Most organizations move to higher technology systems to improve productivity but other aims are improved customer service, reduced costs, safety, better stock control and more flexibility. Many analyses can help with this decision, including break-even points, return on investment, net present value, and measures of productivity. Manual Unit cost Mechanised Automated Manual Mechanised Automated Throughput Choice of automation and warehouse size Figure 6.7 choice of automation 6.11 PACKAGING Packaging is a technology that encloses and protects a product in its journey from the factory, to its end use by the consumer including transportation, warehousing, logistics and sale. It assumes the dual role of creator as well as preserver of wealth. Its benefits range from creating employment to lengthening the shelf life of the product to educating the consumers of the product. Key to understanding the packaging need is to understand the product packed inside and its demand. Thus, packaging can take various shapes, sizes, materials (used for packaging) etc. Packaging and Packing 101 CU IDOL SELF LEARNING MATERIAL (SLM)
Packaging refers to a container in which the product reaches the end use consumer. It is a part of the presentation of the product and stays right till the customer takes it from the retail store. It should not be confused with packing. Packing refers to the external protective covering used for the safe transportation of the goods to the importer. For example, plastic box used to pack a set of embroidered handkerchiefs is an example of packaging. On the other hand, the corrugated fireboard boxes, which are used for packing the plastic boxes for their safe transportation to the importer in the foreign country, would represent packing. Packaging plays a very important role in the marketing of a product; it is a part of the augmented product. The augmented product is that part of the product which deals with adding new features to the basic product in order to exceed the customer expectations. These features take the form of packaging, delivery arrangements, warehousing, customer advice etc. in order to add value to the product. As a matter of fact, the competition between the exporters at the foreign market place is not in relation to the core product or its basic tangible features but it is about the augmented product. For instance, an expensive chessboard offered to a customer wrapped in the old newspaper is very likely to lose out to an identical chessboard set neatly presented in a nice matching box. In the latter case, the packaging makes it a more valuable product and offers more ‘value’ to the customer. Functions of Packaging Packaging of goods for exports performs the following functions: 1 The product is broken down into saleable units in terms of size or weight or any other dimension relevant to that product. 2 It protects the product during transportation, storage, display and use. 3 It conveys a message about handling of the product to the transporter /buyer consumer during transport, storage, display and use. Packaging Design The design of the packaging should be developed very carefully to ensure that: Proper · Protection is provided to the product. · The product is environment friendly to produce and dispose off. · It is safe to handle during transportation. · It is economical to produce, handle and store. 102 CU IDOL SELF LEARNING MATERIAL (SLM)
· It is very attractive when displayed. ·It is convenient and safe to use in compliance with the relevant standards of the target export market. It should be understood that primary packaging of the product performs the function of the silent sales man. It should appeal to the prospective consumer and satisfy his desire to use a better quality product. The total package design (comprising of material, size, shape, colour, text, graphics and logo) should be such that it provides: A. Proper perception and expectations about the product. B. Convenience and efficiency in use. . C. It should be faultless. The exporter should also keep in mind the product and the target group 01 customers while designing the primary packaging of the product. Packaging Materials and Kinds of Packaging Packaging Material There are various types of materials available for packaging of the goods. These materials are paper, plastics, wood, cardboard etc. Selection of the packaging mate-rials should be made keeping in view primarily the specifications given by the importer because he has to plan further for consumer packaging of the goods. Broadly, the selection of the packaging materials would depend upon the following factors: 1 Product characteristics 2 Transportation and storage methods. 3 Climate and culture. 4 Standards and environmental considerations. 5 Market position. The type and quality of the packaging is specific to the given product. For example, certain products such as garments, shoes, textiles etc. are sold to the consumers without any packaging. They are usually displayed without any packaging at the retail stores. Such goods do not require very expensive packaging. The exporters have to ensure that the packaging 103 CU IDOL SELF LEARNING MATERIAL (SLM)
used by them should be such that it prevents the products from getting dirty. These goods are often packaged in polyethylene bags. Card board boxes are used for the packaging of items such as sets of glasses or tableware, decoration with several delicate parts, pairs of candle holders, glass vases, delicate statuettes etc., to ensure that they are not damaged and their appearance is not spoiled during handling and display. Expensive products and gift items such as jewellery require a high standard of packaging. In fact, the more expensive or exclusive the product, the more justified high quality and more expensive.. Kinds of Packaging Depending on the use of packaging materials, the packaging for export products can be classified into the following categories: 1. Plastic packaging 2. Paper based packaging 3. Combined plastic and cardboard packaging. 4. Miscellaneous packaging Plastic Packaging The various kinds of plastic materials are used for packaging of the export products. The most common plastic materials used for packaging are polyethylene (PE) and polypropylene (PP). Polyethylene film has two main varieties of consumer packaging namely, low density polyethylene (PE-LD) film and highdensity polyethylene (PE-HD). PE-LD film is used for making plastic bags, shrink wrapping and stretch wrapping. This film is very useful to provide protection against moisture and dirt. It does not however, provide any mechanical protection. The exporters can use the plastic bags made of PE-LD films for wrapping articles to package products like T-shirts, table cloths, napkins, leather hand bags etc. These products are placed inside the plastic bags, which are transparent and are suited for retail display. In shrink-wrapping, a specially treated film is loosely wrapped around the product(s) and then shrunk with heat to form a tight package. This kind of wrapping is suitable for solid products like sets of drinking glasses, a group of egg-cups, sets of table mates and so on. 104 CU IDOL SELF LEARNING MATERIAL (SLM)
In stretch wrapping, a thin film is tightly wound around the product, often in several layers. When the wrap is completed, the stretched film tries to return to its original size, thereby holding the product or group of products tightly in place. PE-HD also used for making plastic bags because it provides better resistance against moisture and fats than PE-LD. PE-HD is more expensive than the PE-LD. Both the forms of plastic films are environment friendly as they are easy to recycle. The PP films are stronger than the PE films. It is better to use bags made of pp films for packaging textiles and garments as these can be printed or can be used in plain form as well. PP films are better than PE films in terms of providing better moisture protection but these films are more expensive. Another alternative to PP films is polyvinyl chloride (PVC) material. But from environmental point of view, PVE materials should not be used, as these are not recyclable Plastic boxes can be used especially as retail packages for jewellery and other small, precious products. They are also well suited to add appeal to products such as embroidered handkerchiefs or tablecloths, souvenir dolls, etc. They come in square, oval or round shapes; printed or plain. Paper Based Packaging Paper based materials are used as wrapping, as paperboard cartons or corrugated fiberboard boxes. The various types of paper can be coated with plastics, waxed or treated with anti- corrosion agents. Paper is either produced from virgin wood fibers or recycled fibers. The former is stronger than the latter. Paper wrappings provide protection against dust and light, but do not provide mechanical protection. Paper absorbs moisture when the surrounding air is more humid than the paper, and it gives up ,moisture when the surroundings are drier. Thus, paper wrappings can be used to some extent as moisture protection inside the packages as well to slow down the harmful effect of moisture in the air. One should use tissue paper instead of newspaper to protect the surface of products. Paperboard Folding Cartons Folding cartons made of different paperboard qualities can be used as retail packaging for variety of reasons. Folding cartons are economical; they can be shaped in almost unlimited number of ways; they can be printed very decoratively; properly designed cartons provide 105 CU IDOL SELF LEARNING MATERIAL (SLM)
mechanical protection to products; they protect products against dust and light, and are easy to handle in retail shops. The most important property of such cartons is their stiffness. Paper Board Cans The paperboard can is a form of paper based retail packaging, which is quite inexpensive and is used to pack different types of products. These cans can be lined inside with aluminum foil or plastic films to provide additional protection against humidity. Such cans are used for packaging toys, puzzles, games, tennis balls and other sports goods. Combined Plastic and Card Board Packaging There are three main types of packaging that combine paperboard and plastic materials. These are as follows: 1 Skin packaging. 2 Blister packaging and 3 Plastic bags with a paperboard card. These packages are used mainly for retail packaging of pens, small toys, gift items lightweight souvenir articles. This type of packaging has several advantages: the product is visible through the plastic; the paperboard card can be printed to provide information and to add sales appeal; especially small products are not lost or stolen easily. Skin Packaging Skin packaging is a form of packaging where the product is first placed on a paperboard card with heat seal coating. It is suitable for products, which need protection against moisture and are not very heavy or expensive. It is however, not suitable for products which are sensitive to heat. Blister Packaging In this form of packaging, the product is first placed into a preformed plastic blister. Then a paperboard card is attached to it. Blister packaging can be used for a variety of products such as toys, pens, textile articles and decorations etc. It should not be used for those products, which are too delicate as there is always some space for movement inside the blister. This might damage the delicate product. Plastic Bag with Paperboard Card 106 CU IDOL SELF LEARNING MATERIAL (SLM)
