The term “Supply Chain Management” was coined in 1982 by Keith Oliver of Booz, Allen and Hamilton Inc. But the discipline and practice has been in existence for centuries.
The terms Logistics and Supply Chain Management are used interchangeably these days, but there is a subtle difference that exists between the two.
‘Logistics’ has a military origin, and used to be associated with the movement of troops and their supplies in the battlefield. But like so many other technologies and terminologies, it entered into the business lexicon gradually and has now become synonymous with the set of activities ranging from procurement of raw materials, to the delivery of the final polished good to the end consumer.
In a typical business scenario, many organizations work in tandem (knowingly or unknowingly) to get the final product in hand of the end consumer. The supply chain is a network of these organizations that coalesce with each other (downstream or upstream) to make the final shipment successful.
A group of farmers, a cotton mill, a designer and a tailor is the least number of stakeholders you can expect from a regular shirt you wear every day
Introduction to Logistics and Supply Chain Management (SCM)
Logistics is generally seen as a differentiator in terms of the final bottom line of a typical “hard and tangible goods” organization; enabling either a lower cost or providing higher value.
While a lower cost is mostly a one-time feel good factor and has been the traditional focus area in logistics, high value comes into the picture much later and may be tangible or intangible in a good’s initial stages.
So while an organization like Zappos may look costly at a first glance, the extraordinary customer service due to robust policies is a value which more than offsets the slightly higher cost.
Logistics is concerned with both materials flow and information flow. While the materials flow from the supplier to consumer, the information flows the other way round. It is not only concerned with inventory and resource utilization, customer response also falls under the ambit of logistics.
In simple terms, logistics can be seen as a link between the manufacturing and marketing operations of a company. The traditional organizations used to think of them separately, but there is a definite value addition in integrating the two due to the interdependence and feedback channel between the two.
The level of coordination required to minimize the overall cost for the end consumer gets tougher to achieve as the number of participants in a supply chain increase, as an extremely efficient flow of material and information is required for optimization.
Logistics cover the following broad functional areas: network design, transportation and inventory management.
Manufacturing plants, warehouses, stores etc. are all facilities which form key components in the network design. Transportation: the cost and consistency (reliability) required out of the transportation network determines the type and mode of the movement of goods and also affects the inventory.
Buffer (or safety) stock is the reserve stock held to safeguard against shortages or unexpected surge in demand, to avoid “stock-outs”. Fewer inventories with negligible stock-outs — the hallmark of an efficient logistical system
Basic concepts of Logistics and SCM
Organizations want to minimize the inventory levels due to its almost linear relationship with the cost. Yet if the demand is forecasted accurately, there would ideally be no need for inventory and the goods will move seamlessly from warehouses to customers.
- That would have been awesome, but it is deep into the ideal world zone. In the real world, the forecasted numbers can only take you so far and some inventory has to be maintained to satiate any surges in demand; the cost of unhappy consumers who are not serviced is often huge, and is immeasurable in most cases.
- Yet overstocks lead to increase in working capital requirements, insurance costs and blocked resources which could have been productive someplace else.
- Making a business forecast has largely been a gut-based process, but is changing rapidly in the era of data-based decision making. The forecast depends on the historical baseline for sales, seasonality (soft drinks have higher sales volume in May), recent trends (Samsung is losing out to competitors when it comes to phones, a declining trend), business cycles (economies go through expansion and contraction every few years), promotional offers (up to 50% off can drive the average fashionista mad) etc.
The kind of transportation employed by an organization is a strategic decision (it usually accounts for around 1/3rdof the total logistics cost) based on the required level of risk exposure, customer service profiles, geographic area covered etc. Truck shipments take more time for delivery compared to air transport (customers with relaxed turnaround times); is cheaper but necessitates maintenance of higher inventory levels.
- Transportation serves the purpose of not just product movement, but storage as well (not very intuitive). Time spent for delivery means saved time for warehousing, and many times the cost to offload and reload shipments can be greater than the cost of letting the goods stay in the transportation vehicles itself.
