Supply Chain Management & Introduction

to SAP
BME515C
By

Dr.Ashokkumar C N
22-10-2024
Asst.Professor
V I T / M E / Dr. C N A
MODULE 3
• Warehouse Management Stores management-stores systems and
procedures-incoming materials control stores accounting and stock
verification Obsolete, surplus and scrap-value analysis-material
handling transportation and traffic management -operational
efficiency-productivity-cost effectiveness-performance measurement.
• Supply Chain Network Distribution Network Design – Role - Factors
Influencing Options, Value Addition – Distribution Strategies - Models
for Facility Location and Capacity allocation. Distribution Center
Location Models.

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Distribution Network Design (Role of distribution)
• Distribution refers to the steps taken to move and store a product
from the supplier stage to a customer stage in the supply chain.
• Distribution occurs between every pair of stages in the supply chain.
Raw materials and components are moved from suppliers to
manufacturers, whereas finished products are moved from the
manufacturer to the end consumer.
• Distribution is a key driver of the overall profitability of a firm because
it affects both the supply chain cost and the customer value directly.
• Choice of distribution network can achieve supply chain objective
from low cost to high responsiveness.

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• Examples: Wal-Mart and Seven-Eleven Japan, have built the success
of their entire business around outstanding distribution design and
operation.
• Dell distributed its PCs directly to end consumers, whereas companies
such as HP distributed through resellers.
• Proctor & Gamble (P&G) has chosen to distribute directly to large
supermarket chains while obligating smaller players to buy P&G
products from distributors

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• The process of designing a distribution network has two broad
phases.
• In the first phase, the broad structure of the supply chain
network is visualized. This stage includes decisions such as
whether the product will be sold directly or go through an
intermediary.
• The second phase then takes the broad structure and converts
it into specific locations and their capability, capacity, and
demand allocation.
• The appropriate choice of distribution network grows the
supply chain surplus by satisfying customer needs at the
lowest possible cost.
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Figure :Distribution network in the supply chain

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 FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN
At the highest level, performance of a distribution network should be evaluated
along two dimensions:
1. Customer needs that are met (Service Factor)
2. Cost of meeting customer needs (Cost Factor)
Let us focus on those measures that are influenced by the structure of the
distribution network. These include:
• Response time
• Product variety
•· Product availability
• Customer experience
• Time to market
• Order visibility
• Returnability
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Vemana I T / Mech.Engg./ Dr.C N A 8
Relationship between Desired response time and Required Number of
Facilities

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Relationship between Inventory
Costs and Number of Facilities

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Relationship between Transportation Cost and Number of
Facilities

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Relationship between Facility Cost and
Number of Facilities

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Variation of response time and total logistics cost with
number of facilities

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Design options for Distribution Network/ Distribution strategies
Distribution network choices from the manufacturer to the end consumer.
Two key decisions used for designing a distribution network are
1. Will product be delivered to the customer location or picked up from a
preordained site?
2. Will product flow through an intermediary (or) intermediate location?
Based on the choices for the two decisions, there are six classification of distribution
network designs as follows.
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with package carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with costumer pickup
6. Retail storage with customer pickup

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1. Manufacturer storage with direct shipping

Vemana I T / Mech.Engg./ Dr.C N A (Drop shipping)15

1. Manufacturer storage with direct shipping

Table: Performance
Characteristics of
Manufacturer Storage
with Direct Shipping
Network

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2. Manufacturer storage with direct shipping and in-transit merge

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3. Distributor storage with package carrier
delivery

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Performance characteristics of Distributor storage with package carrier delivery

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4. Distributor storage with last-mile delivery

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Performance characteristics Distributor storage with last-mile delivery

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5. Manufacturer/distributor storage with costumer
pickup

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Performance characteristics Manufacturer/distributor storage with costumer pickup

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 6. Retail storage with customer pickup
Performance characteristics

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 THE ROLE OF NETWORK DESIGN IN THE SUPPLY CHAIN
Supply chain network design: It includes the location of manufacturing,
storage and transportation related facilities and the allocation of capacity
and roles of each facility

Supply chain network design decisions are classified as follows:

1. Facility role: What role should each facility play? What processes are
performed at each facility?
2. Facility location: Where should facilities be located?
3. Capacity allocation: How much capacity should be allocated to each
facility?
4. Market and supply allocation: What markets should each facility
serve? Which supply sources should feed each facility?

