Supply Chain Management

This book is a part of the course by Jaipur National University, Jaipur.

This book contains the course content for Supply Chain Management.

JNU, Jaipur
First Edition 2013

The content in the book is copyright of JNU. All rights reserved.

No part of the content may in any form or by any electronic, mechanical, photocopying, recording, or any other
means be reproduced, stored in a retrieval system or be broadcast or transmitted without the prior permission of
the publisher.

JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the
content whenever the need arises, and to vary it at any time without prior notice.
Index

I. Content....................................................................... II

II. List of Figures........................................................... V

III. List of Tables..........................................................VI

IV. Abbreviations....................................................... VII

V. Case Study............................................................. 116

VI. Bibliography......................................................... 120

VII. Self Assessment Answers................................... 123

Book at a Glance

I/JNU OLE
Contents
Chapter I........................................................................................................................................................ 1
Supply Chain Management.......................................................................................................................... 1
Aim................................................................................................................................................................. 1
Objectives....................................................................................................................................................... 1
Learning outcome........................................................................................................................................... 1
1.1 Introduction............................................................................................................................................... 2
1.2 Supply Chain............................................................................................................................................. 2
1.3 Supply Chain Management....................................................................................................................... 4
1.4 Objective of Supply Chain Management.................................................................................................. 5
1.5 Importance of Supply Chain Management............................................................................................... 5
1.6 Activities of Supply Chain Management.................................................................................................. 6
1.7 Decision Phases in a Supply Chain........................................................................................................... 7
1.8 Process View of Supply Chain.................................................................................................................. 8
1.9 Linking Competitive (Business) and Supply Chain Strategies . ............................................................. 9
1.10 Supply Chain Drivers .......................................................................................................................... 10
1.11 Barriers of Supply Chain Management..................................................................................................11
1.12 Scope of Supply Chain Activities..........................................................................................................11
1.13 Marketing Mix Model............................................................................................................................11
Summary...................................................................................................................................................... 14
References.................................................................................................................................................... 14
Recommended Reading.............................................................................................................................. 14
Self Assessment............................................................................................................................................ 15

Chapter II.................................................................................................................................................... 17
Designing the Supply Chain Network....................................................................................................... 17
Aim............................................................................................................................................................... 17
Objectives..................................................................................................................................................... 17
Learning outcome......................................................................................................................................... 17
2.1 Introduction............................................................................................................................................. 18
2.2 Role of Distribution Network ................................................................................................................ 18
2.3 Factors Influencing Distribution Network Design.................................................................................. 19
2.4 Design Options for a Distribution Network . ......................................................................................... 20
2.5 E-business and its Impact ...................................................................................................................... 25
2.5.1 Advantages of E-business....................................................................................................... 27
2.5.2 Disadvantages of E-business.................................................................................................. 28
2.6 Distribution Networks in Practice . ........................................................................................................ 28
2.7 Distribution Network Design in the Supply Chain................................................................................. 28
2.8 Factors Affecting Network Design Decisions......................................................................................... 29
2.9 Supply Chain Model............................................................................................................................... 31
Summary...................................................................................................................................................... 33
References.................................................................................................................................................... 33
Recommended Reading.............................................................................................................................. 33
Self Assessment............................................................................................................................................ 34

Chapter III................................................................................................................................................... 36
Designing and Planning Transportation Networks.................................................................................. 36
Aim............................................................................................................................................................... 36
Objectives..................................................................................................................................................... 36
Learning outcome......................................................................................................................................... 36
3.1 Introduction............................................................................................................................................. 37
3.2 Transportation in Supply Chain.............................................................................................................. 37
3.3 Importance of Transportation . ............................................................................................................... 38
3.4 Role of Transport in Supply Chain......................................................................................................... 38
3.4.1 Transportation Modes in Supply Chain................................................................................. 39
3.5 Transportation Infrastructure and Policies ............................................................................................. 41
3.6 Design Options For Transportation Network ........................................................................................ 41

II/JNU OLE
3.7 Tailored Transportation........................................................................................................................... 45
3.8 Trade-off in Transportation Design......................................................................................................... 45
3.9 Routing and Scheduling in Transportation............................................................................................. 45
3.10 Making Transportation Decisions in Practice....................................................................................... 46
Summary...................................................................................................................................................... 47
References.................................................................................................................................................... 47
Recommended Reading.............................................................................................................................. 47
Self Assessment............................................................................................................................................ 48

Chapter IV................................................................................................................................................... 50
Sourcing and Pricing.................................................................................................................................. 50
Aim............................................................................................................................................................... 50
Objectives..................................................................................................................................................... 50
Learning outcome......................................................................................................................................... 50
4.1 Introduction............................................................................................................................................. 51
4.2 Sourcing ................................................................................................................................................. 51
4.3 In-house and Outsource ......................................................................................................................... 51
4.4 3PL and 4PL . ......................................................................................................................................... 53
4.5 Benefits of Effective Sourcing Decisions............................................................................................... 53
4.6 Supplier Scoring and Assessment........................................................................................................... 54
4.6.1 Scoring Suppliers.................................................................................................................... 54
4.6.2 Ranking Suppliers................................................................................................................... 54
4.7 Supplier Selection................................................................................................................................... 55
4.8 Design Collaboration ............................................................................................................................. 55
4.9 Procurement Process............................................................................................................................... 56
4.10 Sourcing Planning and Analysis........................................................................................................... 56
4.11 Pricing and Revenue Management for Multiple Customers................................................................. 56
4.12 Perishable Products and Seasonal Demand.......................................................................................... 58
Summary .................................................................................................................................................... 60
References.................................................................................................................................................... 60
Recommended Reading.............................................................................................................................. 60
Self Assessment............................................................................................................................................ 61

Chapter V..................................................................................................................................................... 63
Information Technology in the Supply Chain.......................................................................................... 63
Aim............................................................................................................................................................... 63
Objectives..................................................................................................................................................... 63
Learning outcome......................................................................................................................................... 63
5.1 Introduction............................................................................................................................................. 64
5.2 Supply Chain IT Framework.................................................................................................................. 65
5.3 Role of Information in Supply Chain...................................................................................................... 65
5.4 Customer Relationship Management (CRM)......................................................................................... 65
5.5 Internal Supply Chain Management ...................................................................................................... 67
5.6 Supplier Relationship Management........................................................................................................ 67
5.7 Transaction Management........................................................................................................................ 68
5.8 Enterprise Resource Planning (ERP)...................................................................................................... 68
5.9 E-commerce............................................................................................................................................ 69
5.10 Supply Chain Information Technology in Practice............................................................................... 70
Summary .................................................................................................................................................... 71
References.................................................................................................................................................... 71
Recommended Reading.............................................................................................................................. 71
Self Assessment............................................................................................................................................ 72

III/JNU OLE
Chapter VI................................................................................................................................................... 74
Coordination in a Supply Chain................................................................................................................ 74
Aim............................................................................................................................................................... 74
Objectives..................................................................................................................................................... 74
Learning outcome......................................................................................................................................... 74
6.1 Introduction............................................................................................................................................. 75
6.2 Lack of Supply Chain Coordination ...................................................................................................... 75
6.3 Bullwhip Effect....................................................................................................................................... 76
6.4 Managerial Levers.................................................................................................................................. 78
6.5 Building Strategic Partnerships and Trust.............................................................................................. 78
6.6 Continuous Replenishment Program (CRP) and Vendor Managed Inventory (VMI)............................ 78
6.7 Collaborative Planning, Forecasting and Replenishment (CPFR).......................................................... 80
Summary...................................................................................................................................................... 82
References.................................................................................................................................................... 82
Recommended Reading.............................................................................................................................. 82
Self Assessment............................................................................................................................................ 83

Chapter VII................................................................................................................................................. 85
Dimensions of Logistics.............................................................................................................................. 85
Aim............................................................................................................................................................... 85
Objectives..................................................................................................................................................... 85
Learning outcome......................................................................................................................................... 85
7.1 Introduction . .......................................................................................................................................... 86
7.2 Macro and Micro Dimension.................................................................................................................. 86
7.2.1 Macro Dimension................................................................................................................... 86
7.2.2 Micro Dimensions................................................................................................................... 87
7.3 Logistics Activities.................................................................................................................................. 89
7.4 Approach to Analysing Logistics Systems.............................................................................................. 90
7.5 Logistics and Systems Analysis.............................................................................................................. 93
7.6 Techniques of Logistics System Analysis............................................................................................... 94
7.7 Factors Affecting the Cost and Importance of Logistics........................................................................ 95
Summary...................................................................................................................................................... 98
References.................................................................................................................................................... 98
Recommended Reading.............................................................................................................................. 98
Self Assessment............................................................................................................................................ 99

Chapter VIII.............................................................................................................................................. 101

Demand Management and Customer Service........................................................................................ 101
Aim............................................................................................................................................................. 101
Objectives................................................................................................................................................... 101
Learning outcome....................................................................................................................................... 101
8.1 Introduction........................................................................................................................................... 102
8.2 Outbound to Customer Logistics Systems . ......................................................................................... 102
8.3 Supply and Demand Relationship......................................................................................................... 102
8.4 Graphical Representation of Supply and Demand Relationship........................................................... 103
8.5 Demand Management........................................................................................................................... 105
8.5.1 The Demand Management Process....................................................................................... 106
8.6 Demand Forecasting............................................................................................................................. 107
8.7 Demand Planning.................................................................................................................................. 108
8.8 Demand Forecasting Error.................................................................................................................... 108
8.9 CPFR..................................................................................................................................................... 108
8.10 Customer Service................................................................................................................................ 109
8.11 Cost of Stock-outs . .............................................................................................................................111
8.12 Channels of Distribution......................................................................................................................111
Summary.....................................................................................................................................................113
References...................................................................................................................................................113
Recommended Reading.............................................................................................................................113
Self Assessment...........................................................................................................................................114