In this form of packaging, a paperboard card is attached to the plastic bags through a hole in the bag. This adds sales appeal to plain plastic bags and is always very cost effective. The paperboard card can be printed on adding information and attraction. The plastic bags can be made of any materials but PP film should be preferred in the interest of better product presentation. Miscellaneous Packaging Exporter can make use of wood, textiles, straw, leaves or any other locally available materials for packaging of the goods. Specially made wooden boxes can be used to package traditional ceramics, woodcarvings, various gift items, pieces of jewellery etc. If wooden packaging is used as a gift or retail package, it has to be made with as much care as the product itself. This means that it should be smooth, clean, and dry, with any hinges or locks well-made and functioning. It is also important to pack the product with sufficient cushioning material into a wooden package, so that the product is not damaged during transport. Before using wood as packaging material, one should always check, whether there are any regulations concerning the treatment or certification of wooden materials. Paperboard cartons or boxes can be covered or lined with cloth to give them a more decent appearance. Bags made of jute; cotton, velvet or other fabric could be used for the packaging of products, which do not need much protection. Baskets made of local materials can also provide very attractive packaging for handicraft products. 6.12 PURPOSE OF PACKAGING Many items need special protective packaging during moves, particularly delicate things like china and electronics. Sometimes the packaging can protect goods from harsh environments, such as rain or sun; sometimes it is needed to separate materials that would contaminate each other, such as sugar and petrol; sometimes it keeps the contents clean, such as foodstuffs and medicines. In general, packaging serves four basic functions as it: ● Identifies the product and gives basic information ● Protects items while they are being moved through the supply chain makes handling easier ● Assists in marketing, promoting the product, advertising and giving information to customers. 107 CU IDOL SELF LEARNING MATERIAL (SLM)
The balance between these depends very much on the product. Bars of chocolate, for example, might put more emphasis on marketing, while boxes of ice cream might be more concerned with protection. There are also two types of packaging to consider. First, the interior, or consumer packaging, is designed for the customer and includes the marketing and promotional materials. This is the one that is brightly colored and has cellophane and advertisements. Second, the exterior or industrial packaging that is designed to protect and make handling easier. This is the plain box or pallet that gives information to organizations in the supply chain. This packaging can be made of many different materials, but the consumer packaging tends towards bright plastic, while the industrial packaging tends towards dull cardboard. Some perfumes and alcoholic drinks come in very elaborate bottles that cost a lot more to produce than the contents. With expensive consumer goods this might be acceptable, but it would certainly not work with basic products such as milk or sugar. So we have to consider the design and materials of the packaging carefully. There are five main materials for packaging: ● Glass is easy to clean, reuse and recycle, but is fragile, relatively expensive and difficult to make ● Plastic is light, strong and easy to clean, but can be expensive and difficult to make or reuse ● Cardboard is light, cheap and can be recycled, but has little strength and poor durability ● Wood is strong, durable, easy to use and can be reused, but it is heavy, bulky and difficult to clean ● Metal is strong and durable, but it is heavy and can be expensive. The choice of these – or other materials – depends largely on the type of products, movement and protection needed. This can be a difficult decision, balancing many factors. You would, for example, ordinarily expect liquids to delivered in some form of plastic bottles. But this would give the wrong image for wine which is generally delivered in glass bottles. Shrink- wrapped pallet loads give a lot of protection, but they would not be appreciated by JIT operations that want fast access to small quantities of parts. 108 CU IDOL SELF LEARNING MATERIAL (SLM)
6.13 PACKAGING WASTE When you buy something, you might be surprised by the amount of packaging. Cakes and chocolates routinely have three layers of wrapping; sometimes you might find up to five layers. But remember that you only see the consumer wrapping, and there have probably been two more layers of industrial wrapping which has already been removed. There are growing concerns about the amount of packaging, its cost and disposal. The UK produces about eight million tons of packaging waste a year, and half of this comes from industrial packaging. Conventionally, industrial packaging is more likely to be reused and recycled than consumer packaging, because it is more robust, and can be collected from a few locations. Consumer packaging is more likely to be discarded, but some companies, such as Body Shop, have policies of reducing this by reusable containers. This is an important issue, as the European Union, and other areas are introducing limits on the amount of packaging waste that companies can discard. Several countries only allow glass containers if these are collected and reused, or at least recycled. There are similar regulations for metal containers, particularly aluminum cans. Perhaps more noticeable are the regulations on other packaging, which are increasingly forcing organizations to record the amount of packaging they use, and the amount they recycle. If they fail to achieve some target for recycling, they face heavy fines. The European Union has moved towards this scheme, with overall recycling targets of 50%. Such trends have encouraged many organizations to switch away from packaging that is discarded after delivery to the final customer, and towards reusable packaging and reverse logistics. Replacing cardboard containers by wood might seem expensive, but it can be used repeatedly and actually reduce overall costs – as well as contributing to a cleaner environment. 6.14 SUMMARY 109 ● Warehouses are places where goods are stored and are distributed ● Most common warehouses are distribution and logistics centres ● Activities performed in a warehouse are • unloading • quality check CU IDOL SELF LEARNING MATERIAL (SLM)
• Labeling, sorting, moving, holding, picking, assembly, loading for delivery and controlling all communications such as inventory control. ● Material handling is concerned with movement of materials for short distances with a warehouse or between storage points. 6.15 KEY WORDS • Turnaround time – the time between a vehicle arriving and departing 6.16 LEARNING ACTIVITIES List out various schemes and subsidies given by WDRA and its activities. ___________________________________________________________________________ _____________________________________________________________________ 6.17 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Write a short note about the purposes of warehouse 2. Briefly describe various activities within a warehouse 3. What is meant by turnaround time. 4. What is meant by cross-docking 5. Discuss briefly about automated warehouses Long Questions 1. Describe in detail about manual, automated and mechanized warehouses 2. Elaborate about basic activities and other activities in a warehouse. 3. Discuss about packaging of goods in detail. 4. Discuss about the Packaging waste. 5. What is the purpose of packaging. B. Multiple Choice Questions 110 CU IDOL SELF LEARNING MATERIAL (SLM)
1. A ___________ is any location where stock of material are held on their journey through supply chain. a. Distribution centres b. Logistics centres c. Warehouse d. None of these 2. Ware houses are places for storage of goods on ______ basis. a. Short term b. Long term c. Both a and b d. None of these 3. Warehouses are sometimes used for sorting and doing works on materials rather than storing them. a. True b. False c. Partly true d. None of these 4. __________ describes the physical arrangement of storage racks, loading and unloading areas, equipment, offices, rooms, and all other facilities. a. Warehouse b. Docking c. Layout d. Planning 5. ___________ is concerned with the movement of materials for short distances generally within a warehouse, or between storage areas and transport. a. Materials handling 111 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Warehousing c. Layout d. planning Answers 1) c 2) b 3) a 4) c 5) a 6.18 REFERENCES Text Books: ● Simchi-Levi, D., Kaminsky, P., &Simchi-Levi, E. (2003). Designing and managing the supply chain: Concepts, strategies, and case studies. Boston: McGraw-Hill/Irwin. ● Monczka, R. M. (2009). Purchasing and supply chain management. Mason, OH: South-Western. ● Stock & Lambert (2001) Strategic Logistics Management. 4th Edition, McGraw Hill, New York, 70-89. Reference Books: ● Raghuram G. &Rangaraj. N.,Logistics (2012 ) Supply Chain Management, Macmillan Publication, ● K. ShridharaBhat,( 2008 ) Logistics Management, Himalaya Publishing House, Mumbai, ● Bowerson, Donald J., David J.Closs and Owner K. Helferich,( 1986) Logistical Management, Macmillan, New York, ● Alan E. Branch,(2009 )Global Supply Chain Management and International Logistics”, Routledge, New York ● MARTIN CHRISTOPHER, Logistics and Supply Chain Management, Pearson Education Limited, New Delhi, 2016 ● Excel Books Private Limited, Neha Tikoo, Logistics And Supply Chain Management,New Delhi, 2017 112 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 7 - PURCHASING FUNCTION 113 Structure 7.0 Learning Objectives 7.1 Introduction 7.2 Strategic Sourcing 7.3 Cooperative Sourcing 7.4 Sourcing Business Model 7.5 Vendor Rating 7.6 Supply chain cost management models 7.7 The balanced measurement portfolio model to optimize supply chain costs 7.8 Elements of the balanced measurement portfolio model 7.9 How Foodpanda optimized its operations to save the supply chain 7.10Summary 7.11Key words 7.12Unit end questions 7.13Learning activity 7.14References 7.0 LEARNING OBJECTIVES After studying this unit, students will be able to ● Remember the concept of Purchasing Function ● State the concept of Strategic Sourcing ● Evaluate the Cost management models CU IDOL SELF LEARNING MATERIAL (SLM)