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 Models for facility location and Capacity allocation
• A manager’s goal when locating facilities and allocating capacity
should be to maximize the overall profitability of the resulting supply
chain network while providing customers with the appropriate
responsiveness.
• Revenues come from the sale of product, whereas costs arise from
facilities, labor, transportation, material, and inventories.
• The profits of the firm are also affected by taxes and tariffs. Ideally,
profits after tariffs and taxes should be maximized when designing a
supply chain network.

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 Phase II : Network Optimization Models- The Capacitated Plant Location
Model

• Network optimization models are useful for managers considering

regional configuration during Phase II.

• During Phase II of the network design framework, a manager

considers regional demand, tariffs, economies of scale, and aggregate
factor costs to decide the regions in which facilities are to be located.

• During Phase II, the manager must consider these quantifiable trade-
offs along With non - quantifiable factors such as the competitive
environment and political risk

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The capacitated plant location network optimization model requires the following
inputs:

n = number of potential plant locations/capacity (each level of capacity will count as a

separate location)
m = number of markets or demand points
Dj = annual demand from market j
Ki = potential capacity of plant i
fi = annualized fixed cost of keeping factory i open
cij = cost of producing and shipping one unit from factory i to market j (cost includes
production, inventory, transportation, and tariffs)

The model focuses on minimizing the cost of meeting global demand.

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 Define the following decision variables:
yi = 1 if plant i is open, 0 otherwise
xij = quantity shipped from plant i to market j
The problem is then formulated as the following integer program

• The constraint in Eqn 1 requires that the demand in each regional market is satisfied
• The constraint in Eqn 2 states that no plant can supply more than its capacity
• The constraint in Eqn 3 enforces that each plant is either open or closed.
• The solution will identify the plants that are to be kept open, their capacity and the allocation
• The model is solved using Solver tool in Excel;
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PHASE III : GRAVITY LOCATION MODELS:

▪ During Phase III a manager identifies potential locations in each region where
the company has decided to locate a plant.

▪ As a preliminary step, the manager needs to identify the geographic location

where potential sites may be considered.

▪ Gravity location models can be useful when identifying suitable geographic

locations within a region.

▪ Gravity models are used to find locations that minimize the cost of transporting
raw materials from suppliers and finished goods to the markets served

India GPS co-ordinates : 20.5937° N, 78.9629° E

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The basic inputs to the model are as follows:
▪ Xn,Yn: coordinate location of either a market or supply source n
▪ Fn: cost of shipping one unit for one mile between the facility and either market
or supply source n
▪ Dn: quantity to be shipped between facility and market or supply source n
▪ If (x, y) is the location selected for the facility, the distance dn between the facility
at location (x, y) and the supply source or market n is given by

▪ The optimal location is one that minimizes the total cost TC. It is obtained using Solver
tool in Excel.
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PHASE IV : NETWORK OPTIMIZATION MODELS:

▪ During Phase IV, a manager decides on the location and capacity allocation for
each facility.
▪ Besides locating the facilities, a manager also decides how markets are allocated
to facilities.
▪ The demand allocation decision can be altered on a regular basis as costs change
and markets evolve.
▪ When designing the network, both location and allocation decisions are made
jointly.

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Allocating Demand to Production facilities:
The model requires the following inputs:

n = number of factory locations

m = number of markets or demand points
Dj = annual demand from market j
Ki = capacity of factory i
Cij = cost of producing and shipping one unit from factory i to market j (cost
includes production, inventory, and transportation)
xij = quantity shipped from factory i to market j

• The goal is to allocate the demand from different markets to the various
plants to minimize the total cost of facilities, transportation and inventory.