IV/JNU OLE
List of Figures
Fig. 1.1 A conceptual model of a basic supply chain...................................................................................... 2
Fig. 1.2 A supply chain network..................................................................................................................... 3
Fig. 1.3 Key parts of supply chain ................................................................................................................. 3
Fig. 1.4 Flows in a supply chain .................................................................................................................... 4
Fig. 1.5 Supply chain management activities................................................................................................. 6
Fig. 1.6 Cycle view of supply chain .............................................................................................................. 8
Fig. 1.7 Push/pull view of supply chain ........................................................................................................ 9
Fig. 1.8 Linking competitive (business) and supply chain strategies........................................................... 10
Fig. 1.9 Supply chain drivers.........................................................................................................................11
Fig. 1.10 Elements of marketing mix............................................................................................................ 12
Fig. 1.11 Market space model....................................................................................................................... 13
Fig. 2.1 Relationship between number of facilities and logistics cost.......................................................... 20
Fig. 2.2 Manufacturer storage with direct shipping...................................................................................... 21
Fig. 2.3 Manufacturer storage with direct shipping and in-transit merge..................................................... 22
Fig. 2.4 Distributor storage with package carrier delivery........................................................................... 23
Fig. 2.5 Distributor storage with last mile delivery...................................................................................... 24
Fig. 2.6 Manufacturer or distributor storage with costumer pickup............................................................. 25
Fig. 2.7 Elements of e-business domain....................................................................................................... 26
Fig. 2.8 Areas of e-business.......................................................................................................................... 27
Fig. 2.9 Supply chain model......................................................................................................................... 32
Fig. 3.1 Flow of product along the supply chain.......................................................................................... 38
Fig. 3.2 Direct shipping network.................................................................................................................. 42
Fig. 3.3 Direct shipping network with milk runs.......................................................................................... 43
Fig. 3.4 Shipments via central distribution network..................................................................................... 44
Fig. 3.5 A tailored network........................................................................................................................... 44
Fig. 3.6 Savings matrix method.................................................................................................................... 46
Fig. 4.1 Pricing charges into supply chain.................................................................................................... 57
Fig. 4.2 The 4 “R” strategy of revenue management.................................................................................... 57
Fig. 4.3 Pegging in SCM.............................................................................................................................. 58
Fig. 4.4 Warehousing in SCM....................................................................................................................... 59
Fig. 5.1 Integrated supply chain model......................................................................................................... 64
Fig. 5.2 Customer relationship management................................................................................................ 66
Fig. 5.3 SCM goals: the seven rights of fulfilment....................................................................................... 67
Fig. 5.4 Internal supply chain ...................................................................................................................... 67
Fig. 5.5 E-commerce model . ....................................................................................................................... 70
Fig. 6.1 A typical supply chain...................................................................................................................... 75
Fig. 6.2 Increasing order variability up the supply chain............................................................................. 76
Fig. 6.3 CPFR model.................................................................................................................................... 80
Fig. 7.1 Logistics costs as a percentage of GDP........................................................................................... 87
Fig. 7.2 Push and pull systems in supply chain............................................................................................ 88
Fig. 7.3 Logistic activities............................................................................................................................. 90
Fig. 7.4 Inbound and outbound logistics....................................................................................................... 91
Fig. 7.5 Nodes and links in a logistics system.............................................................................................. 93
Fig. 7.6 A simple logistics channel............................................................................................................... 93
Fig. 7.7 Relationship between required inventory and order cycle length .................................................. 95
Fig. 7.8 Relationship of the cost of lost sales to inventory cost.................................................................... 96
Fig. 7.9 Relationship of product dollar value to various logistics costs....................................................... 97
Fig. 8.1 Supply and demand balance.......................................................................................................... 103
Fig. 8.2 Supply and demand equilibrium.................................................................................................... 104
Fig. 8.3 Shift in demand.............................................................................................................................. 105
Fig. 8.4 Demand management process....................................................................................................... 107
Fig. 8.5 Demand forecasting error.............................................................................................................. 108
Fig. 8.6 Collaborative planning, forecasting and replenishment process................................................... 109
Fig. 8.7 Customer service strategy...............................................................................................................110
Fig. 8.8 Channels of distribution.................................................................................................................111
Fig. 8.9 Distribution network.......................................................................................................................112

V/JNU OLE
List of Tables
Table 4.1 Scoring and assessment of suppliers............................................................................................. 55
Table 4.2 Categories of procurement ........................................................................................................... 56
Table 7.1 Analysis of total logistics cost with a change to higher cost mode of transport........................... 92
Table 7.2 Analysis of total logistics cost with a change to more warehouses.............................................. 92
Table 7.3 Static analysis of C & B chemical company (50,000 pounds of output)...................................... 94
Table 8.1 Demand fluctuations based on price and supply......................................................................... 105

VI/JNU OLE
Abbreviations
3PL - Third Party Logistics
4PL - Fourth Party Logistics
B2C - Business-to-Consumer
CPFR - Collaborative Planning, Forecasting and Replenishment
CRM - Customer Relationship Management
CRP - Continuous Replenishment Program
ERP - Enterprise Resource Planning
ICT - Information and Communications Technology
ISCM - Internal Supply Chain Management
IT - Information Technology
JIT - Just-in-time
PDA - Personal Digital Assistants
SC - Supply Chain
SCM - Suppliers Relationship Management
SCM - Supply Chain Management
SCOR - Supply Chain Operations Reference Model
UPS - Unit Parcel Service
VMI - Vendor Managed Inventory
WWW - World Wide Web

VII/JNU OLE
VIII/JNU OLE
Chapter I
Supply Chain Management

Aim
The aim of this chapter is to:

• define supply chain and supply chain management

• explain the key parts and flows of supply chain

• understand the need of supply chain management

• describe the supply chain drivers

Objectives
The objectives of this chapter are to:

• describe the supply chain concept

• explain the decision phases in supply chain management

• understand the marketing mix model

Learning outcome
At the end of this chapter, the students will be able to:

• state the barriers of supply chain management

• examine the strategies in supply chain management

• get an overview of supply chain management

1/JNU OLE
Supply Chain Management

1.1 Introduction
The global market faces a fierce competition today. The introduction of products with shorter life cycles and the
heightened expectations of customers have forced business enterprises to invest in, and focus attention on, their
supply chains. This, together with continuing advances in communications and transportation technologies (e.g.,
mobile communication, internet, and overnight delivery), has motivated the continuous evolution of the supply chain
and of the techniques to manage it effectively. Recently, the pressure of the competitive market and new information
technologies has affected the structures of the production systems, calling for:
• reduction of time to market
• higher flexibility of the systems
• drastic reduction of costs
• extended quality concept

1.2 Supply Chain

• A supply chain is a system of organisations, people, technology, activities, information and resources involved
in moving a product or service from supplier to customer.
• A supply chain is a network of retailers, distributors, transporters, storage facilities, and suppliers that participate
in the production, delivery and sale of a product to the consumer.
• These activities are associated with the flow and transformation of goods from the raw materials stage to the
end user, as well as the associated information and funds flows.
• Supply chain activities transform natural resources, raw materials and components into a finished product that
is delivered to the end customer.
• In simple terms, a supply chain is the link between a firm or business and its suppliers and customers.

Supplier Firm Customer

Fig. 1.1 A conceptual model of a basic supply chain

• The supply chain, which is also referred to as the logistics network, consists of suppliers, manufacturing centres,
warehouses, distribution centres, and retail outlets, as well as raw materials, work-in-process inventory, and
finished products that flow between the facilities.

2/JNU OLE
 Suppliers Manufacturers
Warehouses and
distribution centers
Customers

Manufacturing costs
Transportation costs
Material costs Transportation costs

Inventory costs

Fig. 1.2 A supply chain network

• A supply chain has three key parts:

‚‚ Supply which focuses on the raw materials supplied to manufacturing, including how, when, and from
what location.
‚‚ Manufacturing which focuses on converting these raw materials into finished products.
‚‚ Distribution which focuses on ensuring that the products reach the consumers through an organised network
of distributors, warehouses, and retailers.

Fig. 1.3 Key parts of supply chain

• A supply chain encompasses all activities in fulfilling customer demands and requests.
• In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual
value is recyclable.

3/JNU OLE
Supply Chain Management

• A supply chain strategy refers to how the supply chain should operate in order to compete in the market. The
strategy evaluates the benefits and costs relating to the operation. The supply chain strategy focuses on the actual
operations of the organisation and the supply chain that will be used to meet a specific goal.
• The supply chain integrates, coordinates and monitors the flow of materials, information, and funds.

Raw Material
Manufacturing Retailers End Customers
Suppliers

Information Flow

Material Flow

Fund Flow

Fig. 1.4 Flows in a supply chain

(Source: http://mdcegypt.com/Pages/Purchasing/Supply%20Chain/Introduction%20to%20Supply%20Chain%20
Management/Introduction%20to%20Supply%20Chain%20Management.asp)

1.3 Supply Chain Management

• Supply chain management (SCM) is the oversight of materials, information, and finances distributed from
supplier to consumer. The supply chain also includes all the necessary stops between the supplier and the
consumer. Supply chain management involves coordinating this flow of materials within a company and to the
end consumer.
• The Council of Supply Chain Management Professionals defines supply chain management as follows: “Supply
chain management encompasses the planning and management of all activities involved in sourcing and
procurement, conversion, and all logistics management activities”. Importantly, it also includes coordination
and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers,
and customers. In essence, supply chain management integrates supply and demand management within and
across companies.
• Supply chain management is an integrating function with primary responsibility for linking major business
functions and business processes within and across companies into a cohesive and high-performing business
model. It includes all of the logistics management activities noted above, as well as manufacturing operations,
and it drives coordination of processes and activities with and across marketing, sales, product design, and
finance and information technology.
• SCM is also called the art of management of providing the right product, at the right time, right place and at
the right cost to the customer.
• Supply chain management can be divided into three main flows:
‚‚ The Product flow includes moving goods from supplier to consumer, as well as dealing with customer
service needs.
‚‚ The Information flow includes order information and delivery status.
‚‚ The Financial flow includes payment schedules, credit terms, and additional arrangements.
• Supply chain management is a set of approaches utilised to efficiently integrate suppliers, manufacturers,
warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations,
and at the right time, in order to minimise system-wide costs while satisfying service level requirements.

