goods from the
production site to other locations where they are held until they are wanted by customers.
Channel intermediaries also perform a number of facilitating functions, functions that make
the purchase process easier for customers and manufacturers. Intermediaries often provide
customer services such as offering credit to buyers and accepting customer returns.
Customer services are oftentimes more important in B2B markets in which customers
purchase larger quantities of higher-priced products.
Distribution channels are not limited to products only even the services provided by a
producer may pass through this channel and reach the customer. Both direct and indirect
channels come into use in this case. For instance, the hotel industry provides facility for
lodging to its customers, which is a non-physical commodity or a service.

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The hotel may provide rooms on direct booking as well as through indirect channels like tour
operators, travel agents, airlines etc. Distribution chain has seen several improvements in
the form of franchising. Also there has been link ups between two service sectors like travel
and tourism which has made services available more accessible to the customer. For
instance hotels also provide cars on rent. ➢ The primary function of a distribution channel
is to bridge the gap between production and consumption. ➢ A close study of the market is
extremely essential. A sound marketing plan depends upon thorough market study. ➢ The
distribution channel is also responsible for promoting the product. Awareness regarding
products and other offers should be created among the consumers. ➢ Creating contacts or
prospective buyers and maintaining liaison with existing ones. ➢ Understanding the
customer’s needs and adjusting the offer accordingly. ➢ Negotiate price and other offers
related to the product as per the customer demand. ➢ Storage and distribution of goods
➢ Catering to the financial requirements for the smooth working of the distribution chain. ➢
Risk taking for example by stock holding
Some wholesalers and retailers assist the manufacturer by providing repair and
maintenance service for products they handle. Channel members also perform a risk-taking
function. If a retailer buys a product from a manufacturer and it doesn’t sell, it is “stuck” with
the item and will lose money. Last, channel members perform a variety of communication
and transaction functions.
Wholesalers buy products to make them available for retailers and sell products to other
channel members. Retailers handle transactions with final consumers. Channel members
can provide two-way communication for manufacturers.
They may supply the sales force, advertising, and other marketing communications
necessary to inform consumers and persuade them to buy. And the channel members can
be invaluable sources of information on consumer complaints, changing tastes, and new
competitors in the market.
Principal Components of the Distribution Process
This consists of four principal components of PDM:
➢ Order processing; ➢ Stock levels or inventory; ➢ Warehousing; ➢ Transportation.
PDM is concerned with ensuring that the individual efforts that go to make up the distributive
function are optimised so that a common objective is realised. This is called the ‘systems
approach’ to distribution management and a major feature of PDM is that these functions be
integrated.
Because PDM has a well-defined scientific basis, this chapter presents some of the
analytical methods which management uses to assist in the development of an efficient
logistics system.
There are two central themes that should be taken into account:
1. The success of an efficient distribution system relies on integration of effort. An overall
service objective can be achieved, even though it may appear that some individual
components of the system are not performing at maximum efficiency. 2. It is never possible
to provide maximum service at a minimum cost. The higher the level of service required by
the customer, the higher the cost. Having decided on the necessary level of service, a
company must then consider ways of minimising costs, which should never be at the
expense of, or result in, a reduction of the predetermined service level.
The distribution process begins when a supplier receives an order from a customer. The
customer is not too concerned with the design of the supplier’s distributive system, nor in

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any supply problems. In practical terms, the customer is only concerned with the efficiency
of the supplier’s distribution.
That is, the likelihood of receiving goods at the time requested. Lead-time is the period of
time that elapses between the placing of an order and receipt of the goods. This can vary
according to the type of product and the type of market and industry being considered.
Lead-time in the shipbuilding industry can be measured in fractions or multiples of years,
whilst in the retail sector, days and hours are common measures. Customers make
production plans based on the lead-time agreed when the order was placed. Customers
now expect that the quotation will be adhered to and a late delivery is no longer acceptable
in most purchasing situations.
1 Order processing
Order processing is the first of the four stages in the logistical process. The efficiency of
order processing has a direct effect on lead times. Orders are received from the sales team
through the sales department. Many companies establish regular supply routes that remain
relatively stable over a period of time providing that the supplier performs satisfactorily. Very
often contracts are drawn up and repeat orders (forming part of the initial contract) are
made at regular intervals during the contract period.
Taken to its logical conclusion this effectively does away with ordering and leads to what is
called ‘partnership sourcing’. This is an agreement between the buyer and seller to supply a
particular product or commodity as an when required without the necessity of negotiating a
new contract every time an order is placed.
Order-processing systems should function quickly and accurately. Other departments in the
company need to know as quickly as possible that an order has been placed and the
customer must have rapid confirmation of the order’s receipt and the precise delivery time.
Even before products are manufactured and sold the level of office efficiency is a major
contributor to a company’s image. Incorrect ‘paperwork’ and slow reactions by the sales
office are often an unrecognised source of ill-will between buyers and sellers. When buyers
review their suppliers, efficiency of order processing is an important factor in their
evaluation. A good computer system for order processing allows stock levels and delivery
schedules to be automatically updated so management can rapidly obtain an accurate view
of the sales position. Accuracy is an important objective of order processing as are
procedures that are designed to shorten the order processing cycle.
The small business owner is concerned with order processing another physical distribution
function because it directly affects the ability to meet the customer service standards
defined by the owner. If the order processing system is efficient, the owner can avoid the
costs of premium transportation or high inventory levels.
Order processing varies by industry, but often consists of four major activities: a credit
check; recording of the sale, such as crediting a sales representative’s commission account;
making the appropriate accounting entries; and locating the item, shipping, and adjusting
inventory records.
Technological innovations, such as increased use of the Universal Product Code, are
contributing to greater efficiency in order processing. Bar code systems give small
businesses the ability to route customer orders efficiently and reduce the need for manual
handling. The coded information includes all the data necessary to generate customer
invoices, thus eliminating the need for repeated keypunching.
Another technological innovation affecting order processing is Electronic Data Interchange.
EDI allows computers at two different locations to exchange business documents in
machine-readable format, employing strictly-defined industry standards.
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Purchase orders, invoices, remittance slips, and the like are exchanged electronically,
thereby eliminating duplication of data entry, dramatic reductions in data entry errors, and
increased speed in procurement cycles.

Customer decides to buy a product

Receive order

Perform validation

Order is invalid Order is valid

Mark the order erraneous Verify stock File order Notify shipping

Pace in follow-up tray

Notify customer

Order Processing
2 Inventory
Inventory, or stock management, is a critical area of PDM because stock levels have a
direct effect on levels of service and customer satisfaction. The optimum stock level is a
function of the type of market in which the company operates. Few companies can say that
they never run out of stock, but if stock-outs happen regularly then market share will be lost
to more efficient competitors.