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Locating Plants & Capacity allocation: The Capacitated plant Location Model

▪ The problem of selecting the optimal location and capacity location is very
similar to the regional configuration problem

▪ Objective is to locate the plants & allocate capacity such that it minimizes the
total cost of facilities, transportation and inventory.
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Locating Plants : The Capacitated plant Location Model with single sourcing

xij = 1, if market j is supplied by factory i, otherwise 0

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 Warehouse Management
▪ Definition of the warehouses or stores : It is the place where one keeps material
for some time before its use.
▪ Functional definition of stores, it is a place where following activities are
carefully undertaken:

•Receipt of goods,
•timely procurement of materials,
•accounting the transactions,
• minimizing obsolescence, surplus & scrap by proper identification
•documentation
• handling other issues pertaining to storage and cleanliness.

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Definition of the Warehouse Management System (WMS) :
It refers to the movement and storage of materials within a warehouse. WMS is part
of the Supply Chain Management and concerned with the receipt, storage, and
shipping (movement) of goods

- More precisely, warehouse management involves

• Receipt : Intaking, identifying, inspecting
• Storage : Storing inventory
• Shipping : Picking, packaging, marking, weighing, and delivering products
from the warehouse to the customer

Inventory Management: It focusses solely on the actual items being held within a
warehouse.
Warehouse management: It is more concerned with the “journey” of individual items
as they flow through the warehouse from receipt to shipment.
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 Objectives (Functions) of store(warehouse)management

▪ To ensure uninterrupted supply of materials without delay to various

users of the organization.
▪ To prevent overstocking and under stocking of the materials
▪ To ensure safe handling of materials and prevent their damage.
▪ To protect materials from pilferage, theft, fire and other risks
▪ To minimize the cost of storage
▪ To ensure proper and continuous control over the materials.
▪ To ensure most effective utilization of available storage space
▪ To optimize the efficiency of the personnel engaged in the store

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 STORES SYSTEMS AND PROCEDURES

The systems and procedures in stores can be broadly studied under four heads

• Identification System
• Receipt System
• Storage System
• Issue System

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1. Identification System

• The development of an unambiguous and efficient identification

system is the first responsibility confronting a store’s manager so as to
facilitate clear internal communication.
i.e. to coordinate the activities of inventory control and stores
departments with possible integration with the operations of design
engineering, production and cost accounting.

• Codification of parts can be done in any one of the following ways:

1. Arbitrary approach:
2. The symbolic approach

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1. Arbitrary approach:
• The inventory items are given an arbitrary number in the sequence in which these are
added in the stores account.
• Each item gets a discrete number but there is no systematic relationship to the numbers
assigned to related items.

2. The symbolic approach:

• This is a very systematic approach to the design of codification system.
• The codes assigned to different parts may be numeric alpha numeric.
• A numerical system assigns a six to ten digit code number to each item.
e.g.The code number of an item is 152 43 25
- First digit 1 General-class
- Next two digits 52 Generic class
- Next two digits 43 Subclass
- Last two digits 25 Specific item numbers

• If it is more than this limit in any of the categories, one more digit is to be added for that
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2. Receipt system

• The inputs into stores or receipts can emanate from internal as well as external
sources.
• The procedures start even before the material reaches the stores when a Purchase
Order (PO) is placed on the vendor.
• The details should be maintained in a chronological order to enable the ease of
understanding.
• A ‘Provisional Goods Inward Note’ (PGI) or a `Materials Received Report’ is
prepared as soon as the materials are cleared from the receiving sections and sent for
inspections.

• This gives information on materials code, quantity received, rate, date of receipt,
carrier details, supplier details, location code and description of the material.

• All the items received are inspected and sample tested to ensure that the purchase
order specifications are made.

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Scope of work involves following functions:

(a) Requirement determination,

(b) Raising purchase requisition,
(c) Chasing purchase orders to expedite supplies,
(d) Scheduling arrival of materials,
(e) Receiving the materials physically and planning for storage,
(f) Quantity & quality inspection,
(g) Checking input documents like invoice, lorry receipt, delivery challans and other challans,
invoices etc.,
(h) Taking stock and keeping record of material received and also of rejected material,
(i) Endorsing the suppliers bills and quantities and forwarding for payment to accounts,
(j) Informing indenting departments of arrival of goods,

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3. Storage System
• The design of proper shortage system is very important for easy location, proper
identification, and speedy issue to the consuming department.

