Materials Management

Market Logistics & Supply Chain • Materials forms the largest single cost item in
Management most manufacturing companies – needs to be
carefully managed
• Materials management function includes
planning and control, purchasing and stores
by and inventory control
• Materials management is the precursor to
Anoop Kumar Gupta logistics and supply chain management
MAIT
2
1

Evolution of Distribution to SCM thru Logistics

The concept of SCM has only recently stepped into the marketing world. It
Logistics Defined
rooted three decades back and has passed through three phases
• Phase 1: Physical distribution management: This phase is better
characterised as ‘inventory push phase when manufacturing was • Logistics collect raw materials from suppliers
handled in isolation and output was pushed down to the finished goods and deliver finished goods to the customers.
warehouses.
• Phase II : Integrated logistics management : This phase recognised
• Logistics means having the right thing, at
the importance of integrating operations within the organisation like the right place, at the right time and at the
sales, procurement, manufacturing, warehousing, distribution and right cost.
transportation to achieve an efficient and effective goods distribution
system. • Logistics is the function that moves both
• Phase IIl : SCM : The graduation of logistics management to its modern tangible materials (e.g. raw materials) and
day avatar is better known as ‘SCM’. SCM extends the scope to link
external partners like suppliers, vendors, distributors and customers with intangible material (e.g. information) through
a view to deliver enhanced customer and economic value through the operations to the customers (as a finished
synchronized management of the flow of physical goods and associated product), for an organization.
information from source to consumption. 3 4
 Logistics Defined
Scope of Logistics
• Logistics is a logical extension of
transportation and its related areas to • Choice of markets
achieve an efficient and effective goods • Procurement
distribution system. • Plant location and layout
• Logistics encompasses the activities of • Inventory management
• Location and management of warehouses
– Inventory management
• Choices of carriers, mode of transport
– Order processing • Packaging decisions
– Warehouse and materials handling • Relevant to all enterprises: manufacturing,
– Physical distribution (Transportation) Government, Institutions, service
organisations
5 6

Components of LOG Links and Flows

Management
Logistics Activities General material flow/ service flow
Input Output
Customer service
Information flow
Demand forecasting
Distribution •Marketing Information flow
•Natural
Communications Orientation
Resources Inventory control (competitive Customer’s Supplier’s
(land, facilities Materials handling Customer Lead Firm Supplier
Advantage) customer supplier
Equipment) Order processing
Parts and service support •Time and
•HR Plants and warehouse selection Place utility General cash flow
•Finance Procurement •Efficient move
•Information Packaging
Return goods handling to customer
Salvage and scrap disposal Outbound / Downstream logistics Inbound / Upstream logistics
Traffic and transportation
Warehouse and storage

7 Source: ICFAI 8
 Logistics and Marketing
• Interface on: Order Processing
– Product design and pricing
– Customer service policies
• Primary contact between the firm and its
– Sales forecasts and order processing customer.
– Inventory policies and location of warehouses • Getting the order, preparing the invoice,
– Channels of distribution and despatch planning
picking and packing the goods and
– Transportation to reach products to customers
despatch
• Production wants larger production runs to
minimise time spent on set up changes on • Quality, speed and accuracy of the
the machines. Marketing wants smaller runs order processing function determines
of a variety of products.
the ‘value’ of the logistics function
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Order Processing Support Records

Benefits
• Customer master – all information about
the customers • Some of the benefits of a good order
• Item master – all information about the processing system are:
goods by SKU – Order cycle times get reduced
• Price master – details of the prices for – Order execution accuracy is 100%
the items to be despatched to – Timely invoicing and accounting
customers – Order review and follow up costs get
• General data base – customer eliminated
quotations, customer sales history and – Improved customer service
open sales orders 11 12
 Source: Michael Porter

Materials Handling The Value Chain

• Function of managing inventory along S Company Infrastructure
U
with storage and transfer of information. P Organisation, people, methods
margin
P
Includes: O
Systems & technology