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The key lies in ascertaining the re-order point. Carrying stock at levels below the re-order
point might ultimately mean a stock-out, whereas too high stock levels are unnecessary and
expensive to maintain. The stock/cost dilemma is clearly illustrated by the systems
approach to PDM that is dealt with later.
Stocks represent opportunity costs that occur because of constant competition for the
company’s limited resources. If the company’s marketing strategy requires that high stock
levels be maintained, this should be justified by a profit contribution that will exceed the
extra stock carrying costs. Sometimes a company may be obliged to support high stock
levels because the lead-times prevalent in a given market are particularly short. In such a
case, the company must seek to reduce costs in other areas of the PDM ‘mix’.
Inventory control can be a major component of a small business physical distribution
system. Costs include funds invested in inventory, depreciation, and possible obsolescence
of the goods. Experts agree that small business inventory costs have dropped dramatically
due to deregulation of the transportation industry.
Inventory Management System
Inventory control analysts have developed a number of techniques which can help small
businesses control inventory effectively. The most basic is the Economic Order Quantity
(EOQ) model. This involves a tradeoff between the two fundamental components of an
inventory control cost: inventory-carrying cost (which increases with the addition of more
inventory), and order-processing cost (which decreases as the quantity ordered increases).
These two cost items are traded off in determining the optimal warehouse inventory quantity
to maintain for each product. The EOQ point is the one at which total cost is minimized. By
maintaining product inventories as close to the EOQ point as possible, small business
owners can minimize their inventory costs.
3 Warehousing
Currently, many companies function adequately with their own on-site warehouses from
where goods are despatched direct to customers. When a firm markets goods that are
ordered regularly, but in small quantities, it becomes more logical to locate warehouses
strategically around the country.
Transportation can be carried out in bulk from the place of manufacture to respective
warehouses where stocks wait ready for further distribution to the customers. This system is
used by large retail chains, except that the warehouses and transportation are owned and
operated for them by logistics experts (e.g. GATI Logistics, BOC Distribution, Excel
Logistics and Rowntree Distribution).
Levels of service will of course increase when numbers of warehouse locations increase,
but cost will increase accordingly. Again, an optimum strategy must be established that
reflects the desired level of service.
Small business owners who require warehousing facilities must decide whether to maintain
their own strategically located depot(s), or resort to holding their goods in public
warehouses. And those entrepreneurs who go with non-public warehousing must further
decide between storage or distribution facilities.
A storage warehouse holds products for moderate to long-term periods in an attempt to
balance supply and demand for producers and purchasers. They are most often used by
small businesses whose products’ supply and demand are seasonal.
On the other hand, a distribution warehouse assembles and redistributes products quickly,
keeping them on the move as much as possible. Many distribution warehouses physically
store goods for fewer than 24 hours before shipping them on to customers.

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Warehouse Management In contrast to the older, multi-story structures that dot cities
around the country, modern warehouses are long, one-story buildings located in suburban
and semi-rural settings where land costs are substantially less. These facilities are often
located so that their users have easy access to major highways or other transportation
options.
Single-story construction eliminates the need for installing and maintaining freight
elevators, and for accommodating floor load limits. Furthermore, the internal flow of stock
runs a straight course rather than up and down multiple levels. The efficient movement of
goods involves entry on one side of the building, central storage, and departure out the
other end.
Computer technology for automating warehouses is dropping in price, and thus is
increasingly available for small business applications. Sophisticated software translates
orders into bar codes and determines the most efficient inventory picking sequence. Order
information is keyboarded only once, while labels, bills, and shipping documents are
generated automatically. Information reaches hand-held scanners, which warehouse staff
members use to fill orders. The advantages of automation include low inventory error rates
and high processing speeds.
To summarise, factors that must be considered in the warehouse equation are:
➢ Location of customers; ➢ Size of orders; ➢ Frequency of deliveries; ➢ Lead times.
4 Transportation
Transportation usually represents the greatest distribution cost. It is usually easy to
calculate because it can be related directly to weight or numbers of units. Costs must be
carefully controlled through the mode of transport selected amongst alternatives, and these
must be constantly reviewed. During the past 50 years, road transport has become the
dominant transportation mode in India. It has the advantage of speed coupled with door-to-
door delivery.
The patterns of retailing that have developed, and the pressure caused by low stock holding
and short lead times, have made road transport indispensable. When the volume of goods
being transported reaches a certain level some companies purchases their own vehicles,
rather than use the services of haulage contractors. However, some large retail chains like
Marks and Spencer, Tesco and Sainsbury’s have now entrusted all their warehousing and
transport to specialist logistics companies as mentioned earlier.
Transportation modes
For some types of goods, transport by rail still has advantages. When lead-time is a less
critical element of marketing effort, or when lowering transport costs is a major objective,
this mode of transport becomes viable. Similarly, when goods are hazardous or bulky in
relation to value, and produced in large volumes then rail transport is advantageous. Rail
transport is also suitable for light goods that require speedy delivery (e.g. letter and parcel
post).
Exporting poses particular transportation problems and challenges. The need for the
exporter’s services needs to be such that the customer is scarcely aware that the goods
purchased have been imported. Therefore, above all, export transportation must be reliable.
The chosen transportation mode should adequately protect goods from damage in transit (a
factor just mentioned makes air freight popular over longer routes as less packaging is
needed than for long sea voyages). Not only do damaged goods erode profits, but frequent
claims increase insurance premiums and inconvenience customers, endangering future
business.

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The Systems or ‘Total’ Approach to PDM

One of the central themes of this text has been to highlight the need to integrate marketing
activities so they combine into a single marketing effort. Because PDM has been neglected
in the past, this function has been late in adopting an integrated approach towards it
activities. Managers have now become more conscious of the potential of PDM, and
recognise that logistical systems should be designed with the total function in mind. A
fragmented or disjointed approach to PDM is a principal cause of failure to provide
satisfactory service, and causes excessive costs.
Within any PDM structure there is potential for conflict. Individual managers striving to
achieve their personal goals can frustrate overall PDM objectives. Sales and marketing
management will favour high stock levels, special products and short production runs
coupled with frequent deliveries.
Against this, the transport manager attempts to reduce costs by selecting more economical,
but slower transportation methods, or by waiting until a load is full before making a delivery.
Financial management will exercise pressure to reduce inventory wherever possible and
discourage extended warehousing networks.
Production managers will favour long production runs and standard products. It is possible
for all these management areas to ‘appear’ efficient if they succeed in realising their
individual objectives, but this might well be at the cost of the chosen marketing strategy not
being implemented effectively.Burbridge (1987) has provided guidelines to how levels of
service to customers can be provided at optimal cost.
Senior management must communicate overall distribution objectives to all company
management and ensure that they are understood. Ideally, the systems approach to PDM
should encompass production and production planning, purchasing and sales forecasting.
Included in the systems approach is the concept of total cost, because individual costs are
less important than the total cost.
The cost of holding high stocks may appear unreasonable, but if high stocks provide a
service that leads to higher sales and profits, then
the total cost of all the PDM activities will have been effective. Costs are a reflection of
distribution strategy, and maximum service cannot be provided at minimum cost.
PDM as a cost centre is worth extensive analysis as this function is now recognised as a
valuable marketing tool in its own right. In homogeneous product markets, where
differences in competitive prices may be negligible, service is often the major competitive
weapon. Indeed, many buyers pay a premium for products that are consistently delivered on
time. Similarly, the salesperson whose company provides a comprehensive spare parts and
service facility, has a valuable negotiating tool when discussing prices.
Distribution is not, therefore, an adjunct to marketing; it has a full place in the marketing mix
and can be an essential component of marketing strategy. In terms of marketing planning, a
well-organised business logistics system can help to identify opportunities as well as
supplying quantitative data that can be used to optimise the marketing mix as a whole.
Monitoring and Control of PDM
The objective of PDM is: Getting the right goods to the right place at the right time for the
least cost’.
The objective seems reasonable, although it gives little guidance on specific measures of
operational effectiveness. Management needs objectives or criteria that, in turn, allow
meaningful evaluation of performance. This is the basis of monitoring and control.
Basic Output of Physical Distribution Systems