● Apply the Supply chain models learnt in practical aspects 7.1 INTRODUCTION Purchasing is the first phase of Materials Management. Purchasing means procurement of goods and services from some external agencies. The object of purchase department is to arrange the supply of materials, spare parts and services or semi-finished goods, required by the organisation to produce the desired product, from some agency or source outside the organisation. The purchased items should be of specified quality in desired quantity available at the prescribed time at a competitive price. In the words of Alford and Beatty, ”Purchasing is the procuring of materials, supplies, machines, tools and services required for equipment, maintenance, and operation of a manufacturing plant”. According to Walters, purchasing function means ‘the procurement by purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in the proper quality and quantity at the proper time and at the lowest price, consistent with quality desired.” Thus, purchasing is an operation of market exploration to procure goods and services of desired quality, quantity at lowest price and at the desired time. Suppliers who can provide standard items at the competitive price are selected. Purchasing in an enterprise has now become a specialised function. It was experienced that by giving the purchase responsibility to a specialist, the firm can obtain greater economies in purchasing. Moreover purchasing involves more than 50% of capital expenditure budgeted by the firm. 7.2 STRATEGIC SOURCING Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional organisational purchasing activities to embrace all activities within the procurement cycle, from specification to receipt and payment for goods and services. Strategic sourcing 114 CU IDOL SELF LEARNING MATERIAL (SLM)
processes aim for continuous improvement and re-evaluation of the purchasing activities of an organisation. In the services industry, strategic sourcing refers to a service solution, sometimes called a strategic partnership, which is specifically customized to meet the client's individual needs. In a production environment, it is often considered one component of supply chain management. Modern supply chain management professionals have placed emphasis on defining the distinct differences between strategic sourcing and procurement. Procurement operations support tactical day-to-day transactions such as issuing purchase orders to suppliers, whereas strategic sourcing represents to strategic planning, supplier development, contract negotiation, supply chain infrastructure, and outsourcing models. The term \"strategic sourcing\" was popularized through work with a variety of blue chip companies by a number of consulting firms in the late 1980s and early to mid 1990s. This methodology has become the norm for procurement departments in large, sophisticated companies such as fortune 500 companies. Steps The key steps in a continuous strategic sourcing process were defined by Japanese writer Toshihiro Nishiguchi in 1994 as: 1. Assessment of a company's current spending (what is bought, where, at what prices?). 2. Assessment of the supply market (who offers what?). 3. Total cost analysis (how much does it cost to provide those goods or services?). 4. Identification of suitable suppliers. 5. Development of a sourcing strategy (where to purchase, considering demand and supply situations, while minimizing risk and costs). 6. Negotiation with suppliers (products, service levels, prices, geographical coverage, Payment Terms, etc.). 7. Implementation of new supply structure. 8. Track results and restart assessment. 115 CU IDOL SELF LEARNING MATERIAL (SLM)
Sarangapani notes that \"sourcing\", without its \"strategic\" function, was traditionally linked with the fourth step, identification of suitable suppliers, and especially the identification of new or potential suppliers. Payne and Dorn (2012) describe a strategic sourcing process with the following steps: 1. Data collection and spend analysis 2. Market Research 3. The RFx process (also known as go to market) 4. Negotiation 5. Contracting 6. Implementation and continuous improvement While the modernized process combines the market assessment and cost analyses steps of the older model into a single \"market research\" step, and the supplier identification and sourcing strategy development steps into a single \"go-to-market\" step, in Payne and Dorn's summary \"negotiation\" has been divided into two steps, \"negotiation\" and \"contracting\". This change is due to the heightened importance of market intelligence in modern strategic sourcing plans, and its ability to deliver value by improving both pricing and contract terms when leveraged against the identified suppliers. Although both descriptions of the sourcing process are accurate to some extent, there is no standard set of steps and procedures. As strategic sourcing is put in place and practiced over time, many large, sophisticated organizations will modify the process to better meet their individual corporate needs. Outsourcing a business practice to another company may also be incorporated into a sourcing strategy for services. This strategy may involve the transfer of staff and assets to the outsource company. Due to the strategic and complex nature of outsourcing, many organizations such as Procter & Gamble, Microsoft and McDonald's have created what is referred to as Vested Outsourcing agreements to help build highly collaborative win-win business relationships. Researchers at the University of Tennessee provide guidance on how to create Vested Outsourcing agreements in their book Vested Outsourcing: Five Rules that will Transform Outsourcing. Sourcing plan 116 CU IDOL SELF LEARNING MATERIAL (SLM)
The sourcing plan is the result of all planning efforts on strategic sourcing. Into this planning, all sourcing events are organized and detailed with tactical and operational information such as the sourcing team responsible for each event, when the sourcing event is supposed to begin and end based on each RFX step (RFI, RFP, RFQ), the requirements, specifications of all services or materials, and negotiations/cost goals. The objective of the sourcing plan is to manage the timing and quality of all sourcing events in the strategic sourcing program. Many procurement professionals continue to conduct sourcing and RFX activities manually using spreadsheets; however, this creates risk for error and gaps in the sourcing process. Sourcing optimization Operations research is a discipline of applying advanced techniques to help make better decisions. Optimization, in turn, utilizes mathematical algorithms to rapidly solve a business problem by evaluating all possible outcomes (or many outcomes) and selecting those ones that yield the best solution. When applied to sourcing and supply chain operations, optimization helps the sourcing professional simultaneously evaluate thousands of different procurement inputs. This evaluation can take into consideration the global market, specific current supply chain conditions, and individual supplier conditions, and offers alternatives to address the buyer’s sourcing goals. Furthermore, it allows internal stakeholders in the buying organization to impose constraints on the award or specify preferences to favour certain non-cost objectives such as limited switching, reduced supplier numbers or higher quality outcomes. 7.3 COOPERATIVE SOURCING Cooperative sourcing is a collaboration or negotiation of different companies, which have similar business processes. To save costs, the competitor with the best production function can insource the business process of the other competitors. This is especially common in IT- oriented industries due to low to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcers or insources the main challenge in this collaboration is to find a stable coalition and the company with the best production function. This is difficult since the real production costs are hard to estimate and negotiators might be tempted to portray their real costs as much higher than they actually are in order to demand higher fees for insourcing. High switching costs, costs for searching potential cooperative sources, and negotiating often result in inefficient solutions. 117 CU IDOL SELF LEARNING MATERIAL (SLM)
7.4 SOURCING BUSINESS MODEL Sourcing Business Models are a systems-based approach to structuring supplier relationships. A sourcing business model is a type of business model that is applied to business relationships where more than one party needs to work with another party to be successful. There are seven sourcing business models that range from the transactional to investment- based. The seven models are: 1. Basic Provider 2. Approved Provider 3. Preferred Provider 4. Performance-Based/Managed Services Model 5. Vested outsourcing Business Model 6. Shared Services Model and 7. Equity Partnership Model. Sourcing business models are targeted for procurement professionals who seek a modern approach to achieve the best fit between buyers and suppliers. 7.5. VENDOR RATING Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given standing, status, or title according to their attainment of some level of performance, such as delivery, lead time, quality, price, or some combination of variables. The motivation for the establishment of such a rating system is part of the effort of manufacturers and service firms to ensure that the desired characteristics of a purchased product or service is built in and not determined later by some after-the-fact indicator. The vendor rating may take the form of a hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert in between the two. For some firms, the vendor rating may come in the form of some sort of award system or as some variation of certification. Much of this attention to vender rating is a direct result of the widespread implementation of the just-in-time concept in the United States and its focus on the critical role of the buyer-supplier relationship. Factors consider in Vendor Rating 118 CU IDOL SELF LEARNING MATERIAL (SLM)