4/JNU OLE
1.4 Objective of Supply Chain Management
• A supply chain is a global network of organisations that cooperate to improve the flows of material and information
between suppliers and customers at the lowest cost and the highest speed. The final objective of a supply chain
is customer satisfaction.
• The supply chain management takes into consideration every facility that has an impact on cost and plays a
role in making the product match to customer requirements: from supplier and manufacturing facilities through
warehouses and distribution centres to retailers and stores.
• The main purpose of the supply chain is to maximise overall value generated. Value is the difference between
what the cost supply chain incurs and the worth end product has to the customer. Value of the commercial supply
chain is correlated with its profitability generally known as supply chain surplus.
• For example, A customer purchase a personal computer from IBM at $2,000, which indicates the revenue supply
chain achieved. All the stages incur costs to make sure the efficient transfer of funds, information, storage of
the product, transportation to the final consumer etc. The difference between the supply chain cost and revenue
generated from personal computer represent the supply chain surplus or profitability.
• Supply chain surplus can be defined as the total profit shared by all the stages and intermediaries of a supply
chain. The greater the supply chain surplus the more successful is supply chain. But, Supply chain success is
measured by its overall surplus not by the profit at each stage.
• The supply chain management has to be efficient and cost-effective across the entire system; from transportation
and distribution to inventories of raw materials, work in process, and finished goods, are to be minimized. The
emphasis is not on simply to minimise transportation cost or reducing inventories but, rather, on taking a systems
approach to supply chain management.
• The objectives of supply chain management can be listed below:
‚‚ enhancing customer service
‚‚ expanding sales revenue
‚‚ reducing inventory cost
‚‚ improving on-time delivery
‚‚ reducing order to delivery cycle time
‚‚ reducing lead time
‚‚ reducing transportation cost
‚‚ reducing warehouse cost
‚‚ reducing supplier base
‚‚ expanding depth of distribution

1.5 Importance of Supply Chain Management

• The importance of supply chain management comes into picture if there is sharp focus on the loss due to
the absence of an effective supply chain strategy and / or the benefit due to an effective supply chain for any
firm.
• Basically, it refers that how good is the integration of supply chain that matters for any firm. The importance of
having a robust supply chain management can be depicted from the following example:
‚‚ Suppose, ABC is any company that manufactures the cycle chains for a cycle manufacturing company
XYZ. Another company PQR manufactures bits used in the cycle chain manufactured by ABC. Now, in
coming days, as per the market forecast, XYZ shall need 50,000 units of cycle chain, information that is
not available with ABC. Accordingly, PQR also does not know how many bits to produce in order to meet
ABC’s requirement. The result would be either both ABC and PQR hold high safety stock inventory or
lose business respectively with XYZ and ABC. Now, if in this example showing only three supply chain
partners, absence of a critical information among the partners, that is of production forecast at XYZ firm
results into either a higher inventory level or loss of future business.
• The importance of supply chain management is to:

5/JNU OLE
Supply Chain Management

‚‚ reduce inventories along the chain

‚‚ share better information among the partners
‚‚ plan in consultation rather than in isolation

1.6 Activities of Supply Chain Management

• There are three levels of activities of supply chain management that different parts of the company will focus
on:
‚‚ Strategic: At this level, strategic decisions concerning the whole organisation, such as the size and location
of manufacturing sites, partnerships with suppliers, products to be manufactured and sales markets are taken.
Such decisions have a long-lasting effect on the firm. This includes decisions regarding product design,
what to make internally and what to outsource, supplier selection, and strategic partnering and the flow of
material through the logistics network.
‚‚ Tactical: Tactical decisions focus on adopting measures that will produce cost benefits such as using
industry best practices, developing a purchasing strategy with favoured suppliers, working with logistics
companies to develop cost effect transportation and developing warehouse strategies to reduce the cost of
storing inventory. Such decisions are typically updated anywhere between once every quarter and once every
year. These include purchasing and production decisions, inventory policies, and transportation strategies,
including the frequency with which customers are visited.
‚‚ Operational: Decisions at this level affect how the products move along the supply chain. Operational
decisions involve making schedule changes to production, purchasing agreements with suppliers, taking
orders from customers and moving products in the warehouse. Such decisions refer to day-to-day decisions
such as scheduling, lead time quotations, routing, and truck loading.

Business Strategic Level

IS Strategy

Shared Understanding
IS Department Business
Department
- IS executives Operational
- IS team Level
- Business
executive
Communication

IS Users
Individual
Level

Fig. 1.5 Supply chain management activities

(Source: http://businessitalignment.wordpress.com/page/2/)

6/JNU OLE
1.7 Decision Phases in a Supply Chain
Successful supply chain management requires many decisions relating to the flow of information, product, and
funds. These decisions fall into three categories or phases, depending on the frequency of each decision and the
time frame over which a decision phase has an impact. The design, planning, and operation of a supply chain have
a strong impact on overall profitability and success.
i. Supply chain strategy or design
• During this phase, the supply chain is structured and configured.
• It is designed that, how resources will be allocated, and what processes each stage will perform.
• Strategic decisions made by companies include:
‚‚ location and capacities of production and warehouse facilities
‚‚ products to be manufactured or stored at various locations
‚‚ modes of transportation to be made available along different shipping legs
‚‚ type of information system to be utilized
• Supply chain design decisions are typically made for the long term (in years) and can be expensive to alter on
short notice. Consequently, when a company makes these decisions, they must take into account uncertainty in
anticipated market conditions over the next few years.

ii. Supply chain planning

• During this phase, the time frame considered is a quarter to a year. It starts with a forecast of demand in the
coming year.
• As a result, the supply chain’s configuration determined in the strategic phase is fixed. The configuration
establishes constraints within which planning must be done. Planning establishes parameters within which a
supply chain will function over a specified period of time. Companies start the planning phase with a forecast
for the coming year of demand in different markets.
• Planning decisions include those regarding markets to which a given production facility will supply and target
production quantities at different locations.
• The companies must include uncertainty in demand, exchange rates, and competition over this time horizon in
their decisions.
• Given a shorter time horizon and better forecasts than the design phase, companies in the planning phase
try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimise
performance.
• As a result, companies define a set of operating policies that govern short-term operations.
• Following are the planning decisions undertaken in supply chain:
‚‚ which markets will be supplied from which locations
‚‚ planned buildup of inventories
‚‚ subcontracting, backup locations
‚‚ inventory policies
‚‚ timing and size of market promotions

iii. Supply chain operation

• The time horizon is weekly or daily, and during this phase companies make decisions regarding individual
customer orders.
• At the operational level, supply chain configuration is considered fixed and planning policies are already
defined.
• The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During
this phase, the following activities are undertaken:
‚‚ firms allocate inventory or production to individual orders

7/JNU OLE
Supply Chain Management

‚‚ set a date that an order is to be filled

‚‚ generate pick lists at a warehouse
‚‚ allocate an order to a particular shipping mode and shipment
‚‚ set delivery schedules of trucks
‚‚ place replenishment orders
• There is less uncertainty about demand information because operational decisions are being made in the short
term horizon (minutes, hours, or days).
• The goal during the operation phase is to exploit the reduction of uncertainty and optimise performance.
• The main aim here is to implement the operating policies as effectively as possible.

1.8 Process View of Supply Chain

The process view of supply chain can be categorised as:
• Cycle view: In this, processes in a supply chain are divided into a series of cycles, each performed at the interfaces
between two successive supply chain stages.

Customer

Customer Order Cycle

Retailer
Replenishement Cycle

Distributor

Manufacturing Cycle

Manucacturer

Procurement Cycle
Supplier

Fig. 1.6 Cycle view of supply chain

(Source: http://iem.csu.edu.tw/member/huangck/images/%E4%BE%9B%E6%87%89%E9%8F%88%E7%AE%
A1%E7%90%86/Ech01.pdf)

Each cycle occurs at the interface between two successive stages:

‚‚ Customer order cycle (customer-retailer)
‚‚ Replenishment cycle (retailer-distributor)
‚‚ Manufacturing cycle (distributor-manufacturer)
‚‚ Procurement cycle (manufacturer-supplier)
Cycle view clearly defines processes involved and the owners of each process specify the roles and responsibilities
of each member and the desired outcome of each process.
• Push/pull view: In this, processes in a supply chain are divided into two categories depending on whether they
are executed in response to a customer order (pull) or in expectation of a customer order (push).

8/JNU OLE
 Procurement Customer Order
Manufacturing and Cycles
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
Fig. 1.7 Push/pull view of supply chain

• The flows in supply chains helps in:

‚‚ Close connection between design and management of supply chain flows (product, information, and cash)
and supply chain success.
‚‚ Playing a significant role in the success or failure of a firm.

1.9 Linking Competitive (Business) and Supply Chain Strategies

• The competitive strategy defines the set of customer needs which a firm seeks to satisfy through its products
and services. It includes low cost, rapid response, product differentiation etc.
• Supply chain strategy determines the nature of material procurement, transportation of materials, and manufacture
of product or creation of service, distribution of product.
• Consistency and support between supply chain strategy, competitive strategy, and other functional strategies
is important.

9/JNU OLE
Supply Chain Management

Competitive (Business) Strategy

New Product Marketing

Strategy Supply Chain Strategy
Strategy

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

Fig. 1.8 Linking competitive (business) and supply chain strategies
(Source: http://www.clt.astate.edu/asyamil/SCM_Chopra/chopra3_ppt_ch02.ppt)

1.10 Supply Chain Drivers

Supply chain drivers determine the supply chain performance. For each driver, managers must make tradeoffs
between efficiency (cost) and responsiveness. The drivers of supply chain include:
• Inventory: It consists of all raw materials; work in process, and finished goods within a supply chain. Inventory
is maintained in the supply chain because of mismatches between supply and demand. Increasing inventory
gives higher responsiveness but results in higher inventory carrying cost.
• Transportation: It involves moving inventory from one point in the supply chain to another point. A number
of decisions have to be taken in designing a supply chain regarding transportation. The six basic modes of
transportation are:
 air
 truck (road)
 rail
 ship
 pipeline
 electronic transportation (the newest mode for music, documents etc)
• Facilities: A facility is a place where inventory is stored, manufactured or assembled. Hence, facilities can be
categorised into production facilities and storage facilities. The facilities related decisions involve location,
capacity, manufacturing methodology or technology and warehousing methodology.
• Information: It consists of data and results of analysis regarding inventory, transportation, facilities, customer
orders, customers, and funds. Good information drives good decisions.

10/JNU OLE
 How to achieve
Efficiency Responsiveness

Supply chain structure

Inventory Transportation Facilities Information

Drivers
Fig. 1.9 Supply chain drivers
(Source: http://www.clt.astate.edu/asyamil/SCM_Chopra/chopra3_ppt_ch02.ppt)

1.11 Barriers of Supply Chain Management

The obstacles of supply chain management include:
‚‚ lack of top management support
‚‚ non-aligned strategic and operating philosophies
‚‚ inability or unwillingness to share information
‚‚ lack of trust among supply chain members
‚‚ unwillingness to share risks and rewards
‚‚ inflexible organisational systems and processes
‚‚ cross-functional conflicts
‚‚ inconsistent or inadequate performance measures
‚‚ resistance to change
‚‚ lack of training for new mindsets and skills

1.12 Scope of Supply Chain Activities

The scope of supply chain activities includes:
‚‚ sourcing and procurement
‚‚ production scheduling and manufacturing
‚‚ order processing
‚‚ inventory management
‚‚ warehousing
‚‚ customer service
‚‚ distribution
‚‚ reverse logistics

1.13 Marketing Mix Model

‚‚ Marketing managers and strategists have used the ‘Four P’s’ model of marketing mix to define their business
strategy for product specification, delivery and promotion.
‚‚ The term “marketing mix” became popular after Neil H. Borden published his 1964 article, The Concept
of the Marketing Mix. Culliton described the marketing manager as a “mixer of ingredients”. McCarthy

11/JNU OLE
Supply Chain Management

proposed a Four P classification in 1960.