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The output from any system of physical distribution is the level of customer service. This is a
key competitive benefit that companies can offer existing and potential customers to retain
or attract business. From a policy point of view, the desired level of service should be at
least equivalent to that of major competitors.
The level of service is often viewed as the time it takes to deliver an order to a customer or
the percentage of orders that can be met from stock. Other service elements include
technical assistance, training and aftersales services. The two most important service
elements to the majority of firms are:
➢ Delivery - reliability and frequency; ➢ Stock availability - the ability to meet orders
quickly.
Distribution Strategy
Distribution strategy is influenced by the market structure, the firm’s objectives, its resources
and of course it’s overall marketing strategy. All these factors are addressed in the section
on selecting Distribution Channels.
The first strategic decision is whether the distribution is to be: Intensive (with mass
distribution into all outlets as in the case of confectionery); Selective (with carefully chosen
distributors e.g. speciality goods such as car repair kits); or Exclusive (with distribution
restricted to upmarket outlets, as in the case of Gucci clothes).
The next strategic decision clarifies the number of levels within a channel such as agents,
distributors, wholesalers, retailers. In some Japanese markets there are many, many
intermediaries involved. Two common strategies are Vertical Marketing Systems and
Horizontal Marketing Systems.
Vertical Marketing Systems involve suppliers and intermediaries working closely together
instead of against each other. They plan production and delivery schedules, quality levels,
promotions and sometimes prices. Resources, like information, equipment and expertise,
are shared. The system is usually managed by a dominant member, or ‘channel captain’.
VMS is more flexible than vertical integration where the manufacturer actually owns the
distribution channel, for example, Doctor Martens boot manufacturers own their own retail
store.
Horizontal Marketing Systems occur where organisations operating on the same channel
level (e.g. two suppliers or two retailers)
DISTRIBUTION TYPES
A plan created by the management of a manufacturing business that specifies how the firm
intends to transfer its products to intermediaries, retailers and end consumers. Larger
companies involved in making products will usually also put together a detailed production
distribution strategy to guide its entry into its intended market. Strategic distribution is a
competitive advantage that accrues generally from the configuration of a distribution
network (who, what, where, when) and, more specifically. From the selection of
partners.(I.e. middlemen) who intermediates between the company and the customer by
performing necessary fulfilment and service activities.More specifically, a company’s
distribution strategy is largely defined by decisions on the number and type of customer
interfaces. That is, order entry points (where and how orders are placed) and fulfilment
nodes (where and how customers obtain finished goods). At the extremes are two
fundamental fulfilment options:
 Direct distribution from the manufacturer to customers,
 Intermediated (indirect) distribution through aggregators that carry products from
multiple suppliers (who may themselves be complementors and competitors).

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For consumer products, aggregators fall into two broad categories:

 Remote access (cataloguers, ecommerce companies);
This typically involves the submission of an order via mail, telephone or the internet to a
centralized site with shipments made to a customer’s specified location from one or more
remote distribution centers, usually via a 3rd party carrier such as UPS or FedEx.

 Local access (typically brick and mortar retail stores).

This is the traditional and still more prevalent form. Inventory is maintained at physical
outlets for immediate on-site purchase by customers or with remote orders place for
subsequent pick-up by customers.

Generally there are 3 main types of distribution strategy and they include:
 intensive distribution
Means the producer’s products are stocked in the majority of outlets. This strategy is
common for basic supplies, snack foods, magazines and soft drink beverages.
 Selective Distribution
Means that the producer relies on a few intermediaries to carry their product. This strategy
is commonly observed for more specialised goods that are carried through specialist
dealers, for example, brands of craft tools, or large appliances.
 Exclusive Distribution
Means that the producer selects only very few intermediaries. Exclusive distribution is often
characterized by exclusive dealing where the reseller carries only that producer’s products
to the exclusion of all others. This strategy is typical of luxury goods retailers such as
Gucci.

CHANNELS AND INTERMEDIARIES

Distribution of products takes place by means of channels. Channels are sets of
interdependent organizations (called intermediaries) involved in making the product
available for consumption.
 Merchants are intermediaries that buy and resell products.
 Agents and brokers are intermediaries that act on behalf of the producer but do not
take title to the products.

CHANNEL DESIGN
A firm can design any number of channels. Channels are classified by the number of
intermediaries between producer and consumer. A level zero channel has no
intermediaries. This is typical of direct marketing. A level one channel has a single
intermediary. This flow is typically from manufacturer to retailer to consumer.

CHANNEL MIX
In practice, many organizations use a mix of different channels; in particular, they may
complement a direct sales-force, calling on the larger accounts, with agents, covering the
smaller customers and prospects. In addition, online retailing or e-commerce is leading to
disintermediation. Retailing via smart phone or m-commerce is also a growing area.

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MANAGING CHANNELS
The firm’s marketing department needs to design the most suitable channels for the firm’s
products, and then select appropriate channel members or intermediaries. The firm needs
to train staff of intermediaries and motivate the intermediaries to sell the firm’s products.
The firm should monitor the channel’s performance over time and modify the channel to
enhance performance.

CHANNEL MOTIVATION
To motivate intermediaries the firm can use positive actions, such as offering higher
margins to the intermediary, special deals, premiums and allowances for advertising or
display. {1} on the other hand, negative actions may be necessary, such as threatening to
cut back on margin, or hold back delivery of product.

CHANNEL CONFLICT
Channel conflict can arise when one intermediary’s actions prevent another intermediary
from achieving their objectives. [1]Vertical channel conflict occurs between the levels within
a channel and horizontal channel conflict occurs between intermediaries at the same level
within a channel.

STRATEGIC ALLIANCE
A strategic alliance is a relationship between two or more parties to pursue a set of
agreed upon goals or to meet a critical business need while remaining independent
organizations. This form of cooperation lies between M&A and organic growth. Partners
may provide the strategic alliance with resources such as products, distribution channels,
manufacturing capacity, project funding, capital equipment, knowledge, expertise or
intellectual property. The alliance is cooperation or collaboration which aims for a synergy
where each partner hopes that the benefits from the alliance will be greater than those from
individual efforts. The alliance often involves technology transfer (access to knowledge and
expertise), economic specialization, shared expenses and shared risk.

For example, an oil and natural gas company might form a strategic alliance with a
research laboratory to develop more commercially viable recovery processes. A clothing
retailer might form a strategic alliance with a single clothing manufacturer to ensure
consistent quality and sizing. A major website could form a strategic alliance with an
analytics com. One company has the technical know-how; another has the resources to
bring that know-how to market. But without the ability to build, implement, and sustain
proper alliances, they may be unable to leverage the resources of even the best
combination of firms. Alliances between vendors and companies and client to client are
becoming critical to competitive success. A successful alliance can give you access to
markets, technology, and other resources. It can give you flexibility to handle change and
hedge risks, but only if you manage it effectively.

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Strategy alliances take a wide view of the process of forming alliances and focuses
on the negotiation and evolution of the alliance. It will give you the tools needed to
overcome many of the obstacles inherent in new-market expansion or new-product
development, and you will learn how to establish a global strategic position with limited time
and resources. The program is complementary to Mergers & Acquisitions, which focuses
more on valuation and legal issues.

To form a Strategic Alliance, companies should:

 Define their business vision and strategy in order to understand how an alliance fits
their objectives;
 Evaluate and select potential partners based on the level of synergy and the ability of
the firms to work together;
 Develop a working relationship and mutual recognition of opportunities with the
prospective partner;
 Negotiate and implement a formal agreement that includes systems to monitor
performance.