Vendor performance is usually evaluated in the areas of pricing, quality, delivery, and service. Each area has a number of factors that some firms deem critical to successful vendor performance. Pricing factors include the following: • Competitive pricing. The prices paid should be comparable to those of vendors providing similar product and services. Quote requests should compare favorably to other vendors. • Price stability. Prices should be reasonably stable over time. • Price accuracy. There should be a low number of variances from purchase-order prices on invoiced received. • Advance notice of price changes. The vendor should provide adequate advance notice of price changes. • Sensitive to costs. The vendor should demonstrate respect for the customer firm's bottom line and show an understanding of its needs. Possible cost savings could be suggested. The vendor should also exhibit knowledge of the market and share this insight with the buying firm. • Billing. Are vendor invoices are accurate? The average length of time to receive credit memos should be reasonable. Estimates should not vary significantly from the final invoice. Effective vendor bills are timely and easy to read and understand. Quality factors include: • Compliance with purchase order. The vendor should comply with terms and conditions as stated in the purchase order. Does the vendor show an understanding of the customer firm's expectations? • Conformity to specifications. The product or service must conform to the specifications identified in the request for proposal and purchase order. Does the product perform as expected? • Reliability. Is the rate of product failure within reasonable limits? • Reliability of repairs. Is all repair and rework acceptable? • Durability. Is the time until replacement is necessary reasonable? 119 CU IDOL SELF LEARNING MATERIAL (SLM)
• Support. Is quality support available from the vendor? Immediate response to and resolution of the problem is desirable. • Warranty. The length and provisions of warranty protection offered should be reasonable. Are warranty problems resolved in a timely manner? • State-of-the-art product/service. Does the vendor offer products and services that are consistent with the industry state-of-the-art? The vendor should consistently refresh product life by adding enhancements. It should also work with the buying firm in new product development. Delivery factors include the following: • Time. Does the vendor deliver products and services on time; is the actual receipt date on or close to the promised date? Does the promised date correspond to the vendor's published lead times? Also, are requests for information, proposals, and quotes swiftly answered? • Quantity. Does the vendor deliver the correct items or services in the contracted quantity? • Lead time. Is the average time for delivery comparable to that of other vendors for similar products and services? • Packaging. Packaging should be sturdy, suitable, properly marked, and undamaged. Pallets should be the proper size with no overhang. • Documentation. Does the vendor furnish proper documents (packing slips, invoices, technical manual, etc.) with correct material codes and proper purchase order numbers? • Emergency delivery. Does the vendor demonstrate extra effort to meet requirements when an emergency delivery is requested? Finally, these are service factors to consider: • Good vendor representatives have sincere desire to serve. Vendor reps display courteous and professional approach, and handle complaints effectively. The vendor should also provide up-to-date catalogs, price information, and technical information. Does the vendor act as the buying firm's advocate within the supplying firm? 120 CU IDOL SELF LEARNING MATERIAL (SLM)
• Inside sales. Inside sales should display knowledge of buying firms needs. It should also be helpful with customer inquiries involving order confirmation, shipping schedules, shipping discrepancies, and invoice errors. • Technical support. Does the vendor provide technical support for maintenance, repair, and installation situations? Does it provide technical instructions, documentation, general information? Are support personnel courteous, professional, and knowledgeable? The vendor should provide training on the effective use of its products or services. • Emergency support. Does the vendor provide emergency support for repair or replacement of a failed product. • Problem resolution. The vendor should respond in a timely manner to resolve problems. An excellent vendor provides follow-up on status of problem correction. 7.6 SUPPLY CHAIN COSTS MANAGEMENT MODELS Supply chain cost management is the task of controlling the operational cost in order to enhance the profit margin of a business. It involves all activities of logistics and supply chain such as stocking, distribution, processing, packaging, procurement, and handling (Silva, Gonçalves, & Leite, 2014). Supply chain cost management has become very crucial for businesses due to the intensifying market competition (Lai & Cheng, 2016). Walmart and Kmart had started their journey in retailing during the same period. Kmart had offered the products at a fixed price whereas Walmart had provided the products at a daily low range price. Walmart did so by reducing the cost associated with logistics through seamless communication with its suppliers daily. Some of Kmart’s biggest problems included: ● misalignment of the company’s objectives and supply chain management (SCM), ● delay in implementing basic cost-reduction logistics strategies, ● optimization of business network, ● high inventory purchase costs and, 121 CU IDOL SELF LEARNING MATERIAL (SLM)
● obsolete SCM technology (O’Byrne, 2017). Eventually, the company filed for bankruptcy in the USA in 2002 and again in 2018. Kmart’s failure has repeatedly been attributed to its incompetent supply chain management, among other reasons (Information Week, 2002; Leinwand & Mainardi, 2010; Schoenberger, 2002). The aim of this article is to review two major models in supply chain cost management function: 1. Balanced Measurement Portfolio and, 2. Supply Chain Operations Reference (SCOR) model. 7.7 THE BALANCED MEASUREMENT PORTFOLIO MODEL TO OPTIMIZE SUPPLY CHAIN COSTS The balanced measurement portfolio in SCM deals with the material flow, information flow, and the time management to optimize inventory. This portfolio focuses on maintaining the balance between the interests of the stakeholders and operational measures (Harrison & van Hoek, 2008). These operational measures are used for examining the performance. This performance is measured through the modern performance management system. This system is developed in the form of balanced scorecard wherein long-term profitability is considered. The goal of long-term profitability is achieved by identifying the business processes, customer benefits, financial perspective and innovation (Callado & Jack, 2015). Thus, there is a need for the model that links the supply chain management with balanced scorecard performance. 122 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 7.1: Balanced measurement portfolio model of supply chain cost management (Harrison & van Hoek, 2008) 7.7 ELEMENTS OF THE BALANCED MEASUREMENT PORTFOLIO MODEL The business process perspective includes taking feedback from the customers. This feedback helps to improve the business perspective through a flexible response. Thus communication is an important part of the model. Smooth flow of information between the management and the customers can also reduce waste in the form of excess inventory stocks. Additionally, effective communication ensures timely flow of information. Furthermore, financial prospective is considered by ensuring cash flow and growth in revenue. The balanced measurement portfolio also helps to decide whether operational functions are needed to be internationalized or localized. Based on this, decisions can be taken about the level of inventory, handling charges and transportation costs. Thus in this level, the companies forge innovative strategies to maintain supplier relationships and reduce costs while improving quality. The reduction in transportation generates greater efficiency in the supply chain management process (Bhagwat & Sharma, 2007). 7.8 SUPPLY CHAIN OPERATIONS REFERENCE (SCOR) MODEL SCOR is defined as the managerial tool to improve, communicate and address the decisions related to supply chain operations for meeting the customer needs (Ntabe, et al., 2015). The 123 CU IDOL SELF LEARNING MATERIAL (SLM)
model acts as a process-based approach for evaluation of supply chain performance and cost which directly affects the final pricing of the product. Thus it helps them improve the return on investment. The figure below demonstrates the SCOR model. Figure 7.2: SCOR model to manage supply chain costs (Montgomery, et al., 2018) A key feature of the SCOR model is that it helps to communicate with the stakeholders about the suppliers’ cost. This helps to make the product or service cost-effective to the consumers. Plan In the planning stage, decide the requirements and frames policies related to transportation, assets, inventory and regulatory compliance. It helps to maintain a regular flow of inventory and revenues (Akkucuk, 2016). Source Decide further details pertaining to procurement such as supplier network, terms of the agreement, inventory management, and supplier performance management. Make This stage makes use of tasks performed in previous stages, i.e. planning and procurement, to produce the finished product strategically. Deliver 124 CU IDOL SELF LEARNING MATERIAL (SLM)
This stage consists of activities related to the movement of finished goods. It involves distribution and logistics, warehousing, transportation and order management. It is the last stage of the model, where finished inventories are delivered to the customer (Lima-Junior & Carpinetti, 2016). Return This stage concerns all activities related to the return of goods to the previous stage. For instance, goods purchased by the customer are returned to the company. Also, raw materials are sometimes returned to the supplier. In recent years, recycling has emerged as an important component of this stage. It aims to reduce waste and maintain sustainability in the supply chain (Wibowo, Elizar, & Adiji, 2017). It is pertinent for businesses to repeat these stages and establish effective communication with suppliers and distributors for the cost-effective delivery of the product. 7.9 HOW FOODPANDA OPTIMIZED ITS OPERATIONS TO SAVE THE SUPPLY CHAIN COSTS The case of Foodpanda as illustrated by (Ahmed & Ahmed, 2016) shows how the company improved its supply chain performance by integrating the SCOR model. Foodpanda is an online application which enables customers to order food from other vendors. Therefore, it does not manufacture anything on its own. Hence the company modified the five stages in the SCOR model to: 1. plan, 2. source, 3. deliver and, 4. enable. In the planning stage, Foodpanda used its previous data on several elements like: ● past sales, 125 CU IDOL SELF LEARNING MATERIAL (SLM)