‚‚ These four P’s are the parameters that the marketing manager can control, subject to the internal and external
constraints of the marketing environment. The goal is to make decisions in the target market in order to
generate a positive response.
‚‚ Any organisation, before introducing its products or services into the market; conducts a market survey.
The sequence of all ‘P’s as above is very much important in every stage of product life cycle. These four
most important ‘P’s of marketing mix are generally accepted to be:
i. Price (the amount a customer pays for the product)
ii. Product (specification and branding)
iii. Promotion (all of the communications that a marketer may use in the marketplace, advertising,
public relations, personal selling and sales promotion.)
iv. Place (the location where a product can be purchased, distribution channel)

Product Price

target
market

Place Promotion

Marketing Mix
Fig. 1.10 Elements of marketing mix
(Source: http://www.designersplus.co.uk/unit1/elements_of_the_e_business_domain/level3.html)

‚‚ The Marketspace Model (de Meyer et al) is a useful model that identifies three key features of e-business
that are enabled through technology, as an extension of the traditional ‘4 P’s’ marketing model. Customer
relationship is rightly placed at the centre, because the customer is uniquely identified. The on-line nature
of the internet, relationships between organisations and customers are becoming more interactive.
‚‚ Interactivity is the two-way exchange of information and ideas with the customer through an on-line
interface, which enhances the richness of customer relationships and gives rise to new paradigms of product
design and customer service, such as internet forums.

12/JNU OLE
 Product Price

Customer
Internet www

Interactivity Connectivity
Relationships

Promotion Placement

Fig. 1.11 Market space model

13/JNU OLE
Supply Chain Management

Summary
• The introduction of products with shorter life cycles and the heightened expectations of customers have forced
business enterprises to invest in, and focus attention on, their supply chains.
• A supply chain is a network of retailers, distributors, transporters, storage facilities, and suppliers that participate
in the production, delivery and sale of a product to the consumer.
• A supply chain strategy refers to how the supply chain should operate in order to compete in the market. The
strategy evaluates the benefits and costs relating to the operation. The supply chain strategy focuses on the actual
operations of the organisation and the supply chain that will be used to meet a specific goal.
• The supply chain integrates, coordinates and monitors the flow of materials, information, and funds.
• SCM is also called the art of management of providing the right product, at the right time, right place and at
the right cost to the customer.
• The supply chain management takes into consideration every facility that has an impact on cost and plays a
role in making the product match to customer requirements: from supplier and manufacturing facilities through
warehouses and distribution centres to retailers and stores.
• Successful supply chain management requires many decisions relating to the flow of information, product, and
funds. These decisions fall into three categories or phases, depending on the frequency of each decision and the
time frame over which a decision phase has an impact. The design, planning, and operation of a supply chain
have a strong impact on overall profitability and success.
• Planning decisions include those regarding markets to which a given production facility will supply and target
production quantities at different locations.
• The competitive strategy defines the set of customer needs which a firm seeks to satisfy through its products
and services. It includes low cost, rapid response, product differentiation etc.
• Marketing managers and strategists have used the ‘Four P’s’ model of marketing mix to define their business
strategy for product specification, delivery and promotion.
• The Marketspace Model (de Meyer et al) is a useful model that identifies three key features of e-business that
are enabled through technology, as an extension of the traditional ‘4 P’s’ marketing model.

References
• Objectives of supply chain management [Online]. Available at: <http://wiki.answers.com/Q/What_are_
objectives_of_supply_chain_management#ixzz1Fyi6LwK4>. [Accessed 14 March 2011].
• The objective of a supply chain [Online]. Available at: < http://mba-lectures.com/supply-chain/1113/the-objective-
of-a-supply-chain.html>. [Accessed 13 March 2011].
• Importance of Supply Chain Management - SCM, a set of critically important functions [Online]. Available at:
<http://www.supplychainmanagement.in/scm/importance-of-supply-chain.htm>. [Accessed 13 March 2011].
• Decision Phases in a Supply Chain [Online]. Available at: <http://www.sbaer.uca.edu/publications/supply_
chain_management/pdf/03.pdf>. [Accessed 14 March 2011].
• Creaney, N., 2008. Legal Issues for IT Professionals [Online]. Available at: <http://knol.google.com/k/n-/-
/1hzaxtdr9c09g/7>.[Accessed 13 March 2011].

Recommended Reading
• Mentzer J. T., 2001. Supply chain management, Sage Publications, 2nd ed., p.512.
• Chopra, S., & Meindl P., 2003. Supply Chain Management: Strategy, Planning, and Operations, Prentice Hall,
2nd ed., p.592.
• Hugos M. H., 2006. Essentials of supply chain management: Essentials (John Wiley) Series, John Wiley and
Sons, 2nd ed., p.290.

14/JNU OLE
Self Assessment

1. A supply chain has _______ key parts.

a. two
b. three
c. four
d. five

2. _________ focuses on converting these raw materials into finished products.

a. Manufacturing
b. Distribution
c. Production
d. Supply chain

3. Which flow includes moving goods from supplier to consumer, as well as dealing with customer service
needs?
a. Product flow
b. Information flow
c. Financial flow
d. Materials flow

4. What is the term given to the difference between what the cost supply chain incurs and the worth end product
has to the customer?
a. Lead time
b. Sales revenue
c. Value
d. Supplier-base

5. Which decisions focus on adopting measures that will produce cost benefits such as using industry best
practices?
a. Tactical decisions
b. Strategic decisions
c. Operational decisions
d. Supply chain design decisions

6. Supply chain design decisions are typically made for _______.

a. months
b. years
c. days
d. weeks

15/JNU OLE
Supply Chain Management

7. Which of the following statements is false?

a. Strategic decisions made by companies include location and capacities of production and warehouse
facilities.
b. Operational decisions involve making schedule changes to production.
c. Tactical decisions focus on adopting measures that will produce cost benefits such as using industry best
practices and developing a purchasing strategy with favoured suppliers.
d. Tactical decisions affect how the products move along the supply chain.

8. Which of the following statements is false?

a. Cycle view clearly defines processes involved and the owners of each process specify the roles and
responsibilities of each member and the desired outcome of each process.
b. The competitive strategy defines the set of customer needs which a firm seeks to satisfy through its products
and services.
c. Increasing inventory gives lower responsiveness but results in higher inventory carrying cost.
d. Supply chain drivers determine the supply chain performance.

9. There are ______ P’s’ in the model of marketing mix used by marketing managers and strategists.
a. five
b. two
c. four
d. three

10. ________is the two-way exchange of information and ideas with the customer through an on-line interface.
a. Interactivity
b. Customer relationship
c. Promotion
d. Internet

16/JNU OLE
Chapter II
Designing the Supply Chain Network

Aim
The aim of this chapter is to:

• define supply chain distribution network

• explain the factors influencing distribution in supply chain

• understand the role of distribution in supply chain management

• describe the concept of e-business

Objectives
The objectives of this chapter are to:

• describe the impact of e-business in supply chain

• explain the network design in the supply chain

• understand the supply chain model

Learning outcome
At the end of this chapter, the students will be able to:

• analyse the advantages and disadvantages of e-business

• examine the role of network in supply chain

• summarise the concept supply chain network design

17/JNU OLE
Supply Chain Management

2.1 Introduction
The supply chain network consists of suppliers, manufacturing centres, warehouses, distribution centres, and retail
outlets, as well as raw materials, work-in-process inventory, and finished products that flow between the facilities.
It is the collection of physical locations, transportation vehicles and supporting systems through which the products
and services the firm markets are managed and ultimately delivered. All organisations have or can purchase the
components to build a supply chain network.
Physical locations included in a supply chain network can be manufacturing plants, storage warehouses, major
distribution centres, ports, etc. Transportation modes that operate within a supply chain network can include the
many different types of trucks, trains, container ships or cargo planes. The many systems which can be utilised to
manage and improve a supply chain network include order management systems, warehouse management system,
transportation management systems, strategic logistics modelling, inventory management systems, replenishment
systems, supply chain visibility, optimisation tools and more. Emerging technologies and standards are now making
it possible to automate these supply chain networks in a real time mode making them more efficient than the simple
traditional supply chain.

2.2 Role of Distribution Network

• Distribution is the steps taken to move and store a product from the production stage to the customer stage in
a supply chain. Distribution directly affects cost and the customer experience and therefore drives profitability.
There is a system of intermediaries between the producer of goods and/or services and the final users. A strong
and efficient distribution network is one of the most important assets a manufacturer can possess.
• The distribution is one of the four elements of the marketing mix. The other three parts of the marketing mix
are product, pricing, and promotion.
• Distribution is a key driver of the overall profitability of a company because it directly impacts both the supply
chain costs and customer experience.
• Good distribution system serves the effectiveness of realising marketing strategy. This strategy is aimed at
reaching certain levels of customer service.
• Distribution process involves each intermediary passing the product down the chain to the next organisation,
before it finally reaches the consumer or end-user. This process is known as the distribution chain or the channel.
Each of the elements in these chains will have their own specific needs, which the producer must take into
account, along with those of the all-important end-user.
• A number of alternate channels of distribution may be available:
‚‚ Distributor, who sells to retailers
‚‚ Retailer (dealer), who sells to end customers
‚‚ Advertisement typically used for consumption goods
• Distribution channels may not be restricted to physical products from producer to consumer in certain sectors.
Both direct and indirect channels may be used. Hotels, for example, may sell their services directly or through
travel agents, tour operators, airlines, tourist boards, centralised reservation systems, etc.
• There has been some sort of innovations in the distribution of services. For example, there has been an increase
in franchising and in rental services. There has also been some evidence of service integration, with services
linking together, particularly in the travel and tourism sectors. For example, links now exist between airlines,
hotels and car rental services.
• Supply chain distribution often introduces middlemen into the economic market.
• Historically, supply chains were primarily found in the manufacturing and production industries. These
companies transform raw materials such as timber, minerals, steel, and fabric into valuable goods ready for use
by consumers.
• Manufacturing and production companies may not have resources available for delivering products into retail
stores where consumers can safely shop and purchase items, so they depend upon supply chain distribution to
complete the process.
• There is an increasing number of complicated supply chains. So, the distribution network design plays a key

18/JNU OLE
 role in controlling the cost of doing business.
• The distribution network design involves:
‚‚ locating production plants and distribution warehouses
‚‚ determining the best strategy for distributing the product from the plants to the warehouses and from the
warehouses to the customers
• The aim is to select the optimum numbers, locations and capacities of plants and warehouses to open so that
all customer demand is satisfied at minimum total costs of the distribution network (including transportation
and production costs).
• Since, controlling of the cost of doing business is an important factor; it can put supply chain network optimisation
goals ahead of competitors. The choice of distribution network can achieve supply chain objectives from low
cost to high responsiveness.