TYPES OF STRATEGY ALLIANCES

Various terms have been used to describe forms of strategic partnering. These include
‘international coalition’ (Porter and Fuller, 1986), ‘strategic networks’ (Jarillo, 1988) and,
most commonly, ‘strategic alliances’/ definitions are equally varied. An alliance may be seen
as the ‘joining of forces and resources, for a specified or indefinite period, to achieve a
common objective. There are four types of strategy alliances: joint venture, equity strategic
alliance, non-equity strategic alliance, and global strategic alliances.

 Joint venture: is a strategic alliance in which two or more firms create a legally
independent company to share some of their resources and capabilities to develop a
competitive advantage.
 Equity strategic alliance:is an alliance in which two or more firms own different
percentage of the company they have formed by combining some of their resources and
capabilities to create a competitive advantage.
 Non-equity strategic alliance: is an alliance in which two or more firms develop a
contractual-relationship to share some of their unique resources and capabilities to create a
competitive advantage.


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 Global strategic alliance:working partnership between companies (often more than

two) across national boundaries and increasingly across industries, sometimes formed
between company and a foreign government, or among companies and governments.

STAGES OF ALLIANCES FORMATION

A typical strategic alliance formation studying involves these steps:

 Strategy Development: involves studying the alliance’s feasibility, objectives and

rationale, focusing on the major issues and challenges and development of resources
strategies for production, technology, and people. It requires aligning alliances objectives
with overall corporate strategy.
 Partner Assessment: involves analysing a potential partner’s strength and
weaknesses, creating strategies for accommodating all partner’ management styles,
preparing appropriate partner selection criteria, understanding a partner’s motives for joining
the alliance and addressing resource capability gaps that exist for a partner.
 Contract Negotiation: involves determining whether all parties have realistic
objectives, forming high calibre negotiating teams, defining each partner’s contributions and
rewards as well as protect any proprietary information, addressing termination clauses,
penalties for poor performance, and highlighting the degree to which to which arbitration
procedures are clearly stated and understood.
 Alliance Operation: involves addressing senior management’s commitment, finding
the calibre of resources devoted to the alliance, linking of budgets and resources with
strategic priorities, measuring and rewarding alliance performance, and assessing the
performance and results of the alliance.
 Alliance Termination: involves winding down the alliance, for instance when its
objectives have been met or cannot be met, or when a partner adjusts priorities or re-
allocates resources elsewhere.

ADVANTAGES OF STRATEGIC ALLIANCE

 Allowing each partner to concentrate on activities that best match their capabilities.
 Learning from partners & developing competencies that may be more widely
exploited elsewhere.
 Adequate suitability of the resources & competencies of an organization for it to
survive.
 Reduce costs through economics of scale or increase knowledge.
 Increase access to new technology
 Inhibit competencies
 Enter new markets
 Reduce cycle time
 Improve research and development efforts
 Improve quality

POTENTIAL CHALLENGES
 CHOOSING THE RIGHT PARTNER
The challenges to a strategic alliance begin during the very first stage of choosing a partner.
Choosing the wrong partner can be damaging if it is not able to contribute to the growth of
your business and offer a degree of dedication, honesty and integrity to the partnership.
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When researching different businesses that your company could potentially form an alliance
with, it is important to keep in mind that this will often be an exclusive relationship, meaning
it may very well be the only business our brand will be able to partner with in the category.
In partnerships, the franchise company is going to want to choose businesses with a
positive reputation in its industry that uphold similar policies and values as within its
business model. Once a relationship is formed with a business in a specific industry, the
odds of forming more in that same industry are very slim, so it is important to do it right the
first time.

 BUILDING A MUTUALLY BENEFICIAL ALLIANCE

One of the biggest challenges of entering a strategic alliance is ensuring that the
partnership is going to benefit both businesses involves. With human mature being
motivated by self-interest; it is often difficult to enter into a business relationship with the
goal to benefit the other party just as much as it will benefit your brand. Once that emotion
is overcome, a new challenge rises to continue to keep the relationship mutually beneficial
throughout its lifetime, which will require dedicated, trust and honesty.

 UPHOLDING TRUST AND HONESTY

Without a certain degree of trust and honesty, a partnership has no foundation to build on.
It is important for both parties approaching an alliance to set their expectations clearly and
concisely before the partnership is solidified. Senior Strategic Account Manager Chris
Hilliard, before entering a partnership, it is essential to discuss and address the @whatifs@
of things that could potentially occur down the road that may be damaging to the
relationship. For example a company may eventually find it necessary to change its
insurance coverage for its truck teams which would definitely affect the job being done with
the partnering company. If this what-if isn’t discussed in the beginning stages of solidifying
the partnership, it could potentially affect the agreement and foundation built with your
partner.

 KNOWING WHEN TO REASSES THE ALLIANCE

Every business will experience constant flux and change and initiatives that have once been
prosperous may not be right two to three years down the road. To ensure that a business
alliance continues to mutually benefit both parties, it is important to know when to reassess
the alliance and change the foundation. Both businesses must understand that change is
inevitable and must be able to work together to reach new agreements over time.
Sometimes the need to restructure will be clear, while at other times it will take the initiative
of one or both sides of the partnership to actively seek whether or not the partnership is still
working. It is a good idea to reassess a business alliance at regular intervals.
Strategic business alliances could be the next step in the growth and marketing
initiatives for our franchise as they offer a wealth of benefits including increased brand
awareness and the ability to reach new markets and offer supplementary services to your
clients, but there is a certain level of risk involved and partnerships should be approached
carefully. Business alliances should be approached just as one would approach a
friendship. Both need constant nurturing to grow and prosper. There must be consistent
and quality interaction as well as thorough, clear communication to obtain the best results.
If a friendship or alliance is not constantly being nurtured, “fall out” might result.
In the end, strategic alliances offer tremendous potential benefits to both parties. But like
any relationship, both companies need to carefully assess each other’s motivation and
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expectations before making a commitment. It’s necessary for both companies to bring equal
value to the partnership. Franchisors should go into partnerships unselfishly and with clear
expectations from both sided-just as they would before signing on a franchisee.

PROCUREMENT MANAGEMENT
Procurement management is the systematic approach used for buying all the goods and
services needed for a company to stay sustainable.

Procurement: the act of obtaining or buying goods and services. The process includes
preparation and processing of a demand as well as the end receipt and approval of
payment. It often involves:
 Purchase planning
 Standards determination
 Specifications development
 Supplier research and selection

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 Value analysis
 Financing
 Price negotiation
 Making the purchase
 Supply contract administration
 Inventory control and stores
 Disposals and other related function.
The process of procurement is often part of a company’s strategy because the ability to
purchase certain materials will determine if operation will continue. A business will not be
able to survive if its price of procurement is more than the profit it makes on selling the
actual product.

WHAT IS PROCUREMENT AND SUPPLY?

This Involves buying the goods and services that enable an organization to operate.
Procurement management is a key factor to run a successful company because it helps you
meet business goals and live up to stakeholders expectations. Manage your procurement
well, and it will add value to all your business practices and save your time and money.

OUTSOURCING
Is a practice in which an individual or company performs tasks, provides services or
manufacture products for another company. This is typically used by companies to save
costs.