R
– Receiving, storing and despatch of goods T Procurement

– Order picking and packing

– Sorting of goods Inbound
Operations
Outbound Marketing Service
logistics logistics & sales
– Re-packing in case of damages
– Arranging transport and loading of the margin

goods on the carrier vehicle

13 Primary activities 14

Logistics Strategy Logistics Strategy Based

• Corporate strategy defines the business On…
the company wants to be in • Markets – focus on meeting customer
• The marketing strategy decides the requirements even across business
products and markets to be focused on units
• The distribution strategy decides how • Process – operation of an efficient and
the company will ‘reach’ its integrated logistics function
customers/markets • Channels – participate in the customer
• The distribution strategy includes the service delivery process
physical distribution and channel
management 15 16
 Logistics Plan Outline
Principles of Logistics Excellence
• Internal analysis (current position)
– Organisation
– Human resources
– Transportation Strategic Operational
– Relations with internal customers
Link logistics to corporate Focus on financial
– Quality of product strategy performance
– Quality of Service Organise comprehensively Target optimum service levels
• External / situation analysis Use the power of information Manage the details
– Competitor logistics performance Emphasise human resources Leveraging logistics volumes
– Trends Form strategic alliances Measure and react to
performance
– External environment / economy
– Public, private and contract warehouse
– Public, private and contract carriage 17 18
Alling & Tyndall

Logistics Focus Areas Logistics for Rural

• A business challenge as ‘access’ is still limited
Customer service related Operations related
• Some of the salient points on rural distribution:
Packaging Plant and warehouse site – Vast potential for business but collection and
Order processing location delivery points are too many
Spare parts and service support Procurement – Producers of agricultural produce and the users of
After sales Customer service Inventory control consumer products are dispersed
support Materials handling – Transport is unviable – no return loads
Demand forecasting Salvage and scrap disposal – Agri produce is seasonal, bulky, perishable and
Distribution communications Traffic and transportation
not of standard sizes
Return goods handling Warehousing and storage
– Intermediaries in various forms are a major
element of cost
Logistics may be confined to the company whereas SCM extends beyond

19 20
 Evolution of the concept of SCM Logistics and SCM
The chain of activities and organizations is named
• Logistics is more concerned with
differently as per the situation.
activities within the company –
• If the emphasis is on operations then it is called
process;
procurement, production scheduling,
despatch planning, inventory,
• If the emphasis is on marketing then it is called
logistics; warehousing and transportation.
• If the emphasis is on value-addition then it is called • Supply chain management extends the
value-chain; process of planning procurement,
• If the emphasis is on meeting customer demand production and despatches beyond the
then it is called demand chain; company boundaries to its suppliers
• If the emphasis is on movement of material then we and customers.
use the most general term i.e., supply chain. 21 22

Supply Chain Management

Supply Chain Integration
• Business context:
– Globalization of the market place • Optimising the supply chain requires
– Advances in technology
– Increasingly demanding, informed customer base
supplier and customer involvement to
– Purchase decisions on dimensions of quality, price integrate processes, policies, systems,
and time database and strategies between
• Innovative supply chain: diverse trading partners
– To meet customer driven challenges
– To reduce costs
– Improve service levels
– Enhance speed to market

23 24
 Supply Chain Integration
Order Fulfillment
Customer Analysis
IT Systems for SCM
Purchasing/Supplier
Partnering
• Supplier relationship management –
processes for flow of materials between
the suppliers and the firm
Integrated Inventory Management and

Storage & Supply Chain control • Customer relationship management – to

Transportation Management optimize revenue and profitability by
superior customer service
• Electronic data interchange – exchange of
Manufacturing/ Demand & Lead
Time Management
business information through standard
Re-manufacturing/
Assembly interfaces between suppliers and the firm
Inventory management…
Materials
Management 25 26

IT Systems for SCM Why Carry Inventory?

• Bar codes – popular and cost effective • Support production requirements
way of tracking items along the supply
chain • Support operational requirements
• Radio frequency identification – tracking of • Maximize customer service – ensure
items, people and equipment in real time availability when needed – protect
without need for ‘line-of-sight’ against uncertainty
• Data warehousing – collection of data from • Hedge against marketplace uncertainty
multiple sources and converting into
information for storage and use as • Take advantage of order quantity
required discounts
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 Functions of Inventory Factors Which Drive Inventory
• Inventory serves as a buffer between: • Target service level parameters
– Supply and demand • Lot sizing practices
– Customer demand and finished goods • Safety stock and safety time
– Material requirements for an operation and conventions
the output from the previous operation
• Volume discounts and purchase
– Parts and materials to begin an operation
and the suppliers of these materials
arrangements
• Seasonal build up needs
The shock absorber of business !
29 30