Commonly followed systems for physically controlled stores:

•Closed stores system
•Open stores system
•Random access stores system.
Closed stores system:
▪All materials are physically stored in a closed or controlled area, usually kept in physical
control by locking.
▪Only stores personnel are permitted to enter the stores area.
▪ Entry and exit of the material from the area is permissible only with the accompaniment
of authorizing document.
▪Maximum physical security and tight accounting control of inventory material are ensured
by such a storage system.
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Open stores system:
▪No separate store room exists.
▪ The material is stored as close to the point of use as is physically possible.
▪Such a system finds applicability in the highly repetitive, mass production type of systems
e.g. automobile assembly plant.
▪The storage facilities are arranged at each work station as per requirement and availability
of space.
▪ The storage facilities are open and worker has direct access to it; no authorization
document is needed.

Random Access Stores System:

▪No material has a fixed location’
▪ All materials are stored at random locations throughout the store room.
▪However, similar types and sizes of storage equipment are grouped together.
▪ When an item enters the stores, it is stocked at the first available storage location for that
particular group
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 4. Issue System
• Issues can be of two kinds, i.e., issues to consuming departments, and
issues to outside supplies.

•The control of issues is regulated by production programmers.

• Based on the programme and the bill of materials work orders are prepared, listing for
each material quantity to be issued and the corresponding quantity of the component to
be manufactured.

• The junior stores personnel are not authorized to issue beyond the work order quantity.

• Normally, two copies of the work order or Material Requisition are prepared .

• One copy is retained at the material accounting section and the other is returned to the
originating department where it is used.
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▪ The scope of this issue control involves
- the issue of the right material, in the right quantity, to the right personnel, at
the right time and place on receiving the right authorisation,
- maintaining the records for the same

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 Incoming materials control

▪ T o ensure that the incoming materials of right quality are procured for use.

▪ Quality - “CONFORMANCE TO ORDERED SPECIFICATION & FITNESS

FOR USE”,

Ways (Methods) of carrying out inspection:

1. Pre Dispatch Inspection
2. Stage Inspection / Final Inspection
3. Document Inspection
4. Stores / Receipt Inspection
5. Third Party Inspection :

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1. Pre Dispatch Inspection:

•This is inspection before dispatch of material.

•The inspection is carried out at supplier’s premises .
• Supplier gives an Inspection Request (IR) to the inspection agency mentioned in the PO
(Purchase Order).
• On receipt of IR, the inspecting officer visits the supplier’s premises along with
documents necessary for inspecting such as copy of PO, drawing, specification etc.

The following checks are conducted depending on the nature of item:

➢ Visual check
➢ Dimensional check
➢ Functional check
➢ Physical testing such as hardness, pressure test, load test etc
➢ Electrical and other on-bed testings such as High voltage test,
➢ Insulation resistance test etc.
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2. Stage Inspection / Final Inspection :

•For critical items, it is required to conduct stage inspection of semi-finished items

(such as castings, forgings etc) at suppliers premises.

• In such cases, the supplier gives an interim Inspection Request to the inspection
agency.

• During stage inspection, sample is collected by the inspecting officer for Chemical
analysis / Physical testing at either their own facility or at 3rd party locations.

•On receipt of test results, conformance to specification is verified & clearance is given
to the supplier for further processing of the item.

•After readiness of the material in all respect & internal checking, the supplier gives
the final Inspection Request to the inspection agency.
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3. Document Inspection :

• Usually for very standard items, inspection can be carried out through the
verification of supplier given certificates such as
- Material Test Certificate (MTC),
- Manufacturing Certificate (Mfg. TC),
- Guarantee Certificate (GC) etc.

•After ensuring conformance of materials to the ordered specification in all

respect, Inspection Certificate (IC) is issued by the inspecting officer to the
supplier.

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4. Stores / Receipt Inspection :

• Majority of items are inspected through this route.

• Materials are received in the receiving bays of Stores.

• Such items are usually accepted based on visual examination & verification of documents.

• Materials in the receiving bay are segregated into several categories, based on their quality
control status and destination

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The major categories are :

- Awaiting inspection – This category consists of material that has been received and is
awaiting inspection before being moved into stock.