PROCUREMENT AND OUTSOURCING

Procurement outsourcing is the transfer of specified key procurement activities relating to
sourcing and supplier management to a third party-perhaps to reduce overall costs or
maybe to tighten the company’s focus on its core competencies. Procurement
categorization and vendor management of indirect materials and services (commonly
referred to as indirect procurement) are typically the most popular outsourced activity.
Outsourced procurement teams allow companies to benefit immediately from experienced
procurement specialists support & expertise. This avoids the creation of an internal team
(new resources) and the required time for that team to structure itself, its processes and its
expertise. Outsourced procurement is therefore an available solution for companies who:

 Have no internal competencies but want to quickly benefits from procurement action
(cost reduction, suppliers and contract and contract management.)
 Have internal procurement expertise (department) but want to outsource activity on
specific area(s) like indirect materials and services.
 Consider procurement as a non-strategic/core function and want to have it managed
by a procurement service provider.
 Want to develop quickly a procurement function to deliver savings, with a willingness
to internally develop this function in the mid-term.
Procurement outsourcing is being thought of in a big way in automobile manufactures in
India and China because with increasing number of cars being produced every passing day
more man hours are required in trivial issues like timely delivery of materials. Hence
procurement team cannot concentrate on its core competency of negotiations and vendor
selections. Procurement specialists usually split procurement activities into two parts:
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 Direct Procurement: direct categories are all goods purchase by the company
which directly enter into the production process of that company. For the food industry as
an example, ingredients and packages will be the key direct procurement categories.
 Indirect Procurement: indirect categories are all the goods and services that are
bought by the company to enable its activity. This entails a wide scope, including marketing
related services (media buying, agencies), IT related services (hardware, software), HR
related services (recruitment agencies, training), facilities management and office services
(Telecoms, furniture, cleaning, catering, printers), or utilities (gas, electricity, water)….etc.
Because of procurement’s strategic important to any organization, leading businesses are
looking outside of their organizations for expertise and support in their quest to drive
strategic value through the enterprise and deliver results. Organizations are constantly
searching for ways to bolster bottom-line performance by not only increasing revenue, but
also by decreasing the cost of doing business. To facilitate these outcomes, one strategy
employed is to leverage Business Process Outsourcing (BPO) services to streamline
business processes and improve operational performance. The groundswell of support for
procurement outsourcing previously percolating is starting to simmer? But how far are
interposes willing to go? The answer lies with Best-in-Class enterprises that are shifting the
procurement outsourcing paradigm from one that focuses on tactical, cost-cutting benefits to
one driven by the strategic advantages of utilizing a third-party expert.

PROCUREMENT SERVICES PROVIDERS (PSP)

Specialized procurement service providers are dedicated to procurement and have
developed a strong expertise in procurement and procurement outsourcing, mainly in
indirect procurement. Additionally, several consulting companies offer procurement
outsourcing services in a limited manner, mainly focusing on strategic inputs or
recommendations. Procurement services providers will usually ask for a fixed remuneration
against commitment to saving delivery. Some providers also work on incentives or
performance related fees (% of savings). Apart from procurement outsourcing, PSPs will
offer other services like spend analysis or opportunity assessments.

Procurement outsourcing constitutes a growing dimension of corporate procurement

strategy. To date, procurement outsourcing has mostly been limited to the transactional
purchase-to-pay process rather than the more strategic aspects of procurement. However,
research by the Hackett Group, a leading global strategy and operations consulting firm,
indicates that major companies will likely expand the scope of procurement outsourcing in
the coming years. If procurement outsourcing is to yield the expected benefits, its adopters
will need to carefully weigh the comparative costs and risks of insourcing vs. outsourcing
across specific procurement activities, manage the potential risks, and ensure the sufficient
effort goes into process design and optimization.

PROCUREMENT OUTSOURCING COST AND RISK ASSESSMENT

To assess the potential for procurement outsourcing across specific procurement activities,
it’s helpful to thick in terms of a simple cost-risks matrix. The X-axis gauges the cost of
outsourcing the procurement activity relative to performing it in house, and arrays activities
from low cost across to high cost. The Y-axis measures the risk associated with non-
performance or incorrect performance of the procurement activity, and arrays activities from
low risk up to high risk. Procurement activities that fall in the low cost, low risk area of the
matrix-such as purchase order (PO) processing and accounts payable-are clear candidates

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for procurement outsourcing only if risks can be well managed through information sharing
and carefully structured Service Level Agreements (SLAs). Meanwhile, activities for which
the costs of procurement outsourcing are not less than doing them in house-which may be
the case for large companies that can achieve internal economies of scale-may still be
outsourcing candidates in situations when the company would benefits from trading capital
expenditure for variable costs, or when there is a benefit in the company being able to
redirect its time and attention away from operational activities and toward more strategic
concerns.

LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Logistics refers to activities within a single organization and supply chains refer to networks
of companies that work together. Also, traditional logistics focuses on activities such as
procurement, distribution and inventory management. Supply chain also includes marketing,
new product development, finance and customer service.
Logistics is the management of the flow of things between the point of origin and the
point of consumption in order to meet the requirement of customer.
Logistics is about getting the right product, to the right customer, in the right quality,
in the right condition, at the right place, at the right time, and at the right cost (the seven Rs
of logistics).
7Rs in logistics: right product, right customer, right quality, right condition, right
place, right time, right cost.
Types of Logistics
1. Inbound Logistics – activities associated with receiving, storing and disseminating
inputs to the product. Includes material handling, warehousing, inventory, equipment
maintenance scheduling and returns to suppliers.

2. Outbound Logistics – The activities associated with collecting, storing and physically
distributing the product to buyers, includes finished goods warehousing, material handling,
freight delivery, order processing and scheduling.

LOGISTICS RISK MANAGEMENT

In a world with conflicts, economic crisis, terrorism and instability, the strategic and
operational risks related to transport and logistics are even more pronounced. In an
unstable market and in high risk areas the probability of criminal acts during transport is
heightened. Moving products from one location to another is often only an issue in risk
areas, but the transporting industry continues to face specific business risks due to the
increasing globalization. The industry is faced with the risks of huge loses in profit and
customer satisfaction, hijacking and theft, lack of security procedures, mergers and
acquisitions, liability for loss or delays, bankruptcy of transport providers, lack of inventory,
new security and safety legislation affecting logistics etc. Supply chain risk management is
aimed at managing risk in complex and dynamic supply and demand networks. (cf.
Wieland/Wallenburg, 2011).

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Supply chain risk management (SCRM) is “the implementation of strategies to

manage both everyday and exceptional risks along the supply chain based on continuous
risk assessment with the objective of reducing vulnerability and ensuring continuity”. SCRM
attempts to reduce supply chain vulnerability via a coordinated holistic approach, involved
all supply chain stakeholders, which identifies and analyses the risk of failure points within
the supply chain. Mitigation plans to manage these risks can involve logistics, finance and
risk management disciplines; the ultimate goal being to ensure supply chain continuity in the
event of a scenario which otherwise have interrupted normal business and thereby
profitability.

Sometimes, it’s possible for supply chain logistics techniques such as supply chain
optimization to prejudice contingency planning which would otherwise reduce the overall
risk level for that particular supply chain.

CONTINGENCY OPTIONS
Some options to engineer an acceptable risk level include:
 Managing stock
 Considering alternative sourcing arrangements
 Business interruption/contingency insurance

Supply management is not just about acquiring goods and services at the best possible
price. It’s also about identifying possible disruptions to the supply chain and taking steps to
mitigate them. According to Kiser and Cantrell, a good risk management strategy has
several key components:
 It must identify risks for the entire life cycle of every product or service the company
provides.
 It must be able to predict the financial impact that a supply disruption can cause.
 It must offer strategies that can mitigate the effects of any disruption of supplies.
 It must delve deeper into the supplies chain than the first tier.
The key strategy is the holistic perspective and the focus on the actual impacts.