Stores Management Functions

Objectives Warehouses

• Providing efficient service to users

Material Customer Information Storage
• Reduce cost of carrying goods handling service transfer function
• Providing correct, updated stock figures
• Controlling inventory Receive goods
Identify goods Temporary Permanent
• Preventing damage to or obsolescence of Sort goods
Despatch to storage
materials Hold inventory
Recall, select goods
• Achieve all of the above with good Marshal the shipment
housekeeping Despatch the shipment
Prepare records and
advices
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 Reasons for Warehousing
Purpose of Warehousing Service related Cost related
Maintain source of supply Achieve production economies
• To provide desired level of customer Support customer service Achieve transportation
service at the lowest possible total cost policies economies
Meet changing market Take advantage of Quantity
• It is that part of the firm’s logistics system that conditions Purchase discounts and forward
stores products (RM, Packing Materials, WIP, Overcome time and space buys
FG) at and between point of origin and point differentials Least Logistics cost for a desired
Support JIT programs of level of customer service
of consumption and provides info to suppliers and customers
management on the status, condition and Provide customers with the right
disposition of items being stored mix of products at all times
Temporary storage of materials
• Distribution warehousing relates mainly to FG to be disposed or re-cycled
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Warehouses Distribution Warehousing

• Support manufacturing • The objective is to set up a network of
warehouses closest to the customer
• Mix products from multiple facilities for locations to service markets better and
shipment to a single customer minimise cost
• Break-bulk • Could be C&FA s, depots or distribution
centers
• Aggregate • Macro location strategies:
• Used more as a ‘flow-thru’ point than as – Market positioned
a ‘hoarding’ point – Production positioned
– Intermediately positioned
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 Distribution Center Market Positioned
• Warehouse designed to speed the flow • Warehouses located nearest to the final
of goods and avoid unnecessary costs customer
• Speeds bulk-breaking to avoid inventory • Factors influencing are:
carrying costs – Order cycle time
• Helps to centralise control and co- – Transportation costs
ordination of logistics activities – Sensitivity of the product
• Products can also be cross-docked (one – Order size
vehicle to another) – Levels of customer service offered
Production positioned….
Market positioned..
37 38

In between…

Production Positioned
Intermediate Positioned
• Warehouses located close to the production
facilities or supply sources
• Mid point locations between the final
• Not the same level of customer service as the customer and the producer
earlier one
• High customer service levels possible even if
• Serve as points of aggregation / collection for
products made in a number of plants products made in number of units
• Factors influencing are:
– Perishability of raw materials • Other macro approaches look at cost
– Number of products in the product mix minimisation or cost and demand elements to
– Assortments ordered by customers maximise profitability
– Transport consolidation rates ex; FTL Transportation management….

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 Transportation Transportation Principles
• Very important in the Logistics function: • Continuous flow
– Movement across space or distance adds value to • Optimise unit of cargo - stackability
products • Maximum vehicle unit – capacity utilization
– Transportation provides time and place utility • Adaptation of vehicle unit to volume and
• Role of transportation includes: nature of traffic
– Provides opportunity for growth under competitive • Standardisation
conditions
– Deeper penetration into markets
• Compatibility of unit load equipment
– Wider distribution means greater demand • Minimum of dead weight to total weight
– Can influence product prices favourably • Maximum utilization of capital, equipment and
personnel
Principles….
41 42
Process….

The Transport Planning

Cost Factors
Criteria
• Environmental analysis: shipper, carrier, • Can be product related or market related.
government regulations, public influence • Product related: density, stowability, ease or
• Deciding objectives difficulty of handling and liability
• Selecting mode • Market related: competition, location of
markets, Government regulations, traffic in
• Select transport type within the mode and out of the market, seasonality of
• Define functions of transport movements and impact on customer service
• Evaluation and control – customer perception • Five prominent modes: (including intermodal)
/ satisfaction, best practice benchmarking – Road, rail, air, water and pipeline.
– Sixth one is use of Ropeways
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 Comparison of modes……

Customer Service Factors Reverse Logistics

• Consistency, dependability • Movement of goods from the market or
customer back to the company
• Transit time • The need:
– Increased awareness of the environment
• Coverage – door-to-door for example
– Stringent legislation
• Flexibility in handling a range of – For some it is part of the business
products – Profitability of dealing with scrap, surplus
• Surplus, obsolescence can result due to:
• Loss and damage performance – Over optimistic sales forecasts, change in product
specs, errors in estimating material usage, losses
• Additional services provided in processing or overbuying based on incentives
Reverse logistics…
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Advantages of Rail Disadvantages

• Economy – more so for goods over • Uneconomical for small shipments and
long distances short distances
• Efficiency of energy • Not suitable for remote stations
• Reliability – not affected by weather • Costly terminal handling facilities
conditions • Inflexible time schedules

Road transport…..