-Acceptance upon certification – This category consists of material that may be accepted
pending certification.

- Rework – In this category are materials that are defective and must be reworked.

- Return – This category contains materials that are defective and will be returned

- Materials to be tested – This category consists of materials which have been received and
are awaiting delivery to the testing department.

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5. Third Party Inspection :
• In case of specialized items, which require special proficiency for inspection, help of third
party is availed by paying the required charge.

Statutory Compliances ( IBR, EXPLOSIVE) :

• In case of items, which require approval of statutory authority such as IBR (Indian Boiler
Regulation), CCE (Chief Controller of Explosives) etc, verification & correlation of
documents with the materials is done by the inspection agency before acceptance.

Quality Complaint Redressal :

• If there is a pre-mature failure of the material, joint investigation is carried out by the
indenter & inspection agency.
• If it is established that, the pre-mature failure has occurred due to use of wrong material or
faulty workmanship, the supplier is asked to either rectify the defects (if feasible) or supply
free replacement.

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 Stores accounting & Stock Verification
Stores accounting

• Stock accounting is a systematic way of assessing the money value of the items lying in
stores
• Since the procurement price or sale price of a material does not remain constant, it is
necessary to evaluate the stocks regularly
• Under the companies act, a change in the method of valuation has to be approved by the
Board of Directors of the company

• The most popular methods of accounting are,

- FIFO: First In First Out
- LIFO: Last In First Out.

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FIFO (First in First out) Method

▪ FIFO method assumes that material purchased are issued in strict chronological
sequence, i.e. the material which comes in first is issued first.

▪ This method ensures that the materials are issued at the actual cost and the valuation is
done at the latest price paid.

▪ In an inflationary scenario, the time lag from the period the material is inward to that
when it is issued results in the material being issued at a lesser price than its current
price which wrongly indicate the higher profits.

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LIFO (Last in First out) Method

▪ This method assumes that the material coming in last are the first to be issued.
▪ The advantage of this method is that the costs are reckoned closest to the latest price
and thus, reflecting the latest market positions. But the stocks are still evaluated at the
old prices for valuation purpose.
▪ LIFO is directed at the latest market conditions so that the pricing conditions are up-to-
date as much as possible.
▪ Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces
their income taxes in times of inflation
▪ But, with International Financial Reporting Standards banning the use of LIFO, more
companies have gone back to FIFO.
▪ LIFO is only used in Japan and the U.S.

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 Stores Verification & Reconciliation

▪ The process of physically verifying the stock of items with respect to the stock on
record is known as stock verification.

▪ The correction of the record to take care of any observed discrepancy in stock is
known as reconciliation of stock.

▪ High value & pilfer-able items are verified more frequently.

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Consumption budget monitoring :

▪ Each User department is allocated the Budget for the consumption of various
commodities of items in the beginning of the financial year.

▪ Issue of material to the user department is made after ensuring the availability
of budget for that department for that commodity.

▪ Once the budget is exhausted the user departments need to take additional
budget provision or clearance of competent authority to draw further material
from Stores.

▪ This consumption budget monitoring is done to ensure proper control on the

expenditure and cost incurred (for consumables) by the user department

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Following procedure is followed in any Stock verification:

1. Preparing a programme of verification.

2. Getting approval from the appropriate authority.
3. Appointing the team of the verifier.
4. Providing the verifiers a time table and also a stock-taking sheet, which should
normally be serialized and dated.
5. Taking notes on the stock-taking sheet and other details with the help of
documents made available.
6. Checking and verifying the stock physically.
7. Noting down the discrepancies etc.
8. Valuing the stock.
9. Dispatching the necessary certificates, reports, suggestions etc.

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 Obsolete, surplus and scrap management

▪ Obsolete items are good in all respect but have no useful role in the company due to
changes that have occurred in the course of time. They have economic worth in the
market.

▪ Surplus items are those that have accumulated due to faulty planning, forecasting
and purchasing.

▪ Scrap is wastage generated due to processes like turning, boring drilling etc. and also
due to bad manufacturing.