SUPPLY CHAIN RISKS

Modelled along the lines of Martin Christopher’s book chapter on Managing risk in the
supply Chain, Kiser and Kitrell define risks outside and inside the supply chain:
 External risks can be driven by event either upstream or downstream in the supply
chain.
 Demand risks related to unpredictable or misunderstood customer or end-customer
demand.
 Supply risks related to any disturbances to the flow of product within our supply
chain.
 Environmental risks that originate from shocks outside the supply chain.
 Business risks related to factors such as suppliers’ financial or management
stability.
 Physical risks related to the condition of a supplier’s physical facilities.
 Internal risks are driven by events within company control.
 Manufacturing risks caused by disruptions of internal operations or processes.

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 Business risks caused by changes in key personnel, management, reporting

structures, or business processes.
 Planning and control risks caused by inadequate assessment and planning, and
ineffective management.
 Mitigation and contingency risks caused by not putting in pace contingencies.

INTERNATIONAL RISK MANAGEMENT STRATEGIES

Uniquely identify supply chain elements, processes and actors. Knowing who and
what is in an enterprise’s supply chain is critical to gain visibility into what is happening
within it, as well as monitoring and identifying high-risk events and activities. Without
reasonable visibility and traceability into the supply chain, it is impossible to understand and
therefore manage risk and to reduce the likelihood of an adverse event.

Limit access and exposure within the supply chain. Elements that traverse the supply
chain are subject to access by a variety of actors. It is critical to limit such access to only as
much as necessary for those actors to perform their roles and to monitor that access for
supply chain impact.

Establish and maintain the provenance of elements, processes, tools and data. All
system elements originate somewhere and may be changed throughout their existence.
The record of element origin along with the history of, the changes to and the record of who
made those changes is called “provenance”. Acquirers, integrators and suppliers should
maintain the provenance of elements under their control to understand where the elements
have been, the change history and who might have had an opportunity to change them.

Share information within strict limits. Acquirers, integrators and suppliers need to share
data and information. Content to be share among acquirers, integrators and suppliers may
include information about the use of elements, users, acquirer, integrator or supplier
organizations as well as information regarding issues that have been identified or raised
regarding specific elements. Information should be protected according to mutually agreed-
upon practices.

Perform supply chain risk management awareness and training. A strong supply chain
risk mitigation strategy cannot be put in place without significant attention given to training
personnel on supply chain policy, procedures and applicable management, operational and
technical controls and practices. NIST SP 800-50, Building an Information Technology
Security Awareness and Training program, provide guidelines for establishing and
maintaining a comprehensive awareness and training program.

Usedefensive design for systems, elements and processes. The use of design
concepts is a common approach to delivering robustness in security, quality, safety,
diversity and many other disciplines that can aid in achieving supply chain risk
management. Design techniques apply to supply chain elements, element processes,
information, systems and organizational processes throughout the system. Element
processes include creation, testing, manufacturing, delivery and sustainment of the element
throughout its life. Organizational and business processes include issuing requirement for
acquiring, supplying and using supply chain elements.

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Perform continuous integrator review. Continuous integrator review is an essential

practice used to determine the defensive measures have been deployed. Its purpose is to
validate compliance with requirements, establish the system behaves in a predictable
manner under stress and classify weakness and vulnerabilities of elements, processes,
systems and any associated metadata.

Strengthen delivery mechanisms. Delivery, including inventory management, is an

essential function within the supply chain, which has a great potential for being
compromised. In today’s environment, delivery can be physical such as hardware or logical
modules and patches.

Assure sustainment activities and processes. The sustainment process begins when a
system becomes operational and ends when it enters the disposal process. This includes
system maintenance, upgrade, patching, parts replacement and other activities that keep
the system operational. Any change to the system or process can introduce opportunities
for subversion throughout the supply chain.

Manage disposal and final disposition activities throughout the system or element
life cycle. Elements, information and data can be disposed of at any time across the
system and element life cycle. For example, disposal can occur during research and
development, design, prototyping or operations/maintenance and include methods such as
disk cleaning, removal of cryptographic keys and partial reuse of components.

Supplier base.This is an important task, particularly identifying what is essential for the
company to be in control of, and what does not matter so much:
Identify each raw material
Identify strategic materials
Understand the strategic suppliers’ organization
Vulnerability.For each of the risks listed, the company must identify what scenarios that are
likely to happen, why they happen, and how the company is able or unable to cope with
them.
Implication.This is one of the sections where the article falls short of mentioning anything
substantially useful besides promoting the Monte Carte Simulation Technique.
Mitigation.This is where the company needs to set goals and targets and how to achieve
them, e.g.: within 24 hours of a supply disruption of material X, purchase orders will be
placed with the alternate supply source to assure there will be no disruption in the supply of
X. This is in fact very similar to business continuity planning and evaluating how soon the
company can get back to ‘business as usual’.
Costs and benefits.Any cost in mitigation actions and measures brings with it the benefits
of risk reductions and possible cost savings in case of a disruption. But how much, and is it
really worth it.
Measures and actions.The most important part of implementing supply chain risk
management is the clarification of roles and responsibilities, including involving or partnering
with the suppliers to in securing the supply chain, but not only that.
For risk management to be effective, it must be fully integrated into the company’s
business processed. The process of identifying risks, analysing them, and planning
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mitigation strategies must be documented and reported throughout the organization. To

effectively evaluate risk strategy, management must balance the cost of mitigation with
available resources and optimum cost management objectives. The risk management
strategy should apply to everyone at all levels in the organization and focus on achieving
the company’s business objectives.
In conclusion, supply chain risk management is more than just supply chain, it is the
business itself. As with Ericsson versus Nokia in the classic case of how not to deal with
supply chain disruptions, a well-handled supply disruption can turn into business continuity,
while an ill-handled supple disruption can turn into business dis-continuity.

CUSTOMER VALUE
The Essence of this chapter is that excellence in supply chain & logistics
management translates into customer value in many dimensions, from availability and
selection to influencing the price at which a product can be sold. Supply chain & logistics
management decisions have rendered significant concern in recent years for a number of
reasons. Directors in many manufactures now realize that activities taken by one member
of the supply chain can determine the profitability of all others in the chain. Many
international commercial enterprise researchers are of the belief that expanded globalization
of markets and increasing international competition mean that firms in all nations will face
like, if not identical, competitive environments. Many manufacturing companies are forces
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to improve the quality of their Chain Management decisions, products and reduce their
manufacturing costs
The main target of supply Chain & Logistics Management decisions is ‘Customer
satisfaction or values’ and to accomplish this all barricades are eliminated between ultimate
customer values and the raw material supplier. Research in Supply Chain & Logistics
Management decisions has identified twelve distinct management areas that are affiliated
with the subject. Each area comprises a Supply Chain & Logistics issue facing the twelve
categories are:
 Location
 Transportation and Logistics
 Outsourcing and Logistics alliances
 Sourcing and supplier management
 Marketing and channel restructuring
 Inventory and forecasting
 Service and after sales support
 Product design and new product introduction
 Information and electronic mediated environment
 Metrics and incentives
 Global issues
Customer Value is the satisfaction of customer requirements at the lowest total cost of
acquisition, ownership, and use. It’s achieved when demands are met fully, reliably, and
cost effectively. In today’s economic system of dynamic technical,financial and competitive
change, ensuring Customer Value demands impact the most timely and flexible supply
Chain & Logistics Management decisions. The key to real Customer Value is effective
Supply Chain & Logistics Management, which links customer engineering, production,
financial and information requirements to supplier resources and capabilities.
Issues related to customer value are:
 Conformance to requirements, giving customer what he wants and needs.
 Product selection, proliferation of customer options.
 Price and brand, matching asking prices with brand reputation.
 Value-added services, e.g. support and maintenance (free of charge)
 Relationships and experience target one attribute and differentiate you from
competitors.
 In addition sophisticated customer interaction via the internet can create additional
differentiation and value. This was 2007, and today, 4 years later we have all jumped the
social media bandwagon, for better and for worse.
Cost effectiveness requires more than low price, it demands quality and reliability
assurance, n-time delivery and availability, superior before and after-sale technical service
and support, continuous product and performance improvement, seamless integration with
supplier process and information flows. If these requirements are not met, Customer Value
then becomes a fiction.