2.3 Factors Influencing Distribution Network Design

• At the highest level, performance of a distribution network should be evaluated along two dimensions:
‚‚ customer needs that are met (influence the company’s revenues)
‚‚ cost of meeting customer needs (decide the profitability of the delivery network)
• Elements of customer service influenced by network structure are:
‚‚ Response time: the time between when a customer places an order and receives delivery.
‚‚ Product variety: the number of different products/configurations that a customer desires from the distribution
network.
‚‚ Product availability: the probability of having a product in stock when a customer order arrives.
‚‚ Customer experience: includes the ease with which the customer can place and receive their order.
‚‚ Order visibility: the ability of the customer to track their order from placement to delivery.
‚‚ Returnability: the ease with which a customer can return unsatisfactory merchandise and the ability of
the network to handle such returns.
• Generally, a customer always wants the highest level of performance along with the above dimensions. However,
in practice, this is not always the case. For example, customers ordering a book at Amazon.com are willing to
wait longer than those that drive to a nearby store to get the same book. On the other hand, customers can find
a far larger variety of books at Amazon compared to the nearby store.
• There can be customers who can tolerate a large response time. The firms target these customers and require
few locations that may be far from the customer. They focus on increasing the capacity of each location. On
the other hand, firms that target customers who value short response times need to locate close to them. Such
firms must have many facilities, with each location having a low capacity. Thus, a decrease in the response
time, which the customers desire, increases the number of facilities required in the networks. For example, ABC
provides its customers with books on the same day but requires about 400 stores to achieve this goal for most
of the country. Amazon, on the other hand, takes about a week to deliver a book to its customers, but only uses
about 5 locations to store its books.

19/JNU OLE
Supply Chain Management

Total Costs

Facilities
Inventory
Transportation

Number of Facilities
Fig. 2.1 Relationship between number of facilities and logistics cost

• Changing the distribution network design affects the following supply chain costs:
‚‚ inventories
‚‚ transportation
‚‚ facilities and handling
‚‚ information
• As the number of facilities in a supply chain increases, the inventory and resulting inventory costs also increase
as shown in the above figure. As long as inbound transportation economies of scale are maintained, increasing
the number of facilities decreases total transportation cost.
• A distribution network with more than one warehouse allows reduction of transportation cost relative to a network
with a single warehouse. Facility costs decrease as the number of facilities is reduced, because a consolidation of
facilities allows a firm to exploit economies of scale. Total logistics costs are the sum of inventory, transportation,
and facility costs for a supply chain network.
• Distribution network design options must therefore be compared according to their impact on customer service
and the cost to provide this level of service.

2.4 Design Options for a Distribution Network

Distribution network design options must be compared according to their impact on customer service and the cost
to provide this level of service. There are two key decisions while designing a distribution network:
• Will product be delivered to the customer location or picked up from a predetermined site?
• Will product flow through an intermediate location?
The distribution networks have their relative strengths and weaknesses. Based on the choices for the two decisions,
there are five distinct distribution network designs that are classified as follows:
• Manufacturer storage with direct shipping (Drop shipping)
‚‚ The product is shipped directly from the manufacturer to the end customer, bypassing the retailer (who takes
the order and initiates the delivery request). All inventories are stored at the manufacturer. Information
flows from the customer, via the retailer, to the manufacturer, while product is shipped directly from the
manufacturer to customers.
‚‚ The biggest advantage of drop shipping is the ability to centralise inventories at the manufacturer. A

20/JNU OLE
 manufacturer can aggregate demand and provide a high level of product availability with lower levels of
inventory than individual retailers.
‚‚ The benefits from such sort of centralisation are highest for high value, low volume items with unpredictable
demand and vice verse. Thus, drop shipping would not offer a significant inventory advantage to an online
grocer selling a staple item like detergent.
‚‚ Transportation costs are high with drop shipping because the average outbound distance to the end consumer
is large and package carriers must be used to ship the product that have high shipping costs per unit compared
to truckload carriers.
‚‚ With drop shipping, a customer order with items from several manufacturers will involve multiple shipments
to the customer. This loss in aggregation in outbound transportation further increases cost.
‚‚ Supply chains save on the fixed cost of storage facilities when using drop shipping because all inventories
are centralised at the manufacturer.
‚‚ There can be some savings of handling costs too because the transfer from manufacturer to retailer no longer
occurs. Handling costs can be significantly reduced if the manufacturer has the capability to ship orders
directly from the production line.
‚‚ A good information infrastructure is needed so that the retailer can provide product availability information
to the customer even though the inventory is located at the manufacturer.
‚‚ The information infrastructure requirement is simpler for direct sellers like Dell because two stages (retailer
and manufacturer) do not need to be integrated.
‚‚ Response times tend to be large when drop shipping is used because the order has to be transmitted from the
retailer to the manufacturer and shipping distances are on average longer from the manufacturer’s centralised
site. Also, the response time need not be identical for every manufacturer that is part of a customer order.
‚‚ Manufacturer storage with drop shipping allows a high level of product variety to be made available to the
customer.
‚‚ Drop shipping provides a good customer experience in the form of delivery to the customer location. The
experience, however, suffers when a single order containing products from several manufacturers is delivered
in partial shipments.

Manufacturer

Retailer

Customers

Product Flow
Information Flow
Fig. 2.2 Manufacturer storage with direct shipping
(Source: http://www1.ximb.ac.in/users/fac/visiting/vfac.nsf/23e5e39594c064ee852564ae004fa010/89b99a7daf20
080665257086002ecac4/$FILE/Facility%20Decisions%20and%20Network%20Design.ppt)

21/JNU OLE
Supply Chain Management

• Manufacturer storage with direct shipping and in-transit merge

‚‚ Unlike drop shipping where each product in the order is sent directly from each manufacturer to the end
customer, in-transit merge combines pieces of the order coming from different locations so that the customer
gets a single delivery. Information and product flows for the in-transit merge network. For example, when
a customer orders a PC from ABC along with a XYZ monitor, the package carrier picks up the PC at the
ABC factory, the monitor at the XYZ factory and merges the two together at a hub before making a single
delivery to the customer.
‚‚ The ability to aggregate inventories and postpone product customisation is a significant advantage of in-
transit merge.
‚‚ As from above example, in-transit merge allows ABC and XYZ to aggregate all their inventories at the
factory. This approach will have the greatest benefits for products with high value whose demand is hard
to estimate.
‚‚ The transportation costs are lower than drop shipping because of the merge that takes place at the carrier
hub prior to delivery to the customer.
‚‚ An order with products from many manufacturers thus requires only one delivery to the customer. Fewer
deliveries save transportation cost and simplify receiving process.
‚‚ Overall supply chain facility and handling costs are somewhat higher than drop shipping.
‚‚ Sophisticated information infrastructure is needed to allow the in-transit merge.
‚‚ The information, operations at the retailer, manufacturers, and the carrier must be coordinated.
‚‚ Response times may be higher because of the need to perform the merge.
‚‚ Customer experience should be better than drop shipping because the customer receives only one delivery
for their order instead of many partial shipments.
‚‚ The main advantage of in-transit merge over drop shipping is the lower transportation cost and improved
customer experience.
‚‚ The major disadvantage is the additional effort during the merge.

Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow

Fig. 2.3 Manufacturer storage with direct shipping and in-transit merge
(Source: http://www1.ximb.ac.in/users/fac/visiting/vfac.nsf/23e5e39594c064ee852564ae004fa010/89b99a7daf20
080665257086002ecac4/$FILE/Facility%20Decisions%20and%20Network%20Design.ppt)

22/JNU OLE
• Distributor storage with package carrier delivery
‚‚ Under this option, inventory is not held by manufacturers at the factories but is held by distributors or
retailers in intermediate warehouses and package carriers are used to transport products from the intermediate
location to the final customer. Information and product flows when using distributor storage with delivery
by a package carrier.
‚‚ Transportation costs are somewhat lower for distributor storage compared to manufacturer storage because an
economic mode of transportation (e.g. truckload) can be employed for inbound shipments to the warehouse,
which is closer to the customer.
‚‚ Unlike manufacturer storage where multiple shipments may need to go out for a single customer order
with multiple items, distributor storage allows outbound orders to the customer to be bundled into a single
shipment further reducing transportation cost.
‚‚ For faster moving items, transportation savings from distributor storage relative to manufacturer storage
increase.
‚‚ Compared to manufacturer storage, facility costs are somewhat higher with distributor storage because of
a lack of aggregation. From a facility cost perspective, distributor storage is not good for extremely slow
moving items.
‚‚ The information infrastructure needed with distributor storage is significantly less complex than the
manufacturer storage.
‚‚ Response time with distributor storage is better than with manufacturer storage because distributor warehouses
are closer to customers and the entire order is aggregated at the warehouse on shipping.
‚‚ Distributor storage can handle somewhat lower variety than manufacturer storage.

Factories

Warehouse Storage by
Distributor / Retailer

Customers

Product Flow
Information Flow

Fig. 2.4 Distributor storage with package carrier delivery

(Source: http://www1.ximb.ac.in/users/fac/visiting/vfac.nsf/23e5e39594c064ee852564ae004fa010/89b99a7daf20
080665257086002ecac4/$FILE/Facility%20Decisions%20and%20Network%20Design.ppt)

• Distributor storage with last mile delivery

‚‚ Last mile delivery refers to the distributor / retailer delivering the product to the customer’s home instead
of using a package carrier. Peapod and Albertson’s have used last mile delivery in the grocery industry.
Unlike package carrier delivery, last mile delivery requires the distributor warehouse to be much closer to
the customer, increasing the number of warehouses required.

23/JNU OLE
Supply Chain Management

‚‚ Distributor storage with last mile delivery requires higher levels of inventory because it has a lower level
of aggregation.
‚‚ Transportation costs are highest using last mile delivery. This is because package carriers aggregate delivery
across many retailers and are able to obtain better economies of scale than available to a distributor or
retailer attempting last mile delivery.
‚‚ Last mile delivery is cheaper in dense cities.
‚‚ Transportation costs are reasonable for bulky products where the customer is willing to pay for home
delivery. For example, home delivery for water and large bags of rice has proved quite successful in China,
where the high population density has helped decrease delivery costs.
‚‚ Facility and processing costs are very high using this option given the large number of facilities required. For
example, a grocery store doing last mile delivery performs all the processing until the product is delivered
to the customer’s home unlike a supermarket where there is much more customer participation.
‚‚ The information infrastructure with last mile delivery requires the additional capability of scheduling
deliveries.
‚‚ Response times are faster than the use of package carriers.
‚‚ Product variety is generally lower than distributor storage with carrier delivery.