▪ It is said that in India nearly Rs. 2500 crores are tied up as obsolete, surplus and
scrap items.

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Causes for their generation

▪ Changes in product design – obsoleting

▪ Faulty planning and forecasting – leads to excess procurement, surplus
generation.
▪ Rationalization – initiative for variety reduction leads to surplus or obsolete
items
▪ Faulty purchase practices – sub-optimization in buying to utilize available
discounts and Transportation economy, surplus and obsolete stocks are
generated.
▪ Cannibalization – parts of one idle machine are fitted on another machine
needed urgently during maintenance, results into obsoleting of parts and at
times even scrap
▪ Parts kept aside for insurance claims, bad storage system, bad material
handling, Bad manufacturing and badly maintained machines are other causes
for spoilage and scrap.
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Control of Obsolescence
▪ Computerised maintenance of records can help largely in identifying potential obsolete
items.
▪ Market intelligence should be practiced as a norm.

▪ This method can also be combined with the XYZ analysis to identify obsolete items.
- X -items account for 70% of value but about 10% of stock items,
- Y -items account for 20% of value but about 20% of stock items, and
- Z - items account for 10% of value but about 70% of stock items.

▪ Here, items coming in Y and Z category need attention whereas X category items are
very critical as they constitute a large value.
▪ Other than very necessary or insurance items, the excess items should be used or
disposed quickly.
▪ One way of controlling can be to introduce buyback clause or having centralised
purchase which can better plan to keep a low spares level as it can divert these to other
sites.
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Control of Obsolescence
▪ Computerised maintenance of records can help largely in identifying potential
obsolete items.
▪ Market intelligence should be practiced as a norm.

▪ This method can also be combined with the XYZ analysis to identify obsolete items.
- X -items account for 70% of value but about 10% of stock items,
- Y -items account for 20% of value but about 20% of stock items, and
- Z - items account for 10% of value but about 70% of stock items.

▪ Here, items coming in Y and Z category need attention whereas X category items are
very critical as they constitute a large value.
▪ Other than very necessary or insurance items, the excess items should be used or
disposed quickly.
▪ One way of controlling can be to introduce buyback clause or having centralised
purchase which can better plan to keep a low spares level as it can divert these to
other sites.
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Control of Scrap

(a) Proper storage and dumping places of scrap need to be identified. It is usual to see that
all construction sites or warehouses are littered nearby with scrap.

(b) Assess the performance of staff by assessing the cleanliness of the place.

(c) Fix tolerance limits itself on the production of scrap. Explaining the efficient use can
control the srap.

(d) Scrap should be segregated and sold as this fetches better value.

(e) Reclamation should be used wherever possible by seeing the economics.

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Disposal Methods
Scrap disposal can be done in the form given below:
(a) By inviting offers from time to time,
(b) By auction, and
(c) By annual contract.

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 Material handling
▪ Material Handling is the movement, storage, control and protection of materials, goods
and products throughout the process of manufacturing, distribution, consumption and
disposal.
The focus is on the methods, mechanical equipment, systems and related controls used to
achieve these functions.

▪ Impact of material handling :

• Production Flow
• Employee Safety
• Employee Morale
▪ Productivity in warehouses, manufacturing plants, and distribution centers.
▪ An inefficient facility causes errors and delays, eroding customer loyalty and making it
easier for your competition to snatch away business

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▪ Benefits of Effective material handling
• The integrity of their goods
• The productivity of their retail warehouse, warehouse, distribution center, or
manufacturing plant

• The physical and mental health of their workers

• When a shipment arrives, a good material handling process ensures goods get from
the dock to the appropriate rack in less time

• Chances of theft, damage, and spoilage can be reduced with a material handling
process that limits access to certain parts of your warehouse to particular employees.