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 Road Freight Advantages Disadvantages
• Through movement – direct from consignor to • Susceptibility to weather and road conditions
consignee, no transshipment – in spite of the best protection
• Flexibility – routes and loading routines can • Unsuitability for heavy loads – rail transport
be easily altered, operate day and night more economical for bulk loads
• Less capital costs – for own fleet + immunity
from industrial action • Unsuitability for long distances – again the
rail telescopic rates are more favourable
• Fast turn-around – if articulated units like
tractors and trailers are used
• Minimum delays Air transport….

49 50

Air Transport Advantages Water Transport

• Faster mode • Advantages:
• Reduction in cost particularly inventory – Mass movement of bulk
– Lowest freight cost
• Broad service range
– Preferred for long haul of low value commodities
• Increasing capabilities
• Disadvantages:
• Disadvantages: – Not for quick transit
– High cost – Suitable for certain types on commodities only
– Weather affects flight conditions
– Limitations on heavy consignments Pipeline….
Water transport…… 51 52
 Ropeways
Pipeline Movement • Advantages:
– In hilly or inaccessible areas
• Advantages: – Long and circuitous routes with streams / deep
– Reliable, continuous, all weather transport valleys
– Low energy consumption – hence low cost
– For commodities capable of movement in ropeway
– Low maintenance and operating costs buckets
– Underground, no space problem
– Short haulages of less than 50 kms
– Can traverse difficult terrain
– Areas where other carriers are uneconomical
– Minimal transit losses
– Operation round the clock, safe • Disadvantages:
– Economies of scale – double the throughput for – Heavy investments
only 30% additional cost – Limitations on size and quantity of haul
• Disadvantage is in the investment cost How to decide on the right carrier?
Ropeways….
53 54

Carrier Selection
Chart of Relative Merits
Traffic Related Shipper related Service related
Parameter Weight Rail Road Air Water Pipe Rope
Length of haul Size of firm Speed (transit time) age line way
Consignment weight Investment priorities Reliability
Speed 30 5 6 8 4 3 3
Dimensions Marketing strategy Cost
Versatility 10 6 8 5 6 3 2
Value Network of Customer relationship
Urgency production and Geographical coverage Reliability 20 6 8 5 5 7 4
Regularity of distribution Accessibility Availability 10 7 8 5 6 3 2
shipment Availability of rail Availability of special
sidings Continuity of 10 6 7 5 5 8 3
Fragility vehicles / equipment service
Toxicity Stockholding policy Monitoring of goods Distribution cost 20 4 5 6 6 7 8
Perishability Management Unitisation
structure Total score 10 5.4 6.7 5.1 5.1 5.1 4.0
Type of packing Ancillary services – bulk
System of carrier breaking, storage Overall ranking 10 2 1 4 5 5 6
Special handling evaluation
required
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 Key Learnings
Key Learnings
• Inventory directly supports customer service
but also adds to the cost and has to be
• Support to customer service has evolved from managed carefully
materials management to logistics and to
supply chain management • Warehousing provides the place utility and
works as a balance between production and
• Production and marketing are the two internal meeting customer needs
customers of Logistics
• Transportation supports the place and time
• Logistics also has a direct impact on the utility and uses different modes to reach the
financials of a company products to the consumer
• Three important functions of logistics are • Modern day supply chains integrate the
inventory management, warehousing and operations of a firm, its suppliers and
transportation customers
57 58

Key Learnings Key Learnings

• Order processing relates to the primary • Logistics strategy is based on: markets,
contact between the company and its processes and channels in use.
customers • Some of the IT systems in use for effective
• A good order processing system creates the management of the supply chain are:
benefits of reduction in lead times, higher – Electronic data interchange
order accuracy and improved customer – Supplier and customer relationship management
service systems
• Materials handling is the function of – Bar codes
managing inventory along with storage and – Radio frequency identification
transfer of information – Data warehousing

59 60