● the number of orders placed by a customer, ● successful deals, commission per restaurant, ● inventory levels for popular restaurants, ● customer satisfaction and, ● delivery service. It uses the data to forecast its sales for the future. These figures are then used by the company for discounts, sales promotions. In the sourcing stage, the company sets the selection criteria for vendors. It does so on the basis of its brand image, presence in the country, brand equity, food quality, customer perception, and offerings. In this stage, Foodpanda emphasizes on quality of food and timely delivery. They continuously monitor customer feedback through their app and website. In the delivery stage, Foodpanda has to make sure the product reaches the customer on time and in good condition. It does so by dividing its restaurants into different categories for better management of its fleet. In the final stage, i.e. ‘enable’, Foodpanda reviews how to integrate the latest technology in each stage of its supply chain. They have online systems called ‘Backend’ and ‘V-Work’ for management of planning, sourcing, delivery, and returns. 7.10 SUMMARY ● Purchasing is the primary phase in material management which involves procurement of material supplies , tools and services to produce required product in a desired quantity and quality at the right time at a competitive price. ● Strategic sourcing is the process of developing channels of supply at lowest total cost and not just lowest price. ● Sourcing optimisation is a combination of mathematical models, computer software , hardware to analyse the supplier bids and sourcing decision. 126 CU IDOL SELF LEARNING MATERIAL (SLM)
● The steps involved in supply chain reference model is to plan, source, make deliver and return of goods to the previous stage. 7.11 KEY WORDS • SCOR - Supply chain operations reference • RFX – Request for X • RFB – Request for BID • RFP – Request for Proposal 7.12 LEARNING ACTIVITY 1. E-commerce has a great impact on purchase and procurement methods adopted by companies. Comment ___________________________________________________________________________ ____________________________________________________________________ 7.13 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define the term purchasing functions 2. What is meant by strategic sourcing 3. Describe from business and customers perspective the balanced measurement portfolio model to optimize supply chain. 4. Write a short note about SCORM. 5. What is vendor rating. Long Questions 1. Discuss in detail about key steps in continuous strategic sourcing process 2. Elaborate about sourcing optimization and cooperative sourcing in detail. 3. Discuss in detail about SCOR model. 127 CU IDOL SELF LEARNING MATERIAL (SLM)
4. Discuss the factors consider for the rating of vendor 5. How Foodpanda optimized its operations to save the supply chain costs B. Multiple Choice Questions 1. __________is the process of developing channels of supply at the lowest total cost. a. Procurement b. Outsourcing c. Strategic sourcing d. None of these 2. __________ is a combination of mathematical models, software, hardware integrated to analyze sourcing decisions. a. Strategic sourcing b. Sourcing optimization c. SCOR d. None of these 3. The term SCOR refers to a. Sourcing business model b. Supply chain operation reference c. Supply chain operation resources d. None of these 4. The result of Vendor Evaluation is_________ 128 a. Answer b. Vendor rating CU IDOL SELF LEARNING MATERIAL (SLM)
c. Vendor service d. None of these 5. The ______ model acts as a process-based approach for evaluation of supply chain performance and cost which directly affects the final pricing of the product. a. SCOR b. Vendor rating c. Sourcing optimization d. Portfolio model Answers 1) c 2) b 3) b 4) b 5) a 7.14 REFERENCES Text Books: ● Simchi-Levi, D., Kaminsky, P., &Simchi-Levi, E. (2003). Designing and managing the supply chain: Concepts, strategies, and case studies. Boston: McGraw-Hill/Irwin. ● Monczka, R. M. (2009). Purchasing and supply chain management. Mason, OH: South-Western. ● Stock & Lambert (2001) Strategic Logistics Management. 4th Edition, McGraw Hill, New York, 70-89. Reference Books: ● Raghuram G. &Rangaraj. N.,Logistics (2012 ) Supply Chain Management, Macmillan Publication, ● K. ShridharaBhat,( 2008 ) Logistics Management, Himalaya Publishing House, Mumbai, ● Bowerson, Donald J., David J.Closs and Owner K. Helferich,( 1986) Logistical Management, Macmillan, New York, ● Alan E. Branch,(2009 )Global Supply Chain Management and International ● Logistics”, Routledge, New York, ● MARTIN CHRISTOPHER, Logistics and Supply Chain Management, Pearson Education Limited, New Delhi, 2016 ● Excel Books Private Limited, Neha Tikoo, Logistics And Supply Chain Management,New Delhi, 2017 129 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 8 - MANAGEMENT OF INVENTORIES Structure 8.0 Learning Objectives 8.1 Introduction 8.2 Functions of Inventory Management 8.3 Methods of Inventory management 8.4 How to ensure Effective Inventory management 8.5 Inventory Control 8.6 Inventory Control Techniques 8.7 Summary 8.8 Keywords 8.9 Learning Activity 8.10 Unit End Questions 8.11 References 8.0 LEARNING OBJECTIVES After studying this unit, the student shall be able to ● Remember the functions of Inventory management ● State the methods of Inventory Management ● Apply effective Inventory management techniques ● Create customized inventory control 8.1 INTRODUCTION Inventory management is the supervision of noncapitalized assets -- or inventory -- and stock items. As 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. A key function of inventory management is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale. 130 CU IDOL SELF LEARNING MATERIAL (SLM)
Organizations from small to large businesses can make use of inventory management to track their flow of goods. There are numerous inventory management techniques and using the right one can lead to providing the correct goods at the correct amount, place and time. Inventory control is a separate area of inventory management that is concerned with minimizing the total cost of inventory, while maximizing the ability to provide customers with products in a timely manner. In some countries, the two terms are used synonymously. Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting packing, processing, transformation, use or sale in a future point of time. Any organization which is into production, trading, sale and service of a product will necessarily hold stock of various physical resources to aid in future consumption and sale. While inventory is a necessary evil of any such business, it may be noted that the organizations hold inventories for various reasons, which include speculative purposes, functional purposes, physical necessities etc. From the above definition the following points stand out with reference to inventory: • All organizations engaged in production or sale of products hold inventory in one form or other. • Inventory can be in complete state or incomplete state. • Inventory is held to facilitate future consumption, sale or further processing/value addition. • All inventoried resources have economic value and can be considered as assets of the organization 8.2 FUNCTIONS OF INVENTORY MANAGEMENT The functions of the inventory management are as follows: 1. The manager of the inventory system has to take great care of time. He should be well aware that how much time a unit will take in processing and reaching the inventory so that the material does not get short in inventory. 131 CU IDOL SELF LEARNING MATERIAL (SLM)
2. Inventory management is also fed with the cost of all the raw items and their subsequent costs in finished form. Inventory management makes sure that the price of an item does not get too high after including all the taxes. It has to be attentive to all costs from production to packaging so that the prices should not get higher. 3. Inventory management is also responsible for observing the availability of all raw materials which to be used in completing all the orders. Managers have to make sure that all material is available so that all orders could get complete in time. 4. It is also a duty of an inventory manager that he keeps account of all raw materials and makes order for their reach in time so that the processing operation does not come to halt. 5. Inventory management is also liable for keeping all records of the ready products which has to be shipped. They have to be very clever in making calculation. The items for shipping should not be shorter than demanded by the clients. If it happens, inventory management can wreck the reputation of the organization. Figure 8.1 – Objectives of Inventory Management Professional inventory management involves creating a purchasing plan that will ensure that items are available when they are needed. 132 CU IDOL SELF LEARNING MATERIAL (SLM)
An inventory can simply be defined as the goods, materials and stocks that a company or manufacturer have at hand. Inventory management is a core task in companies and business organizations concerned with the selling and manufacturing of tangible products and goods. It is concerned with the controlling of the storage, ordering and usage of the assets or stocks a company has at hand. The company’s investment is tied up in the assets until the stock is sold, or the material that it is used in producing is sold. Inventory management is quite in a business enterprise as it saves the business a great deal of money. Companies spend much money in insuring, storing and even tracking of the assets and stocks. Thus, when properly managed, many costs can be saved. 8.3 METHODS OF INVENTORY MANAGEMENT There are basically two methods 1. Just – in – time asset management method 2. Material requirement planning. Just-in-time method In this inventory management, companies ensure that they do not pile up stocks and maintain high level management. This method is quite simple as it involves the reception of the items when they are required. This goes a long way in order to reduce the amount spent on the insurance, tracking and storing the stock. Material Requirement Planning Forecasts and sales are used by the companies involved in measuring and ascertaining the amount of materials needed in the asset. Thus, this method of inventory management utilizes the past sales as well as forecasts to determine the quantity of stock to order and to purchase. 133 CU IDOL SELF LEARNING MATERIAL (SLM)