• Proper material handling allows warehouses to store goods in an organized manner

that makes it easy to pick and pack inventory for outgoing shipments.
• It also accounts for proper control of materials.
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Types of Material Handling Equipment

Storage and handling equipment: Stores goods in the time between receiving and shipping.
Examples of such equipment are stacking frames, racks, and shelves.
Engineered systems: Automated units that efficiently move goods through a warehouse and
reduce the need for manual intervention.
Examples of such equipment are
- Automated storage and retrieval systems (AS/RS),
- Robotic delivery systems, automatic guided vehicles
- Conveyor systems.
Industrial trucks: Powered vehicles that move materials around a warehouse.
Examples of such vehicles are
- forklifts,
- hand trucks.
Bulk Material Handling Equipment: Equipment that assists workers with handling large
loads.
• Examples of such equipment include bucket elevators
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 Transportation and traffic management

Transportation refers to the movement of product from one location to another as it

makes its way from the beginning of a supply chain to the customer.

THE ROLE OF TRANSPORTATION IN A SUPPLY CHAIN

▪ It is an important supply chain driver because products are rarely produced and
consumed in the same location
▪ It is a significant component of the costs incurred by most supply chains.
▪ Transportation activity represented more than 10 percent of the GDP of the United
States .
▪ The role of transportation is even more significant in global supply chains since
suppliers are worldwide and transportation allows products to move across global
network. e.g. Dell
- Global transportation allows to sell products manufactured all over the world in
any country. E.g. Wal-Mart
- Thus transportation is a significant link different stages in a global supply chain.
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▪ With the rapid growth in international trade, good multimodal freight transportation
systems to move the resulting cargo have become even more significant.
▪ Any supply chain's success is closely linked to the appropriate use of transportation.
Inexpensive and appropriate transportation allow firms to provide high-quality
products at low prices globally. E.g. IKEA stores

▪ Transportation can be used to achieve company’s strategic goals. E.g. Seven-

Eleven Japan has a goal of carrying products in its stores to match the needs of
customers.
It uses a responsive transportation system along with aggregation to decrease its
transportation and receiving costs while ensuring that product availability closely
matches customer demand.

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▪ Supply chains also use responsive transportation to centralize inventories and
operate with fewer facilities.
For example, Amazon.com relies on package carriers to deliver customer
orders from centralized warehouses.

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 Factors affecting transportation decisions

1. The shipper - the party that requires the movement of the product between two
points in the supply chain.
2. The carrier - the party that moves or transports the product
3. Owners and operators of transportation infrastructure
4. The bodies that set transportation policy worldwide.
Actions by all four parties influence the effectiveness of transportation.

Shipper decisions:
• Design of the transportation network
• Choice of means of transport
• Assignment of each customer to a particular means of transport

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Factors affecting shipper decisions
A shipper’s goal is to minimize the total cost while achieving the responsiveness
1. Transportation cost : This is the total amount paid to various carriers. It depends on
price offered by carriers and whether the shipper uses inexpensive and slow or the
other way.
2. Inventory cost : Cost of holding inventory before it is transported
3. Facility cost: Cost of various facilities in the shipper’s supply chain network
4. Processing cost: Cost of loading & unloading orders
5. Service level cost : Cost of not being able to meet delivery commitments
6. Responsiveness
7. Margin generated from different products

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Carrier decisions:
• Investment decisions
• Operating policies that maximize the return on its assets.

Factors affecting carrier decisions

1. Vehicle related cost : This is the cost a carrier incurs for the purchase or lease of
the vehicle
2. Fixed operating cost: Cost associated with terminals, airport gates and labour
3. Trip related cost: This includes the price of labor and fuel incurred for trips
4. Quantity related cost: This includes loading/unloading costs that varies with the
quantity
5. Overhead cost: Cost of planning and scheduling a transportation network as well
as any investment in information technology.

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 Modes of Transportation: Choices and their performance measures

• Rail
• Road
• Water
• Air
• Pipeline

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Comparison of modes of transportation on supply chain
performance measures
1. The performance of the four major modes of transport can be compared on the
following performance measures related to the supply chain:
• Freight cost
• Lot size
• Delivery time
• Delivery time variability
• Losses and damages Lead time x Demand rate
2. Total Cost Approach to Performance Measures
Total cost = Transportation cost + Cycle-stock inventory-carrying cost + Pipeline
inventory carrying cost + Safety stock inventory costs + Cost of losses and damages

3. Impact of speed of delivery

4. Impact of demand uncertainty
Safety stock = Service factor x Standard deviation of demand x √lead time
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