SMART PRICING
This chapter expatiate on how smart pricing can increase or even decrease demand,
depending on which you may prefer (if profit margins on a certain product are low, you may

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in fact prefer the latter). The case of Starbuck’s and how they simply do not list available
drinks because they don’t generate much profit although you may ask for it and you will get
it. Or why does the value range at supermarket have such an ugly packaging? Of course,
to make you buy the higher priced and more profitable high-end products.

Smart pricing involves issues such as:

 Group pricing, discounts for certain groups of customers
 Channel pricing, different prices for different channels
 Regional pricing, exploiting price for different delivery times
 Time-base differentiation, different price for different delivery times
 Product versioning, different branding of what is essentially the same product
 Coupons and rebates, where the coupon is meant to be a hurdle, not an incentive.

However, if customers feel that they have been unfairly treated or outsmarted by these
smart prices, it may ultimately hurt the business for example when Apple dropped the price
of its iPhone by a third after only two months on the market, even its most loyal buyers
complained bitterly, forcing chief executive Steve jobs to apologize and offer a partial
rebate. According to Wharton faculty and analysts, the iPhone episode reveals the perils of
pricing in a marketplace where constant innovation, fierce competition and globalization are
changing the rules of the game. “The product lifecycle is short and the market is moving
quickly,” says Wharton marketing professor John Zhang. “You don’t have a lot of time to
learn from your mistakes. You have to price the product right the first time.”

Pricing is gaining new interest as management looks for ways to increase revenues after
years of focusing their attention on downsizing and cost-cutting. Firms are only now
beginning to apply to pricing some of the data collection and management tools they have
using in supply chain & logistics management and other parts of their businesses. “Pricing
is the last bastion of gut feel,” says Greg Cudahy, managing partner of Accenture‘s pricing
and profit optimization practice. Throughout their business and monitor their success with
hard numbers can raise revenue by between 1% and 8%. “That’s a huge shift in pure
revenue improvement”. For example, New York drugstore chain Duane Reade increased
baby product revenues by 27% after using pricing software to examine sales data,
according to an article titled, ‘the Price is Right…. Isn’t?That appeared in the January 2007
edition of Accenture’s business publication, Outlook. In the article, Curdahy and George L
Coleman, a leader of Accenture’s retail pricing group, describe how the data showed that
parents of new-borns are not as price-sensitive as parents of toddlers. In response, the
company cut prices on toddler diapers to remain competitive with other stores, and raised
prices on diapers for infants. Cudahy says better pricing can help businesses on many
other levels beyond revenue boosts. For example, he worked with a parcel delivery
company that introduced a coherent pricing strategy to its operations and found it was able
to reduce by 90% the time spent working out pricing for bids. That allowed the company to
focus more time and effort on building up customer relationships. Accenture found that in
some retail operations, a price decrease in one area can lead to beneficial pricing
elsewhere in the store. Research in retirement communities in the south, for example,
observed that shoppers had a high sensitivity to the price of health care goods. But saving
a few cents on those items may lead them to spend 50 cents more on other items. “Pricing
is not only about trying to get people to pay more, “he says. “Pricing is used as a testing as
a testing mechanism to find what consumers really want.”

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According to Wharton marketing professor Jagmohon Raju, Apple,s price cut is an example
of a strategy known as ‘temporalprice discrimination’. Companies using this strategy charge
people different prices depending on the buyer’s desire or ability to pay. As a result,
companies win two ways. First, they reap wide profit margin from those willing to pay a
premium price. In addition, they benefit from high volume, even at a lower per unit price, by
building a wider customer base for the product later. Raju notes that price discrimination
can also be structured across geographies, seasons and by adding or eliminating features.
Consumers have come to accept this form of pricing in the airline industry. A last-minute
traveller expects to pay vastly more than a frugal flyer who booked a seat on the same
flight, in the same aisle, moths earlier on the internet on the internet. It is easier, Raju says,
to apply temporal pricing structures in an industry with a service component-like airlines-
than it is with a tangible manufactured item. Indeed, just last week, New York City’s transit
agency proposed a two-tier system under peak periods. The plan, which would took effect
in 2008, raised agency revenues and offset overcrowding. However, temporal pricing can
be applied to other non-service industries as well, including the technology sector, where
consumers expect to pay sharply lower prices if they are willing to hold off on buying an
exciting new product the minute it hits the market. Raju says, technology marketers must
set pricing below profitable levels to build an installed user base that will lead to profitable
levels of sales volume later. “If I am the only one with a video phone, whom am I going to
call?” Raju asks.

SUPPLY CHAIN DIAGRAM

Reading a supply chain diagram requires knowing the direction, the notation, and the scope
of the diagram, all of which can vary. Once the basics have been understood, the physical
product and the flow of information in a supply chain are important facts to have when
conducting an assessment. A supply chain diagram can provide information about product
flow, information flow, and the flow of finances. Diagrams usually show process in a linear
or horizontal manner. Supply chains generally have a downstream and an upstream flow,
meaning that products and information can flow in multiple directions on the same diagram.
Data moving upstream heads toward the company suppliers. Information moving
downstream heads toward clients. Supply chains can cover all aspects of collection and
distribution from production to inventory to customer service. When reading a supply chain
diagram, therefore, keep the chosen scope collection of natural resources, moving through
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various channels and means of construction, to distribution amongst smaller storage

facilities or retail stores. A supply chain diagram is often construction to assess particular
sections of the supply chain and may therefore be limited in scope.
Examples of supply chain diagrams include:
Key SCLM Concepts

Each interface in the Supply

Chain & Logistics represents:
Raw Material -movement of goods
-information flows
Component -transfer of title
-purchase and sale
Manufacturer

Retailer
Strategic SCLM consists
Developing smarter ways to consumer
-choose
-Buy from and
Sell to your business partners

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Consumer Dealer
1
8
7
2

5 3

6 4
Manufacturer
Shipper Supplier

SUPPLY CHAIN DIAGRAM ABOVE

Receive Request

cLog Failure Request

Validate

c Invalid Request cLog Failure

Log Failure

LogFailure
cLog Event Repository
c not Available

Repository not Available

c

USE CASE ACTIVITY DIAGRAM ABOVE

An invalid request is a request of item not available tothe customer at the time of request.
Bothsupplychain diagram and usecase diagram are used to demonstrate how
transactions can either end in failure or success in meeting customer satisfaction
The Use case is a model in e-commerce businesses.

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Use case entails the following

 The retailer goes to the manufacturer and makes order for the product.
 He/she makes agreement with the manufacturer on the price and quantity of the product
needed.
 The manufacturer checks the warehouse to see if he/she has it in the stock.
 If he/she has it, the quantity needed may be shipped to the retailer.
 If he/she does not, the manufacturer will immediately produce the product for shipment to the
retailer.
 If the manufacturer does not have it and cannot create it then the transaction ends in failure,
hence the use case end either failure or success.