8.4 HOW TO ENSURE EFFECTIVE INVENTORY MANAGEMENT The inventory managers are responsible for the management of inventories in an organization. They are professionally trained to track the inventory and ensure that losses are minimized. • To keep losses low, there are things to ensure and also to avoid. • This is important to make it sure that the asset is not too much or too small. The inventory or stock at hand should be kept minimal. If the stock is too big, y one may end up selling the redundant stocks at giveaway cost. • Tracking of the asset in companies is critical. It is important to leverage the required tools to track asset in order to avoid loss and shortage. • In large organizations, the inventory may get too large that it becomes impractical to count all the stock at each point in time. In such cases, you need to have priorities and go by them. This simply implies giving attention to those stocks that are high selling and more important than others. Such stocks should be counted more often than other less important stocks. • Most companies use spreadsheets in inventory management. However, spreadsheets could be easily deleted, and the changes you made could be easily lost. There are lots of advanced software that can be used in tracking and managing asset. A good example of such software is Quickbooks and Peachtree. With these pieces of software, you will get great value for your money. • It is also important to backup your inventory. Many uncertainties exist today that might simply cause you to lose those data. By backing up your data, you will ensure that loss and mismanagement of inventory will be reduced. 8.5 INVENTORY CONTROL Inventory control is another name for stock control, and the name says it all. It is the practice of generating maximum revenue of the company’s inventory by regulating it and adopting various practices. The sole aim can be to increase the profits with the least amount of investment in the inventory. This fact stands firm without compromising customer satisfaction. 134 CU IDOL SELF LEARNING MATERIAL (SLM)
Inventory control also includes being accounted for all the goods and where they are at a particular moment. Retailers and distributors adopt the prime use of inventory control to make difference to their profit shares positively. Areas of influence of inventory control Let us delve into the areas where inventory control is mainly adopted and followed to reap more profits. With the lack of raw materials, it will be difficult for the industries and may even lead to the stoppage of production. But if an industrialist decides to keep a huge amount of raw materials in its inventory, it would have to bear the inordinate cost that comes with maintaining it. Hence the ideal way to tackle this problem will be to order quantities in small amounts on a frequent basis to reduce the inventory costs. Thus it shall ensure the steady supply of raw materials at the same time. Just like the instance, we discussed earlier, the availability of finished goods also has a role in inventory control. The cost of maintaining the finished goods within the company to be able to charge a high amount to deliver it right to the customers may sometimes increase the cost of inventory and the pricing premium associated with the product may not have any value. Primary controls within the supply chain Inventory control thus highlights the optimum storage capacity and the balancing of finished goods within the company and the backorders. The use of just-in-time production can eliminate inventory costs within the supply chain management. The production is carried based upon the customer orders. Another area where the inventory control system has its power and influence is the manufacturing or working area where the products are being processed. To reduce inventory investment, one must reduce the inventory associated with the production process. Reducing the inventory travel time and reducing the workspace has a very good effect in this case. Other steps would be to reduce the size of the job to help in internal logistics and storage. 135 CU IDOL SELF LEARNING MATERIAL (SLM)
Another factor that directly deals with inventory control is the setting of reorder point of inventory level. This point is the mark where the company or industry decides to reorder the inventory for production purposes. The problem with the setting of reorder point is that too high a value can increase the chances of rising inventory investment and setting a small value can sometimes lead to stock out and disruption in production processes. All these instances give us insight into the importance of inventory control systems, and sometimes the companies and industries outsource certain aspects of production to transfer the burden of inventory control over to them. 8.6 INVENTORY CONTROL TECHNIQUES Let’s take a look at some inventory-control techniques you may choose to utilize in your own warehouse. 1. Economic order quantity. Economic order quantity, or EOQ, is a formula for the ideal order quantity a company needs to purchase for its inventory with a set of variables like total costs of production, demand rate, and other factors. The overall goal of EOQ is to minimize related costs. The formula is used to identify the greatest number of product units to order to minimize buying. The formula also takes the number of units in the delivery of and storing of inventory unit costs. This helps free up tied cash in inventory for most companies. 2. Minimum order quantity. On the supplier side, minimum order quantity (MOQ) is the smallest amount of set stock a supplier is willing to sell. If retailers are unable to purchase the MOQ of a product, the supplier won’t sell it to you. For example, inventory items that cost more to produce typically have a smaller MOQ as opposed to cheaper items that are easier and more cost effective to make. 136 CU IDOL SELF LEARNING MATERIAL (SLM)
3. ABC analysis. This inventory categorization technique splits subjects into three categories to identify items that have a heavy impact on overall inventory cost. Category A serves as your most valuable products that contribute the most to overall profit. Category B is the products that fall somewhere in between the most and least valuable. Category C is for the small transactions that are vital for overall profit but don’t matter much individually to the company altogether. 4. Just-in-time inventory management. Just-in-time (JIT) inventory management is a technique that arranges raw material orders from suppliers in direct connection with production schedules. JIT is a great way to reduce inventory costs. Companies receive inventory on an as-needed basis instead of ordering too much and risking dead stock. Dead stock is inventory that was never sold or used by customers before being removed from sale status. 5. Safety stock inventory. Safety stock inventory management is extra inventory being ordered beyond expected demand. This technique is used to prevent stockouts typically caused by incorrect forecasting or unforeseen changes in customer demand. 6. FIFO and LIFO. LIFO and FIFO are methods to determine the cost of inventory. FIFO, or First in, First out, assumes the older inventory is sold first. FIFO is a great way to keep inventory fresh. LIFO, or Last-in, First-out, assumes the newer inventory is typically sold first. LIFO helps prevent inventory from going bad. 7. Reorder point formula. 137 CU IDOL SELF LEARNING MATERIAL (SLM)
The reorder point formula is an inventory management technique that’s based on a business’s own purchase and sales cycles that varies on a per-product basis. A reorder point is usually higher than a safety stock number to factor in lead time. 8.7 SUMMARY • Inventory Management is supervision of non-capitalized assets or Inventories & Stock items • Inventories includes stock of raw material, work in progress, Finished Goods, Stores and spares • Inventories are held either for consumption, resale or for further processing. • Methods of Inventory Management a. JIT b. MRP Inventory Management Objectives are ● Reduce purchase cost. ● Optimize storage cost. ● Preventing Dead stock ● Maintain sufficient stock. ● Enhance cash flow 8.8 KEY WORDS • FIFO-First in First out method • LIFO-Last in first out method • EOQ-Economic order Quantity • MOQ-Minimum order Quanity 8.9 LEARNING ACTIVITY 1. Learn about how Toyota used EOQ to manage its inventories and increased its Profits 138 CU IDOL SELF LEARNING MATERIAL (SLM)
___________________________________________________________________________ _____________________________________________________________________ 8.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.List out the functions involved in Inventory Management. 2. What is meant by Inventory Management. 3.List the objectives of Inventory Management 4.Differentiate between Inventory Management and Control 5. List the various inventory control techniques. Long Questions 1.Discuss in detail about Control functions of Inventory Management. 2.Elaborate methods to ensure effective Inventory Management techniques 3.Discuss in detail about various Inventory control techniques. 4. What are the steps to ensure effective inventory management. 5. Discuss about JIT concept. B. Multiple choice Questions 1. ____________inventory management is a technique that arranges raw material orders from suppliers in direct connection with production schedules. a. Just-in-time (JIT) b. Economic order Quantity c. Minimum order Quantity d. None of these 2._________inventory management is extra inventory being ordered beyond expected demand. 139 CU IDOL SELF LEARNING MATERIAL (SLM)
a. Safety stock b. JIT c. Minimum order Quantity d. None of these 3. Inventory Management is a type of Inventory control a. True b. False c. Partly true d. None of these 4. Which of the following are inventory control techniques a. EOQ b. ABC analysis c. FIFO and LIFO d. All of these 5. In ________ method companies ensure that they do not pile up stocks and maintain high level management. a. JIT b. MRP c. FIFO d. LIFO Answers 1) b 2) a 3) b 4) d 5) a 140 CU IDOL SELF LEARNING MATERIAL (SLM)