Factories

Distributor / Retailer
Warehouse

Customers

Product Flow
Information Flow
Fig. 2.5 Distributor storage with last mile delivery
(Source: http://www1.ximb.ac.in/users/fac/visiting/vfac.nsf/23e5e39594c064ee852564ae004fa010/89b99a7daf20
080665257086002ecac4/$FILE/Facility%20Decisions%20and%20Network%20Design.ppt)

• Manufacturer or distributor storage with costumer pickup

‚‚ In this approach, inventory is stored at the manufacturer or distributor warehouse but customers place their
orders online or on the phone and then come to designate pickup points to collect their orders. Orders are
shipped from the storage site to the pickup points as needed.
‚‚ Inventory costs using this approach can be kept low with either manufacturer or distributor storage to
exploit aggregation.
‚‚ Transportation cost is lower than any solution using package carriers because significant aggregation is
possible when delivering orders to a pickup site.

24/JNU OLE
 ‚‚ Facility costs are high if new pickup sites have to be built.
‚‚ A significant information infrastructure is needed. A good coordination is needed between the retailer, the
storage location, and the pickup location.
‚‚ The main advantage of a network with consumer pickup sites is that it can lower delivery cost, thus expanding
the set of products sold as well as customers served online.
‚‚ The major hurdle is the increased handling cost at the pickup site.

Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow

Fig. 2.6 Manufacturer or distributor storage with costumer pickup

(Source: http://www1.ximb.ac.in/users/fac/visiting/vfac.nsf/23e5e39594c064ee852564ae004fa010/89b99a7daf20
080665257086002ecac4/$FILE/Facility%20Decisions%20and%20Network%20Design.ppt)

2.5 E-business and its Impact

• Electronic business, commonly referred as eBusiness or e-business, or an internet business, may be defined as
the application of information and communication technologies in support of all the activities of business.
• E-business is a term used to describe businesses that run on the internet, or utilise internet technologies to
improve the profitability of a business.
• The entire process of setting up a website, helping the prospective customers navigate through the website,
showing them the available products, offering discounts and vouchers and doing everything possible to encourage
the prospective clients and converting them into customers, comes under the area of e-business.
• By selling products and services online, an e-business is able to reach a wider consumer base. This function
of e-business is referred to as e-commerce, and the terms are occasionally used interchangeably. E-business is
a vast term encompassing the various business processes that aim to integrate the vendors or traders with the
consumers and suppliers using the internet.
• E-commerce, on the other hand, is a subset of e-business and refers to online transactions that can be accounted
for in monetary terms. For instance, accepting credit card payment for products sold to consumers or making
payments for shopping online are examples of e-commerce. Thus, simply saying, e-commerce refers to the last

25/JNU OLE
Supply Chain Management

stage of e-business which involves collecting payments for the goods sold by the business firm.
• Wherein, commerce constitutes the exchange of products and services between businesses and groups and
individuals, electronic commerce focuses on the use of information and communication technologies to enable
the external activities and relationships of the business with individuals, groups and other businesses.
• An e-business may also use the internet to acquire wholesale products or supplies for in-house production. This
facet of e-business is sometimes referred to as e-procurement.
• Using email and private websites as a method for dispensing internal memos and white sheets is another use
of the internet by e-business.
• A central server or email list can serve as an efficient method for distributing necessary information. The trend
continues with new technologies, such as internet-enabled cell phones and laptops.
• It can be used for buying and selling of products. The electronic chat is widely in use nowadays which saves
time. The technical support operators can remotely access a customer’s computer and assist them in correcting
a problem.
• Organisations are finding that their ability to respond to unpredicted changes in the market is becoming a key
factor in survival. The ability to adjust e-business processes to customer references (flexibility) has become a
necessity for online systems.

E-Business Environment

Electronic Business

Electronic Commerce

B2B B2C C2C

Community
Supply Customer
Supplier Organisation Customer
Chain Chain
Chain

Intr-Business

Infrastructure

Social

Technical

Fig. 2.7 Elements of e-business domain

(Source: http://www.designersplus.co.uk/unit1/elements_of_the_e_business_domain/level3.html)

26/JNU OLE
B2B = Business to Business
B2C = Business to Consumer
C2C = Consumer to Consumer

Customer Management

Digitised Products Store Online Store Setup

Global Trading Marketing

E-BUSINESS

Order Management Drop Shipping

Pricing Manipulations Payment Options

Invoicing and Packaging Shipping

Fig. 2.8 Areas of e-business

(Source: http://www.ipsrsolutions.com/ebusiness.htm)

2.5.1 Advantages of E-business

The advantages of e-business are described below:
• Worldwide presence
‚‚ This is the biggest advantage of conducting business online. A firm engaging in e-business can have a
nationwide or a worldwide presence.
‚‚ There are many examples which had the advantage by the use of e-business. IBM was one of the first
companies to use the term e-business for servicing customers and collaborating with business partners from
all over the world. Dell Inc. is another success story which too had a blooming business selling personal
computers throughout the United States, only via telephone and the internet till the year 2007. Hence,
worldwide presence is ensured if companies rethink their business in terms of the Internet.
• Cost effective marketing and promotions
‚‚ Nowadays, the web is used to market products guarantees worldwide.
‚‚ Advertising techniques like pay per click advertising ensure that the advertiser only pays for the advertisements
that are actually viewed.

27/JNU OLE
Supply Chain Management

‚‚ Affiliate marketing is a sort of marketing where customers are directed to a business portal because of the
efforts of the affiliate who in turn receive a compensation for their efforts meeting with success. Affiliate
marketing has helped both the business and the affiliates. The cost effective online advertising strategies
are used in e-business.
• Developing a competitive strategy
‚‚ In order to ensure a competitive advantage, an effective strategy should be there to maintain the advantage
and earn profits.
‚‚ It can be a cost strategy or a differentiation strategy.
‚‚ For example, till the year 2007, Dell Inc. was selling computers only via the internet and the phone. It
adopted a differentiation strategy by selling its computers online and customizing its laptops to suit the
requirements of the clients. Thus, e-business resulted in Dell Inc. managing to capture a vast market using
the differentiation strategy.
• Better customer service
‚‚ Customer services help in encouraging the customer to know more about the product or service.
‚‚ For example, on visiting a website, the customer is greeted by a pop-up chat window. Moreover, payments
can be made online; home-delivery of products can be done.

2.5.2 Disadvantages of E-business

The disadvantages of e-business are described below:
• Sectoral limitations
‚‚ Lack of growth in some of the sectors can be on the account of product or sector limitations.
‚‚ For instance, food sector has not experienced growth of sales and revenue generation because of a number of
practical reasons like food products being perishable items. Also, consumers do not look for food products
on the internet since they prefer going to the supermarket to buy the necessary items as and when the need
arises.
• Costly e-business solutions for optimisation
‚‚ Substantial resources are required for redefining product lines in order to sell online.
‚‚ Upgrading the computer systems, training personnel, and updating websites require substantial resources.
Moreover, electronic data management and enterprise resource planning is necessary for ensuring
optimal internal business processes.

From the above discussion, it is observed that the advantages clearly overshadow the disadvantages of
e-business.

2.6 Distribution Networks in Practice

• The ownership structure of the distribution network can have as big as an impact as the type of distribution
network.
• The choice of a distribution network has very long-term consequences.
• Consider whether an exclusive distribution strategy is advantageous.
• Product, price and commoditisation criticality have an impact on the type of distribution system preferred by
customers.

2.7 Distribution Network Design in the Supply Chain

The objective of strategic distribution network planning is to determine a plan that indicates the most economic way
to ship and receive product while maintaining or increasing customer service requirements, i.e., to maximise profits
and optimise service. Strategic distribution network planning typically answers the following:
• How many distribution centres should exist?
• Where should the distribution centre(s) be located?

28/JNU OLE
• How much inventory should be stocked at each distribution centre?
• What customers should be serviced by each distribution centre?
• How should the customer `order` from the distribution centre?
• How the distribution should centres `order` from vendors?
• How frequently should shipments be made to each customer?
• What should the service levels be?
• What transportation methods should be utilised?
• How to measure the balance between logistic costs and customer service correlation?

2.8 Factors Affecting Network Design Decisions

Following are the factors that influence the decision of distribution network design:
• Centralisation vs. Regionalisation
‚‚ In distribution network planning, there is a well-established relationship between the number of distribution
points, transportation costs and customer service targets.
‚‚ Graphically, the point at which these three entities merge is the optimum balance of facility and transportation
costs to develop a low-cost, high service distribution network.
‚‚ As the distribution networks become more centralised, the internal support structures such as facility
management, order entry, customer service and data processing also do the same. Degree of centralisation
achieved determines the cost savings over decentralised networks.
‚‚ However, service levels, limitations on total facility size and risk mitigation must be factored into the
decision.
• Energy
‚‚ Considerable shifts in the cost of energy (for example, electricity, fuel, etc.) can have an impact on operating
costs and, as a result, on distribution.
‚‚ Distribution projects may fail once the cost of energy turns into an influencing factor, for example, energy-
intensive facilities such as refrigerated warehouses.
‚‚ Thus, it is critical to work with all energy providers to determine the load that an operation would put on
the local energy system and develop solutions that conserve energy while achieving goals. Some interesting
energy solutions can be abatement programs (high power generator or solar power) to run normally on a
reduced energy load or high-efficiency units.
‚‚ Even if the transportation is handled via third party carriers, rising fuel costs make a very sensitive component
of distribution costs.
‚‚ Some strategies to consider mitigating this can be cube out containers, transportation management systems,
private fleet concerns etc.
• Flexibility
‚‚ When designing a distribution facility, versatile equipment should be specified.
‚‚ In the beginning, the latest technology can make a good start but becomes a waste of money if it can’t keep
a pace with unpredictable events.
‚‚ Planning for probable or doubtful changes in the distribution profile should drive the warehouse design and
equipment specifications.
‚‚ For the majority of distribution operations, flexible equipment is the more practical choice.
• Global marketplace
‚‚ Preparedness is the critical element in a global marketplace.
‚‚ The supply chain is ever-changing and has a global impact that needs to be considered.
‚‚ This could be as minor as a domestic customer wanting direct shipments to an international location, or as
major as an acquisition by a global company or addition of a key global account.
‚‚ Transportation systems should be designed with exports in mind. Proper customs documentation and