Non-functional Requirements and Assumptions

Call to log statistics will use the document Style One-way Message Scenario.
Open Issues
None
Fundamental of Supply Chain Management
1. Customer Demand Forecasting
2. Master Production Scheduling (MPS)
3. Material Requirement Planning
4. Capacity Planning (making expansion)
5. Production activity control (PAC)

TERMS AND CONCEPTS TO KNOW

Please find the terms and concepts that you should be able to define after having read the
required readings.
Please define the terms from the required readings rather than a dictionary. You will be
tested on the definitions that authors have provided.

Essentials of Supply Chain & Logistics Management

1. Production- Capacity of a supply chain to make and store product.

2. Inventory – Everything from raw material to work in progress to finished goods that are
held by the manufacturers, distributors and retailers in a supply chain.

3. Producers – Organizations that make a product. Also known as manufacturers.

4. Distributors – Companies that take inventory in bulk from producers and deliver a
bundle of related product lines to customers.

5. Retailers – Organizations that stock inventory and sell in smaller quantities to the
general public.

6. Customers – Consumers or any organization that purchases and uses a product.

7. Service Providers – Organizations that provide services to producers, distributors,

retailers and customers.
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8. Cycle Inventory – Inventory required meeting product demand over the time period
between placing orders for the product. The build-up of inventory in the supply chain &
logistics due to the fact that production and stocking of inventory is done in lot sizes that are
larger than the on-going demand for the product.

9. Economics Order Quantity (EOQ) – An order quantity that is the most cost effective
amount to purchase at a time. Calculated as EOQ = √2UO/hC; (the square root of 2UO/hC)
where U = annual usage rate, O = ordering cost, C = cost per unit and h = holding cost per
year as a percentage of unit cost.

10. Safety Inventory – The amount of inventory on hand for an item when the next
replenishment EOQ lot arrives.

11. Order Management – The process of passing order information from customers back
through the supply chain & logistics form retailers to distributors to service providers and
producers.

12. Internal Efficiency – The ability of a company or a supply chain & logistics to operate in
such a way as to generate an appropriate level of profitability.

13. Demand Flexibility – The ability to respond to uncertainty in levels of product demand.

14. Internal Efficiency metrics – The ability of a company or a supply chain & logistics to
use their assets as profitability as possible. These metrics include calculating inventory
value, inventory turns, return on sales, cash-to-cash cycle time.

15. Demand flexibility Metrics – The ability of a company to measure their ability to be
responsible to new demands in the quantity and range of products and to act quickly. Some
measures of Demands flexibility include Activity Cycle time, Upside Flexibility and Outside
Flexibility.

16. Product Development Metrics – A measurement of a company or supply chain’s ability

to design, build and deliver new products to serve their markets as those markets evolve over
time.

SUPPLY CHAIN & LOGISTICS BEST PRACTICES

3. Inbound Logistics – activities associated with receiving, storing and disseminating
inputs to the product. Includes material handling, warehousing, inventory, equipment
maintenance scheduling and returns to suppliers.

4. Operations – The activities associated with transforming inputs into the final product
form. Includes function such as machining, packaging, assembly, equipment maintenance,
testing, printing and facility operation.

5. Outbound Logistics – The activities associated with collecting, storing and physically
distributing the product to buyers, includes finished goods warehousing, material handling,
freight delivery, order processing and scheduling.
6. Horizontal Strategy – a coordinated set of goal and policies across distinct but
interrelated business units.
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7. Unsiloing – when managers cooperate across departments and functions, sharing

resources and cross-selling products to promote the entire company’s bottom line.

8. Supply Chain Planning - coordinates assets to optimize the delivery of goods, services
and information from supplier to customer, balancing supply and demand.

9. Sales and Operations Planning (S & OP) – the process of aligning all of a company’s
business plans (customers, sales and marketing, research development, production,
sourcing and financial) into a single, integrated set of plans. The end goal is a plant that
more accurately forecasts supply and demand.

10. Enterprise Resource Planning (ERP) - Tying together manufacturing, sales,

distribution and finance by collecting data from each area and using it to plan a company’s
resource use – everything from employees to raw materials.

11. E-sourcing – the use of online electronic marketplaces to purchase both basic
commodities (indirect materials) and core production materials (direct materials).

12. Product Life cycle management (PLM) – Technology that enables manufacturers to
manage and share complex design and production information across and extended
enterprise, with the goal of streamlining the product development process.

13. Manufacturing Execution System (MES) – A system of delivering production

instructions to the shop floor and then tracing everything that happens to a product as it
progresses through the manufacturing process.

14. Six sigma – A measurement of quality that strives for near perfection, which is defined
as no more than 3.4 defects per million opportunities.

15. Transportation management System (TMS) - A software program that automates a

company’s shipping process from carrier selection to routing and scheduling.

16. Cross-Docking – The distribution process of re-handling freight from inbound trucks
and loading it onto outbound trucks, without first storing the freight.

17. Warehouse Management System – A system that controls, manage and relates the
movement of goods within a warehouse or distribution centre. Typical features of WMS
include inventory management, picking and put-away, order visibility and fulfilment.

18. Customer Relationship Management (CRM) – A customer-centric strategy that uses

software tools to optimize profitability, revenues and customer satisfaction. It ties into all of a
company’s other enterprise and supply chain systems, with the goal of providing a complete
view of a company’s operation.

19. Third Party Logistics Provider (3PL) – An asset-based or non-asset-based company

that manages one or more logistics processes or operations (typically, transportation or
warehousing) for another company.

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 PSMI (www.psmiinstitute.com)

20. Customs-Trade Partnership AgainstTerrorism (C-TPAT) – Created after 9/11 and it is

a security program that establishes the assurance that a company has implemented security
practices within their company and throughout their supply chain.

21. Radio Frequency Identification (RFID) – A data collection technique that passes
product information via radio waves to a receiving unit.

22. Green Supply Chain Management – The alignment of sourcing, manufacturing,

distribution, transportation and remanufacturing/recycling processes with the goal of reducing
a company’s carbon footprint.

23. Learn Manufacturing – A management philosophy focused on eliminating waste,

reducing inventory and increasing profitability.

Supply Chain &Logistics Agenda: The Steps That Drives Real Value
1. Net Profit Margin – Net operating profit after tax.

2. Capital Turnover – Revenue divided by total capital.

3. Return on Invested Capital – net profit margin multiplied by capital turnover.

4. Economic Profit – Net operating profit after tax less weighted average cost of capital.

5. SWOT analysis – The evaluation of a company’s strength, weaknesses, opportunities

and threats.

6. Automated Storage and Retrieval System (ASRS) – A robotic system used to put
away and pick material needed for manufacturing.

7. Stage-Gate Process – A process to guide the introduction of new products. The

process consists of a series of gates with each one consisting of a number of required
deliverables before the project can proceed to the next stage.

8. Demand-Supply Integration (DSI) – The process of adequately matching supply with

demand, also referred to as Sales and Operations Planning (S & OP).

9. Internal Collaboration – When sales, marketing and operations find a way to align and
focus on serving the customer in a way that maximizes economic profit.

10. External Collaboration – The act of a supplier and a customer working together to
achieve mutual improvement.

11. Value Stream Mapping – A technique to visually display the detail of a process in
order to see non-value-added activities that should be eliminated.

12. Failure Mode and Effects Analysis (FMEA) – An approach to identify and prioritize risk
when implementing change within the supply cha.in

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