8.11 REFERENCES Text Books: ● Simchi-Levi, D., Kaminsky, P., &Simchi-Levi, E. (2003). Designing and managing the supply chain: Concepts, strategies, and case studies. Boston: McGraw-Hill/Irwin. ● Monczka, R. M. (2009). Purchasing and supply chain management. Mason, OH: South-Western. ● Stock & Lambert (2001) Strategic Logistics Management. 4th Edition, McGraw Hill, New York, 70-89. Reference Books: ● Raghuram G. &Rangaraj. N.,Logistics (2012 ) Supply Chain Management, Macmillan Publication, ● K. ShridharaBhat,( 2008 ) Logistics Management, Himalaya Publishing House, Mumbai, ● Bowerson, Donald J., David J.Closs and Owner K. Helferich,( 1986) Logistical Management, Macmillan, New York, ● Alan E. Branch,(2009 )Global Supply Chain Management and International Logistics”, Routledge, New York, MARTIN CHRISTOPHER, Logistics and Supply Chain Management, Pearson Education Limited, New Delhi, 2016 ● Excel Books Private Limited, Neha Tikoo, Logistics And Supply Chain Management,New Delhi, 2017 141 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 9 - MANAGEMENT OF TRANSPORTATION COSTS Structure 9.0 Learning Objectives 9.1 Introduction 9.2 Transport rate 9.3 Mode of Transport 9.3.1 Rail 9.3.2 Road 9.3.3 Water 9.3.4 Air 9.3.5 Pipeline 9.4 Choice of Mode 9.5 Role of Containerization 9.6 Ownership of transport 9.7 Choice of Ownership 9.8 Summary 9.9 Key Words 9.10 Learning Activity 9.11 Unit End Questions 9.12 References 9.0 LEARNING OBJECTIVES After studying this unit, students will be able to ● State the impact of transportation cost in material handling! ● Remember the modes available for transportation of goods and materials. 142 CU IDOL SELF LEARNING MATERIAL (SLM)
● Analyse the proper mode of transportation to be chosen to cut down cost. 9.1 INTRODUCTION Definition When you talk about logistics, most people imagine lorries driving down a motorway. As we know, logistics has a far wider meaning, but transport is certainly one of its main components. Here we will look at transport, which is concerned with the movement of goods between facilities. Transport is responsible for the physical movement of materials between points in the supply chain. As we have already seen, e-commerce can have a major effect on an organisation’s logistics. But remember that it is essentially part of the information system. When you look at a company’s website you can see descriptions of its products, send an order and arrange payment – but you still need transport to deliver it. Sometimes, of course, you buy intangibles such as information, software or music, and the website can deliver it. But most products are more tangible, and they need transport. At the heart of logistics are transport vehicles moving goods between suppliers and customers. This is why transport in the UK employs 1.3 million people out of a workforce of 27 million1 and, along with storage, generates 6% of the GDP. 9.2 TRANSPORT RATE If an organisation uses third-party transport, the price of moving a unit of material between locations is the rate or tariff. This is set by the cost of the service provided, value to the customer, the distance moved, weight, size and value of goods, complexity of journey, and so on. This rate is an important consideration for logistics, and can affect whole patterns of movement. If an item costs Rs20 to make in town A and Rs25 to make in town B, then the maximum rate worth paying to move from A to B is Rs5. If the rate is actually Rs3, producers in town A will export to B, customers in town B pay less for the item, price sensitive demand will rise, logistics companies grow to move the item, competition encourages producers in town B to look for cost savings, some producers in B may divert to other products that they can trade back to town A. Trade rises and everyone seems happy. If, however, the rate is actually Rs 6 none of this happens, and everyone seems to lose out. 143 CU IDOL SELF LEARNING MATERIAL (SLM)
You can find many examples of this effect. The Czech Republic can brew beer more cheaply than countries in western Europe (which may explain why they have the highest beer consumption in the world). However, transport of heavy, relatively low-value loads across Europe is expensive, and these additional costs make the trade unattractive. There is a common view that more expensive fuel, vehicles and drivers are making transport more expensive. The costs for particular journeys vary considerably with conditions, but it is fairer to say that the relative cost of transport is actually falling. This is largely due to more efficient operations and vehicles, but also due to changes in fuel prices and taxes. Partly as a result of this, the overall amount of trade is rising. Manufacturers in the Pacific Rim have efficient operations that give low unit production costs, and cheap transport to Europe means that they often compete on cost with local producers. Relatively cheap transport also changes the shape of supply chains, as organisations can cover a wider area from a facility. A single logistics centre can deliver materials quickly and relatively cheaply to any destination in Europe. This has encouraged many companies to replace their national warehouses by regional ones that cover a wide area. In 1995, for example, Nike was selling billion dollars worth of goods in Europe, with deliveries through 25 warehouses. It replaced these with a single pan-European distribution centre in Belgium, and worked with four specialised transport companies. These companies gave efficient services which allowed transport costs to remain constant – with inbound transport costs falling slightly, and outbound transport costs rising slightly. Then Nike could benefit from the huge reduction in warehousing and inventory costs. The rate is clearly important, but service users seem to have little influence in setting it. A large organisation negotiating freely with a transport company may have some flexibility. The transport industry is very competitive, and large customers can get good deals. They also have the option of running their own fleets if external operators charge too much. Often, however, the rates are fixed by agreement between transport companies, government policies, or monopoly suppliers. Shipping conferences, for example, quote agreed rates between destinations, cartels of major transport operators use industry agreed rates, and government owned rail and road industries fix prices through their monopoly. Transport is one of the most expensive parts of logistics, but users often have little control over it. 144 CU IDOL SELF LEARNING MATERIAL (SLM)
In practice, organisations do have more influence, as they can make a series of decisions about the form of transport. What mode of transport is best? Should we run our own transport or use a third-party carrier? What kind of vehicles should we use? How do we deal with international transport? What routes should we use? Can we back-haul? Every organisation faces these questions, but they come to different answers that depend on particular circumstances. We can give some general advice, and will start by looking at the question of the transport mode. 9.3 MODE OF TRANSPORT The mode of transport describes the type of transport used. There are basically five different options – rail, road, water, air and pipeline. Each mode has different characteristics, and the best in any particular circumstances depends on the type of goods to be moved, locations, distance, value and a whole range of other things. Sometimes there is a choice of mode, such as rail or ferry across the English Channel; road, rail or air between Rome and Geneva. Often, though, there is little choice. If you want to deliver coffee from Brazil to Amsterdam, you will use shipping; if you want to move gas from the Gulf of Mexico to Dallas, you use a pipeline; if you want an express parcel service across the Atlantic, you use air freight. Overall, most goods travel by road. In the UK, 65% of all freight is moved by road, or about 160 billion tonne kilometres out of 240 billion tonne kilometres.3,4 the amount of materials using each mode in the UK over the past ten years or so (the amount of air freight is too small to appear on this graph). There are some variations between countries, but this is a familiar pattern. 9.3.1 Rail Rail transport is most commonly used for heavy and bulky loads over long land journeys. Trains can maintain a consistent, reasonably high speed, and can link with other modes to carry containers and bulk freight. Rail services are organised in different ways. They are almost invariably public carriers(giving a service to all other organisations) rather than private carriers (carrying goods for one organisation). This public service is often considered so important that it is run by the state. Even when the rail service is not nationalised, it is allowed a (near) monopoly. The number of carriers is inevitably small when compared with, say, road transport. The main 145 CU IDOL SELF LEARNING MATERIAL (SLM)
reason for this is the large investments needed for tracks, rolling stock and terminals. A trucking company can start a service between, say, Paris and Zagreb by renting a truck and using public roads; a rail operator has to build its tracks and terminals and buy the trains before it can start work. Costs can be reduced by sharing facilities. Some countries have several train operators using commonly owned tracks, or tracks owned by another company. Such arrangements are not common and they present obvious problems for operations. One advantage of rail is that once the infrastructure is in place, it has very high capacity and low unit costs. This is another factor that discourages competition, as a track built by one organisation between two points, will generally have enough capacity to meet all demand, and it becomes unviable for a competitor to open parallel facilities. There is, for example, only one rail line under the English Channel, but this has enough capacity to meet demand on this very heavily used route for the foreseeable future. Historically there has been more competition in, for example, the USA but this has virtually disappeared. Another advantage of rail is that the unit transport cost is low, so it can be used to move large volumes of relatively low-priced materials, such as coal and minerals. For this reason, rail transport is more common in the earlier, upstream, parts of the supply chain. You are more likely to see organisations using rail for inbound raw materials than outbound finished goods minute or emergency deliveries. Despite this, train operators can provide a number of different services, perhaps offering merry-go-round services (where a train continually moves between two locations, such as a port and a factory), full train services (where customers hire an entire train), full wagon load attached to scheduled services, container transport, or shared wagons on scheduled services. A more obvious concern is that trains can only travel along specified routes between fixed terminals, and cannot stop at intermediary points. Most customers are some distance away from these terminals, so they have to transfer goods by road at both ends of the journey. These transfers add time, and they can leave rail as a fairly slow alternative. It is more useful for long distances, such as between Perth and Sydney in Australia, but is inefficient for small journeys, such as between Rotterdam and Arnhem in the Netherlands. In the UK the average journey length by rail is 180 kilometres, compared with 95 kilometres by road. The problem of limited access is common to several modes of transport, but there are ways of overcoming its effects. The most obvious is to locate facilities near to rail terminals (or ports, airports, container ports or appropriate terminals). If demand is big enough, it is worth 146 CU IDOL SELF LEARNING MATERIAL (SLM)