29/JNU OLE
Supply Chain Management

international shipping paperwork should be done. Operations should be designed in a manner that product
re-labelling or special packaging for international customers can be done easily.
‚‚ Facilities may be needed to accommodate inbound or outbound airfreight or ocean freight containers.
‚‚ Customer service functions may need to operate in 24-hour mode to assist customers in all time zones.
• Government involvement
‚‚ The involvement of government has an impact on distribution.
‚‚ The distribution system should be aware of legislation that involves their industry.
‚‚ Many decisions are made daily at a local, state, and federal level that impact distribution operations. Taxes,
labour regulations, transportation restrictions and infrastructure decisions are continually up for review and
discussion at every level of government.
• Information systems
‚‚ In today’s e-world, timely and accurate information is needed. The days of daily distribution activity and
nightly updates to financial systems are done.
‚‚ Today distribution execution systems must be:
i. Real-time: Customer requirements are moving toward being able to instantly track an order through
every step of the fulfilment process to delivery. The information is linked to internet where a customer
can easily log in and see the exact status of their order. Real-time interfaces and host system updates
enable the customer.
ii. Paperless: Language and educational barriers result in error-prone paper documents that are often
misinterpreted, at best resulting in loss within the distribution operation or, worse still, lost customers
due to fulfilment issues. The solution is paperless systems requiring operator validation.
iii. Standardised: Standardised, industry-tailored software is now the rule.
• Modularity
‚‚ As companies in the distribution space move, their business will typically jump to a new distributor or
distributors.
‚‚ The ability to quickly take on significant business volumes dictates that modularity is a necessity for a
thriving distribution organisation.
‚‚ Modularity must be evident in:
i. Assets: Distribution assets must be modular, providing the ability to easily expand facilities, capacities
and equipment to meet increasing demands and diverse products. Many companies design this into
a facility.
ii. Work assignments: The workforce must be able to handle new work assignments and transfer
knowledge to new employees effectively.
iii. Labour management systems: These systems must be able to handle the addition of new
operations quickly and economically so that performance can be measured and costs can be kept
under control.
• Off-highway vehicles
‚‚ In many countries, issues regarding the environment and air quality continue.
‚‚ These issues for stringent air-quality regulations will impact the warehouse.
‚‚ Electric vehicles will take over as the preferred models in the warehouse.
• Pace
‚‚ Access to a web site can now order product, specify their service requirements, pay for their order on-line,
and track the order right to their doorstep.
‚‚ For distributors, this means that the pace of distribution must increase significantly to account for the
reduced times, shorter product lives, increased inventory turnover and greater customer expectations that
is considered standard in the modern business-to-business and business-to-consumer marketplace.
‚‚ For example, if a customer places an order today with next-day delivery, a company picks and ships the

30/JNU OLE
 order the next day. This won’t be competitive and the entire supply chain needs to keep pace, from vendor
compliance to information and execution systems in order to support the new economy.
• People
‚‚ Team-based, participatory organisational culture and a total dedication to customer satisfaction are the
components of success in supply chain distribution network.
‚‚ For example, employee celebration days, employee suggestion programs, revised organisational designs,
compensation or incentive or bonus plans, and other processes that directly tie the distribution associate.
• Price
‚‚ The service and quality are key factors in selecting a distribution partner.
‚‚ Modern free enterprise demands efficient, effective and low-cost distribution.
‚‚ The goal of a successful distribution operation should be to operate within their core values at the lowest
cost possible. The path to competitive pricing is to operate efficiently and flexibly at low cost.
• Accountability
‚‚ A successful distribution operation must have accountability.
‚‚ Accountability is made possible by effective leadership, clear communications and efficient systems and
equipment to enable productive operations and a fulfilling work environment. Effective leadership make
difficult decisions while maintaining the commitment of the organisation. Accountability requires establishing
standards, identifying improvement opportunities and measuring performance.
• Reverse logistics
‚‚ The challenge is the question of handling the products that are coming back into the operation.
‚‚ The decision on whether to accept the product, whether a refused shipment, an authorized customer return,
or an unexpected return must be planned for and communicated with the distribution operation.
• Third party logistics
‚‚ A growing number of companies are turning to third party logistics organisations to handle the customer
fulfilment in the supply chain.
‚‚ Companies that are accustomed to true partnering with customers and suppliers have less trouble moving
to the third party logistics and achieving the potential cost savings.
‚‚ The key steps are to conduct a complete search for the right third party logistics vendor, thoroughly review
cost proposals and contracts to ensure there is financial benefit, and work with the third party logistics.
• Variety
‚‚ Special packaging, pricing, labelling and delivery requirements are becoming the norm and must be addressed
in any distribution plan. These tasks should be designed into the operation.
‚‚ Many companies invest large amounts of capital setting up specialised packing or value-added services to
gain competitive advantages.
‚‚ Properly planned, these services can give profits, providing differentiation in a competitive marketplace.

2.9 Supply Chain Model

• The supply chain models, which address both the upstream and downstream sides.
• The Supply-Chain Operations Reference model (SCOR) measures total supply chain performance. It is a process
reference model for supply-chain management, spanning from the supplier’s supplier to the customer’s customer.
It is the most widely used model.
• It includes delivery and order fulfilment performance, production flexibility, warranty and returns processing
costs, inventory and asset turns, and other factors in evaluating the overall effective performance of a supply
chain.
• SCOR is based on five distinct management processes: Plan, Source, Make, Deliver, and Return.
‚‚ Plan - Processes that balance aggregate demand and supply to develop a course of action which best meets
sourcing, production, and delivery requirements.

31/JNU OLE
Supply Chain Management

‚‚ Source - Processes that procure goods and services to meet planned or actual demand.
‚‚ Make - Processes that transform product to a finished state to meet planned or actual demand.
‚‚ Deliver - Processes that provide finished goods and services to meet planned or actual demand, typically
including order management, transportation management, and distribution management.
‚‚ Return - Processes associated with returning or receiving returned products for any reason. These processes
extend into post-delivery customer support.

Plan

Customers
Suppliers

Source Make Deliver

Fig. 2.9 Supply chain model

32/JNU OLE
Summary
• The supply chain network is the collection of physical locations, transportation vehicles and supporting systems
through which the products and services the firm markets are managed and ultimately delivered.
• Emerging technologies and standards are now making it possible to automate these supply chain networks in a
real time mode making them more efficient than the simple traditional supply chain.
• The distribution is one of the four elements of the marketing mix. The other three parts of the marketing mix
are product, pricing, and promotion.
• Distribution is a key driver of the overall profitability of a company because it directly impacts both the supply
chain costs and customer experience.
• There is increasing number of complicated supply chains. So, the distribution network design plays a key role
in controlling the cost of doing business.
• Since, controlling of the cost of doing business is an important factor; it can put supply chain network optimisation
goals ahead of competitors. The choice of distribution network can achieve supply chain objectives from low
cost to high responsiveness.
• Distribution network design options must be compared according to their impact on customer service and the
cost to provide this level of service.
• Transportation costs are high with drop shipping because the average outbound distance to the end consumer
is large and package carriers must be used to ship the product that have high shipping costs per unit compared
to truckload carriers.
• With drop shipping, a customer order with items from several manufacturers will involve multiple shipments
to the customer. This loss in aggregation in outbound transportation further increases cost.
• Electronic business commonly referred to as eBusiness or e-business, or an internet business, may be defined
as the application of information and communication technologies in support of all the activities of business.
• E-business is a term used to describe businesses that run on the internet, or utilize internet technologies to
improve the profitability of a business.
• The Supply-Chain Operations Reference model (SCOR) measures total supply chain performance. It is a process
reference model for supply-chain management, spanning from the supplier’s supplier to the customer’s customer.
It is the most widely used model.

References
• Supply Chain Edge: 15 Key Factors That Impact Your Distribution Network Effectiveness [Online]. Available
at <http://www.investorwords.com/1498/distribution_network.html#ixzz1G0TR7yBo>. Accessed 15 March
2011.
• Chopra, S., & Meindl P., 2001. Supply Chain Management: Strategy, Planning, Operation. Prentice Hall, New
Jersey, 3rd ed., 636 pages.
• Supply Chain Edge: 15 Key Factors That Impact Your Distribution Network Effectiveness [Online]. Available
at: < http://www.buzzle.com/articles/advantages-and-disadvantages-of-e-business.html>. Accessed 15 March
2011.

Recommended Reading
• Chopra S., 2010. Supply Chain Management, Pearson Education India, 4th ed., ISBN8131730719, 9788131730713,
p.578.
• Joris J. A. Leeman, 2010. Supply Chain Management, BoD – Books on Demand, ISBN 3839137918,
9783839137918, p.250.
• Shah J., 2009. Supply Chain Management: Text and Cases, Pearson Education India, ISBN 8 1 3 1 7 1 5 1 7 5 ,
9788131715178, p.472.

33/JNU OLE
Supply Chain Management

Self Assessment

1. Supply chain distribution often introduces ___________ into the economic market.
a. common men
b. middlemen
c. suppliers
d. distributors

2. Which of these is not involved in the distribution network design?

a. Locating production plants and distribution warehouses
b. Determining the best strategy for distributing the product from the plants to the warehouses and from the
warehouses to the customers
c. Controlling the cost of doing business
d. Achieve supply chain objectives from high cost to low responsiveness

3. _______ is the ability of the customer to track their order from placement to delivery.
a. Customer experience
b. Product availability
c. Order visibility
d. Product variety

4. A _________ always wants the highest level of performance along with the above dimensions.
a. supplier
b. customer
c. distributor
d. retailer

5. A decrease in the response time, which the customers desire, increases the number of facilities required in the
__________.
a. networks
b. distribution
c. supply chain
d. location

6. Which of the following supply chain costs are not affected by change in the distribution network design?
a. Inventories
b. Transportation
c. Facilities and handling
d. Customers

7. The biggest advantage of _______ is the ability to centralise inventories at the manufacturer.
a. drop shipping
b. direct shipping and in-transit merge
c. distributor storage with package carrier delivery
d. distributor storage with last mile delivery

34/JNU OLE
8. Which of theses is not an advantage of e-business?
a. Sectoral limitations
b. Worldwide presence
c. Cost effective marketing and promotions
d. Developing a competitive strategy

9. Which sector has not experienced growth of sales and revenue generation because of a number of practical
reasons like perishable items?
a. Retail
b. Chemical
c. Software
d. Food

10. ________ is the critical element in a global marketplace.

a. Preparedness
b. Designing
c. Implementation
d. Execution

35/JNU OLE
Supply Chain Management

Chapter III
Designing and Planning Transportation Networks

Aim
The aim of this chapter is to:

• define transportation system in supply chain

• explain the different modes of transportation in supply chain

• understand the transportation network design options

• describe the transportation infrastructure

Objectives
The objectives of this chapter are to:

• describe the objectives of transportation infrastructure policy

• explain the transportation network design in the supply chain

• understand the concept of trade-off in transportation

Learning outcome
At the end of this chapter, the students will be able to:

• understand the pros and cons of different transportation modes

• examine the different design options and trade-offs

• get an overview of design and plan of transportation networks

36/JNU OLE
3.1 Introduction
The importance of supply chain management has been growing in various areas because of the trend of
nationalisation and globalisation in recent decades. For industries, it helps to optimise the existing production and
distribution processes based on the same resources through management techniques for promoting the efficiency
and competitiveness of enterprises. Transportation system is the key element in a supply chain. It joins the separated
activities. Transportation occupies one-third of the amount in the supply chain costs and transportation systems
influence the performance of supply chain system enormously. Transporting is required in the whole production
procedures, from manufacturing to delivery to the final consumers and returns. A good coordination between each
component can give the maximum benefits.