- Two basic thumb rules apply for transportation decisions: truck load (TL) shipments are better than less-than-truckload (LTL) shipments as storage space is a perishable commodity (just like a commercial airline does not want to fly with empty seats), and the cost per kilometer decreases as the distance increases (two 500 km shipments is usually more expensive than a single 1000 km shipment).
- The factors which determine the economies of transportation decisions include but are not limited to: distance between the starting and destination points, and density (higher density products take less space — space constraints outweigh weight constraints by a huge margin), stow ability (spherical packaging will lead to more empty spaces compared to cubical) and volume of the goods. Different modes of transport serve different strategic ends (rail, road, air, water etc).
- FlipKart has eKart for its logistical operations and warehousing, whereas smaller e-commerce players generally outsource their operations to specialized logistics players such BlueDart, DHL and now Delhivery.
The end goals differ: can either be done for end consumers or for logistical considerations. The packaging will then depend on the end goal; form factor plays the lead role when packaging goods for the end consumers, while function plays the lead role in packaging for logistical operation.
It is the back-end building for storing goods. Based on the needs of the organization, it can be in-house or outsourced.
- Primary functions of a warehouse are product movement and storage. Activities such as offloading of the goods coming from the suppliers, the intermediate packaging (if required), and shipping to other destinations (retailers or end consumers) are handled in the warehouse. Similarly, they can also serve as a storage house for handing peak consumer demand to avoid stock out of items, and acts as a buffer between the starting point (usually manufacturing plant) and ending point (think about a typical retail outlet).
Different distribution strategies can be adopted by an organization based on its needs and infrastructure in place, namely:
- Cross-Docking: Relies on minimal processing at the warehouse level and facilitate seamless connection between “incoming” and “outgoing” goods through technologies such as bar code scanners; becoming increasingly important due to established structured communication between retailers and manufacturers; best for high velocity goods with predictable demand patterns.
- Milk Runs: The delivery guy is out to deliver items from a single supplier to multiple retailers or to pick up items from multiple suppliers for a single retailer (An Indian Doodhwala can literally teach a thing or two about this, hence the naming we think).
- Direct Shipping: A supplier directly ships to a particular retailer without any intermediaries. Mostly happens with big-name stores with huge good volumes, and very frequent replenishments. Big savings on time.
- Hub and Spoke Model: Hub serves as the central node for nearby places, and the spokes depend on the hub for their needs (think of a metropolitan and various tier-2 cities in its proximity).
- Pooled Distribution: Region is the most important factor driving this strategy. Delivers to every destination point in a geographical area, smart for handling peak time loads and LTL shipments. Plus one for the planet as a bonus!
Human : Arteries :: Logistics : Information
Traditional paper-based information systems are increasingly on their way out, and electronic exchanges are making rapid inroads into the logistical process flow. The initial investment in electronic systems is recouped quickly by cost savings due to better operational efficiency and enhanced customer service. Advances in electronic data interchange (EDI), artificial intelligence and wireless communication is partly responsible for this intelligent shift.
- The principal information flow can be subdivided in two main streams: one for planning (looking into the future) and the other for operational flows (in the past and present). Plans are to be made for production, storage and movement of goods. Manufacturing constraints (internal) and expected sales (external) are the key areas focused upon. Operating flows refer to the information generated (or required) to serve the orders to the customer.
- Enterprise Resource Planning (ERP) is a fancy term used by IT people for one-stop, integrated packages to support multiple functions across an organization. It serves as a central destination to capture data which aids in making optimal decisions, while also serving as a repository to better understand the current business scenario and plan for any future needs.
Green Supply Chain Management: Lean Practices
Green is the new way to go about things, and the myth that profits and environment cannot go hand in hand is evaporating fast. Commitment to lean practices is a promise to do away with inefficiencies in the system to reduce wastes and have a minimal impact on the environment.
The emphasis on continuous product flows, standardization within the organization/industries and a greater integration between producers and consumers — all these have contributed to efficient supply chains with gradually decreasing waste levels.
Information is often the key differentiator when it comes to successful supply chain practices, and the organizations that share information with each other based on the premise of trust and long-term business viability will often have decisive competitive advantage over organizations that do not share critical information upstream and downstream.
The best part is everybody winning — organizations, end consumers and Mother Nature.