building special facilities. A power station, for example, might find that it is cheaper to build a special rail line to a coal mine, than to use trucks. Another option is to use intermodal transport, which we discuss later in the chapter. 9.3.2 Road Road is the most widely used mode of transport and is used – at least somewhere – in almost all supply chains. Its main benefit is flexibility, being able to visit almost any location. Although the maximum speed on roads is limited, this ability to give a door-to-door service avoids transfers to other modes and can give a shorter overall journey time. You can see this effect if you want to travel between, say, Paris and Brussels. The plane travels faster, but when you add on the travel times to and from the airports, check-in and boarding, it is faster to catch a bus between the city centres. Nonetheless, travel speed can be an important consideration, especially as roads are becoming more congested and vehicles are likely to move even more slowly. Road transport has the advantage of being able to use extensive road networks. Unlike rail, these already exist, so users do not have to build and maintain their own tracks. Also, vehicles do not have to keep to such rigid timetables, so they can go on journeys at short notice and with little planning. In contrast to rail, where each operator is likely to have a (near) monopoly over some route, road transport is characterised by a large number of carriers working in the same areas. In the USA, for example, there are 40,000 public carriers and 600,000 private fleets. With so many operators competition is likely to be more intense and pricing more flexible. There is a huge number of different types of road vehicle. Many of these are specialised, and designed for specific purposes, and there are different regulations in different countries. The following list mentions some of the more important types. ● Delivery vans are the small delivery vehicles which can carry a tonne or two in a sealed body. Smaller vans are based on car designs, while larger ones – such as Luton Box vans –are like small removal vans. ● Flat-bed lorries are basic, rigid vehicles with two or three axles, and a flat platform that is used to stack materials. Materials are tied on, or small sides are added. 147 CU IDOL SELF LEARNING MATERIAL (SLM)
● Box-bodied lorries are like the flat beds, except they have bodies added, traditionally with access from the rear. These give more protection than flat beds. In the 1970s Boalloy added curtain siding to give easier access to the load. ● Articulated lorries, are more manoeuvrable than rigid lorries, so they can be bigger, up to the legal weight limit. There are many variations on the theme of trucks that bend in the middle. A common format has a two- or three-axled tractor and a two- or three-axled trailer. ● Lorry and trailer, which combine a rigid lorry pulling a two-axle trailer. This gives greater capacity than an articulated lorry, but maintains some of its manoeuvrability. Many different formats have been tried. In Sweden, for example, they use articulated lorries with trailers, giving two, or even three, points of articulation. In Alberta, Canada, they use two trailers to move loads over the Rockies. In Australia ‘land trains’ have four or five trailers to move through the outback. Perhaps the overall picture is that, within prevailing regulations, the type of vehicle is only limited by the designers’ imagination. Depending on conditions, road transport can normally carry loads up to, say, 20–30 tonnes. The European Union has a gross limit of 42 tonnes and different limits apply in other areas. In exceptional circumstances, very large loads can be carried, such as the loads of a thousand tonnes that are moved for oil companies in the Arctic. However, weight and size limits mean that road transport is more often used for smaller loads. These become relatively expensive, so road transport is generally used for shorter distances. Although it is a very simplistic view, you are more likely to see road transport used for delivering finished goods than bulky raw materials. Another problem is that lorries are particularly vulnerable to congestion and traffic delays. 9.3.3 Water Both rail and road transport have the obvious limitation of only being used on land. Most supply chains use shipping to cross the oceans at some point, and over 90% of world trade is moved by sea. You can see the importance of shipping to a country like the UK, where 95% of freight arrives or leaves by ship, shipping is the fifth largest service sector exporter, the City of London insures 25% of the world’s marine risk, the marine and repair business is one of the largest in Europe, there are 300 ports around the coast, and the surrounding waters are among the busiest in the world. There are basically three types of water transport – rivers and canals (usually called inland waterways), coastal shipping (moving materials from one port to another along the coast) and 148 CU IDOL SELF LEARNING MATERIAL (SLM)
ocean transport (across the major seas). Many countries have well-developed river and canal transport, such as Canadian and US use of the St Lawrence Seaway, and European use of the Rhine. We normally associate river transport with smaller loads, perhaps narrow boats and barges. But river systems can carry ocean-going ships for surprisingly long distances. The Mississippi, for example, is navigable to Minneapolis, more than 2500 km from the Gulf of Mexico, and Chicago is a major port in the American prairies. Realistically, though, most shipping is done by large vessels travelling through the world’s shipping lanes. Some countries are fortunate enough to have a coastline that can be used for international transport, and cities such as Rotterdam, Hong Kong and New York have developed huge ports. The world’s 20 biggest ports handle over half of all world trade.6 Some form of shipping is largely unavoidable for long journeys. There are many different types of vessel for various cargoes. Ships get considerable economies of scale, so many aim at moving big loads at low unit costs. ● General cargo ships are the standard design, with large holds that carry any type of cargo. Most of these are loaded by crane, although some have side doors that allow vehicles to drive on and off. Many ports around the world do not have facilities to handle the more specialised ships mentioned below, so these general-purpose vessels are very widely used. ● Bulk carriers carry large quantities of cheap bulk materials in large holds, such as grain or ores. ● Tankers carry any liquid, but by far the biggest movements are oil. Because of the economies of scale, these ships are built as big as possible. ● Container ships are specially designed to carry standard containers and their capacity is commonly rated in TEUs (20-foot equivalent units) or FEUs (40-foot equivalent units). A typical container ship carries around 5000 of these, with larger ones carrying 10,000. ● Ferries are usually RO-RO (roll-on roll-off) vessels that carry road vehicles over relatively short distances. There are, however, longer RO-RO routes between, say, Europe and America. ● Barges, which are towed behind ocean-going tugs. These are used for shorter routes where sea conditions are fairly reliable, such as between the USA and Puerto Rico. They have the advantage of being cheaper to run than normal ships. 149 CU IDOL SELF LEARNING MATERIAL (SLM)
● Combination ships. In addition to the specialised ships, many other designs are used, often to allow for dominant patterns of trade. Examples of such combination ships are the RORO/container ships that carry vehicles imported into the USA and return with bulk grain to Japan, and the oil-bulk vessels that carry oil from the Middle East and return carrying ores. One useful combination is passenger/container, as the passengers are ensured priority treatment in ports. The main drawback with water transport is, of course, its inflexibility in being limited to appropriate ports. Journeys from suppliers and to customers inevitably need a change of mode, even if they are close to ports. In St Austell, UK, for example, china clay works are very close to specialised ports in Fowey, but the clay still has to be transported to the quayside. The other problem with shipping is that it is relatively slow, and needs time to consolidate loads and transfer them at ports. However, such transfers can be made efficient, and then coastal shipping can compete with road transport, even for relatively short distances.7–9 The average water journey in the UK is 400 kilometres, so shipping can compete on, say, a Forth–Tees–Thames route. One interesting aspect of shipping is the continued existence of conference services. This means that all carriers in a given area agree to charge a common price and regulate the frequency of their service. The justification of this cartel is that it guarantees a more regular service than would otherwise be available. However, many people question this idea of price fixing, and non-conference lines now offer deep discounts. 9.3.4 Air Because of its low unit costs, water transport is the most common mode for international transport. Sometimes, though, its slow speed is unacceptable. If, for example, you run a factory in Argentina and a critical machine breaks down, you do not want the spare part to be put on the next scheduled ship from Japan, which will arrive in four weeks’ time. In such circumstances the alternative is air transport. Passengers account for most airline business, with eight billion passenger kilometres flown a year in the UK.3 This continues to grow despite some hiccoughs (in, say, 2001), with low-fare carriers (Ryanair, Virgin Express, Go, easyJet, buzz, and so on) accounting for around 25% of the market.10 Airlines also carry a significant amount of freight, for products where speed of delivery is more important than the cost. In practice, this limits airfreight to fairly small amounts of expensive materials. Perhaps the most common movements are documents and parcel delivery, with carriers such as Federal Express and UPS. 150 CU IDOL SELF LEARNING MATERIAL (SLM)
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