3.2 Transportation in Supply Chain

• Transportation refers to the means of distributing goods, supplies, resources, information, people, and energy
from the original point (beginning of supply chain) to the destination point (customer).
• It also involves handling, packaging, managing the time the goods are fetched and delivered, and maintaining
coordination, especially when inter-modal or a combination of two or more transport modes is used.
• An intelligent transportation system may be defined as a planned network of elements or physical components
that play different roles in the transportation of goods, supplies, resources, information, people, and energy
from one place to another.
• The elements or physical components of a transport system are referred as the facilities.
• A transport system consists of:
‚‚ fixed facilities
‚‚ flow entities
‚‚ control system
• The fixed facilities are the physical components of the system that are fixed in space and constitute the network
of links and nodes of the transportation system. For example, the links could be roadway or railway track and
the nodes could be intersections, interchanges, transit terminals, harbours or airports.
• Flow entities are the units that negotiate the fixed facilities. These include people, vehicles, container units,
railroad cars, and so on. In the case of a road system, the fixed facilities accommodate a wide variety of vehicle
types, ranging from bicycles to large tractor-trailer combinations.
• The control system consists of vehicular control and flow control. Vehicular control refers to the technological
way in which individual vehicles are guided on fixed facilities. Such controls can be manual or automated.
• The characteristics of the vehicle and the characteristics of the vehicular control system are considered by
proper geometric design of fixed facilities. For example, in the case of highway facilities, where the vehicles
are manually controlled, these include driver’s characteristics, such as time a driver takes to perceive and react
to various stimuli.
• The flow control system consists of the means that permit the efficient and smooth operation of streams of
vehicles and the reduction of conflicts between vehicles. This system includes various types of signing, marking,
and signal systems and the underlying rules of operation.
• Civil engineering is the branch of engineering involving design of the fixed facilities. The design includes soil
and foundation engineering design, structural engineering design, the design of drainage systems, and geometric
design, which is concerned with the physical proportioning of the elements of fixed facilities.
• The success of any supply chain is closely linked to the appropriate use of transportation. For example, Wal- Mart
has effectively used a responsive transportation system to lower its overall costs. Wal- Mart use cross-docking
process in which product is exchanged between trucks so that each truck going to a retail store has products
form different suppliers.
• There are two keys players in any transportation that takes place within a supply chain: shipper and carrier.
• The shipper is that party that requires the movement of the product between two points in the supply chain.
• The carrier is the party that moves or transports the product. For e.g., when ABC uses uninterruptible power

37/JNU OLE
Supply Chain Management

supply to ship its computers from the factory to the customer, ABC is the shipper & uninterruptible power
supply is the carrier.
• The management of the supply chain requires a coordinated approach to manage all activities to provide the
greatest value to the customer.

Row
Finished
Material
Goods

Fig. 3.1 Flow of product along the supply chain

(Source: http://www.marcbowles.com/courses/adv_dip/module4/module6/m6two.htm)

3.3 Importance of Transportation

The importance of transport has been enumerated below:
• Basic service for increasing national income
‚‚ As national income rises, infrastructure adopts to support changing patterns of demand, with the shares of
power, transport and communication.
‚‚ Transport is one of the most important services within any country and a vital sector of growth.
• Create new economic activity
‚‚ Since, economic development in a country requires adequate and effective transport services; the degree to
which transport creates new activity is a necessary condition within the economy.
‚‚ Transport is one of the essential elements of an integrated plan for area development.
• Indicator of development
‚‚ Existence of high quality transport network, availability of number of mechanised motor transport, adequate
number of railway, air and shipping services as per the demand of the users are indicators of the development
in any country.
‚‚ Effective transportation systems have been playing a vital role in the economic prosperity of a country.
• Enlarge the trading activities
‚‚ The industrially developed countries lay more emphasis on the development of trade.
‚‚ The search for an integrated system combines the merits of the individual transportation modes and
eliminates the uneconomic and unproductive activities.
• Promotes industrialisation
‚‚ It increases wealth, promotes industrialisation and transforms the organisation of industry and raises the
standard of living of the people.

3.4 Role of Transport in Supply Chain

• Transport system provides the vital linkage between production and consumption. Development of transport
infrastructure helps the globalisation of production process.
• Transport is essential in an economy because the demand and supply of goods does not reach equilibrium at
any particular area or point of time.
• The need for dispatch of the goods arises as they are often produced in one place to be sold and consumed in
another place.
• Thus, transport provides the vital link between the production and consumption point and the objective of
production is not fulfilled till the commodity reaches the consumer.
• It forms an integral part of the production, distribution and marketing systems.

38/JNU OLE
• Transport infrastructure services are critical for diversification and modernisation of production and distribution
process.
• Transport is the key factor to link dispersed areas. Transport increases the economic efficiency of resources.
The economic efficiency of resources of various countries is increased with the growth of different mode of
transportation.
• Transport reduces the cost of production and distribution by effective, planned, integrated and co-ordinated
network.
• Developed or developing nations depend largely on transport development for better utilisation of resources.
• The adequacy of transport infrastructure is a key factor in the ability of countries to compete in international
trade. Competition for new exports and location of global industries largely depends on the quality of transport
infrastructure. Increased globalisation of world trade in many countries arouses not only from the liberalisation
of trade policies but also from advances in transportation.
• Transport helps to stabilise prices. Goods can be transported to places, where there is scarcity for it. By this the
consumers can get their desired products or commodities at a reasonable price. Similarly, by transporting goods
to the market, the producer gets fair price on their products.
• Transport curbs monopoly of the trader. Facilities for quick transport of commodities from one place to another,
restricts the traders to charge high price to the consumers. The demand for a product increases because of non-
availability of a product in the market.

3.4.1 Transportation Modes in Supply Chain

Transport modes are the means to achieve mobility of supplies. They fall into one of three basic types, depending
on what surface they are transported:
‚‚ land (road, rail and pipelines)
‚‚ water (shipping)
‚‚ air
Each mode is characterised by a set of technical, operational and commercial characteristics.
• Road transportation
‚‚ Road infrastructures are large consumers of space with the lowest level of physical constraints among
transportation modes.
‚‚ Physiographical constraints are significant in road construction with substantial additional costs to overcome
features such as rivers or rugged terrain.
‚‚ Road transportation has an average operational flexibility as vehicles can serve several purposes.
‚‚ These systems have high maintenance costs, both for the vehicles and infrastructures. Rapid movements of
cargo occur in small batches. With containerisation, road transportation has become a crucial link in cargo
distribution.
‚‚ Trucks are used generally which lowers the cost and have good accessibility. The trucks are able to access
many more locations than planes or railroads.
‚‚ Regional truck lines are excellent for small, frequent shipment and are most effective over short
distances.
‚‚ But, the factors which lower the use of trucks are their speed, capacity and range.
• Rail transportation
‚‚ Railways have an average level of physical constrains linked to the types of locomotives.
‚‚ Heavy industries are traditionally linked with rail transport systems. The process of containerisation has
improved the flexibility of rail transportation by linking it with road and maritime modes.
‚‚ Rail is by far the land transportation mode offering the highest capacity of cargo carried. Gauges are often
complicating the integration of rail systems worldwide.
‚‚ Railroads cost much less than other modes when shipping large quantities or bulky goods over long
distances.

39/JNU OLE
Supply Chain Management

‚‚ Trains run on a more consistent time schedule than trucks or airlines. They are often able to travel in weather
that would slow or stop trucks and airplanes.
‚‚ Disadvantages include inflexibility, potential damage of goods and ineffectiveness with small shipments.
• Pipelines
‚‚ Pipeline routes are practically unlimited as they can be laid on land or under water.
‚‚ They are used for transport of homogenous materials.
‚‚ The costs are lower than other transportation modes. Pipeline construction costs vary according to the
diameter and increase proportionally with the distance and with the viscosity of fluids. Pipeline terminals
are very important since they correspond to refineries and harbors.
‚‚ Pipelines are ideal for materials such as water, oil, and gas. Pipelines have high initial costs since they must
be built but once they are constructed transportation costs are much lower than other modes.
‚‚ They are unable to transport a variety of materials.
• Maritime transportation
‚‚ Ships are one of the oldest methods of transporting goods and they are virtually the only way to transport
large volumes of good over-seas. Although this method is slower than shipping by air, a ship can carry
much more cargo than an airplane. Costs are reduced significantly by choosing ships over air transport.
Because of the physical properties of water such as buoyancy and limited friction, maritime transportation
is the most effective mode to move large quantities of cargo over long distances.
‚‚ Main maritime routes are composed of oceans, coasts, seas, lakes, rivers and channels.
‚‚ However, due to the location of economic activities maritime circulation takes place on specific parts of the
maritime space. The construction of channels and dredging are attempts to facilitate maritime circulation
by reducing discontinuity. Comprehensive inland waterway systems are there.
‚‚ Maritime transportation has high terminal costs, since port infrastructures are among the most expensive
to build, maintain and improve and also high inventory costs.
‚‚ Maritime transportation is linked to heavy industries, such as steel and petrochemical facilities adjacent to
port sites.
• Air transportation
‚‚ Air is considered a premium mode of transportation because of the speed of delivery and the low impact
on the cargo (items are less likely to be broken than those shipped by rail or truck).
‚‚ Airplanes are also able to cover much longer distances in a short time.
‚‚ Savings resulting in speed of delivery are greater than extra costs.
‚‚ Air transport constraints can be the site, the climate, fog and aerial currents. For instance, a commercial
plane needs about 3,300 meters of runway for landing and for take off.
‚‚ Air activities are linked to sectors like finance and tourism, which lean on the long distance mobility of
people.
‚‚ The mode of transportation has been accommodating growing quantities of high value goods and is playing
a growing role in global supply chain management.
• Intermodal transportation
‚‚ Intermodal transport refers to a variety of modes that is used in combination so that the respective advantages
of each mode are better exploited.
‚‚ The intermodal transportation applies for passenger movements, such as the usage of the different, but
interconnected modes of a public transit system,
‚‚ Containerisation has been a powerful vector of intermodal integration, enabling maritime and land
transportation modes to more effectively interconnect.
• Telecommunications
‚‚ Telecommunications are structured networks with a practically unlimited capacity. They have very low
constraints that include the physiographic and oceanic masses that may impair the setting of cables.

40/JNU OLE