Reference Material for

SCM Pro

Module 1
Essentials of Supply Chain Management
 Reference Material for SCM Pro

Disclaimer

The Contents presented here are for the sole purpose of reference for SCM
Pro Certification program by the CII Institute of Logistics subject to the­
condition that it shall not by way of trade or otherwise circulated in any
form or used without the Cll's prior consent.

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Table of Contents:
ESSENTIALS OF SUPPLY CHAIN MANAGEMENT
1. SUPPLY CHAIN MANAGEMENT CONCEPTS ............ 5
1.1 Supply Chain Management: Definition............................... 5

1.2 Logistics Vs. Supply Chain ............................................... 19

1.3 An Evolutionary View ................................................... 20

1.4 Drivers of Supply Chain Management .............................. 21

1.5 Supply Chain for Competitive Advantage .................... 22

1.6 Supply Chains impacting top line and bottom line........23

1.7 Responsive and Efficient Supply Chains ...................... 24

1.8 Collaboration and Integration - Key to Supply Chain .... 26

1.9 Collaborative Planning, Forecasting and Replenishment....

(CPFR) .................................................................................... 30

2. MANAGEMENT OF SUPPLY CHAINS ......................33

2.1 Performance measures - Introduction ............................. 33

2.2 Types of Performance Measures .....................................34

2.3 Supply chain performance Measurement Criteria ........ 38

2.4 Performance measurement techniques- BSC ………………

Benchmarking ............................................................ 40

2.5 Formulation of Metrics ................................................. 56

2.6 Function based Approaches in …………………………………

Supply Chain Performance Measures .............................. 59

2.7 Process view of Supply Chain - Integrated measures ... 61

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2.8 Performance measures for Collaboration ………………...69

2.9 The Supply Chain Council's SCOR Model.......................... 70

3. GREEN SUPPLY CHAINS ................................................ 71

3.1 Green House Gases (GHG) ................................................ 72

3.2 lnventorization of Green House Gases ........................... 78

3.3 Direct and indirect emissions .......................................... 82

3.4 The concept of "Scope" ................................................... 82

3.5 Greening The Supply chains ........................................... 85

3.6 Internal management for GSCM ..................................... 87

3.7 GSCM success stories........................................................ 89

4. Supply Chain Risk Management ............................. 91

4.1 Drivers/ Sources of risks in Supply Chains ......................... 92

4.2 Documented Cases ........................................................ 94

4.3 Supply chain risk management. ...................................... 96

4.4 Risk Value ........................................................................... 99

4.5 Risk Management Methods .......................................... 100

GLOSSARY ……………………………………………………. 121

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1. SUPPLY CHAIN MANAGEMENT CONCEPTS

1.1 Supply Chain Management: Definition
Supply Chain Management envelops all activities starting from
point of origin through point of consumption till End of Life of the
Product or Service. It includes Planning and execution part of
satisfying the customers' demand.

Supply Chain definition: The movement of materials as they flow

from their source to the end customer. Supply Chain includes
purchasing, manufacturing, warehousing, transportation,
customer service, demand planning, supply planning and Supply
Chain management. According to Beamon (1998), a supply chain
is" an integrated manufacturing process wherein raw materials are
converted into finished products, then delivered to customers':

Little (1999) defines a supply chain as "the integrated and

coordinated flows of goods from source to destination, as well as
the information and money flows that are associated with it':

A supply chain is defined by Chow & Heaver (1999) as "the

collection of all producers, suppliers, distributors, retailers and
transportation, information and other logistics providers that are
involved in providing goods to end consumers. A supply chain
includes both the internal and external participants for the firm'

Ayers (2001) defines a supply chain as "life cycle processes

comprising physical, information, financial and knowledge flows
whose purpose is to satisfy end-user requirements with products
and services from multiple, linked suppliers' Mentzer et al. (2001)
defines a supply chain as "a set of three or more entities
(organisations or individuals} directly involved in the upstream
(i.e. supply) and downstream (i.e. distribution) flows of products,
services, finances, and/or information from a source to a customer

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Supply chain is defined by tecc.com.au (2002) as "a chain or progression

beginning with raw materials and ending with the sale of the finished
product'

Bridge field Group (2006) defines a supply chain as"a linked set of
resources and processes that begins with the sourcing of raw
materials and extends through the delivery of end items to the final
customer'

Grant et al. (2006) define supply chain management as "the

integration of business processes from end user through original
suppliers that provides products, services and information that add
value for customers'

Pienaar (2009) defines a supply chain as "a generic description of

the process integration involving organisations to convert raw
materials into finished products and to convey them to the end-user'

The Supply Chain Forum defines supply chain management as

follows: "Supply chain management is the integration of key
business processes from end user through original suppliers that
provide products, services and information that add value for
customers and other stakeholders' According to the Council of
Supply Chain Management Professionals (CSCMP) (2009),
"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 - Boundaries and Relationships
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
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operations, and it drives coordination of processes and activities

with and across marketing, sales, product design, finance, and
information technology.

CSCMP's Definition of Logistics Management

Logistics management is that part of supply chain management that
plans, implements, and controls the efficient, effective forward and
reverses flow and storage of goods, services and related information
between the point of origin and the point of consumption in order to meet
customers' requirements.

Manufacturer Dlstributar Retail consumer

Fig: 1 A typical structure of Supply chain

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Fig 2. Supply Chain Pictorial Representation

Supply chain management essentially ensures three flows:

a. Product flow/ Service Flow

b. Information flow
c. Finance flow
The product flow is the movement of goods from supplier to customers and
customer to manufacturer in case of any customer returns or service
requirements.

The information flow covers updating the status of the delivery as well as
sharing information between suppliers and manufacturers. Information
flow is supposed to happen on a real time basis, without any distortion
and delay to ensure demand is met with correct supplies. The information
flow in the supply chain includes the market signaling amongst the sup­
ply chain members regarding end-user preferences

The finance flow is the result of first two flows that encompasses credit
terms, payment schedules and consignment and title ownership arrange­
ments.

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Upstream & Downstream The focal company is at the centre, the

suppliers' side is called Upstream. Finished Goods from the focal company
is distributed to the customers which is called as Downstream. The supply
chain includes managing information systems, sourcing and procurement,
production scheduling, order processing, inventory management,
warehousing, customer service, and after-market disposition of packaging
and materials. The supplier network consists of all organizations that supply
inputs, either directly or indirectly, to the focal firm. In the automotive Supply
chain, supplier network includes the thousands of firms that provide items
ranging from raw materials such as steel and plastics, to complex
assemblies and subassemblies such as transmissions and brakes. The
supplier network essentially to include internal divisions of the company as
well as external suppliers.

A given material will pass through multiple processes within multiple sup­
pliers and divisions before being assembled into a vehicle. Referring Fig
1, an Automotive Supply chain can be visualized as a long chain with a
number of Suppliers, storage Warehouses, dealers etc. The Manufacturer,
the Original Equipment Manufacturer (OEM) is at the center, designs and
produces many of the parts in-house, and the other parts are produced by
a variety of Tier 1 suppliers. Tier 1 suppliers in turn, procure components
and raw materials from the next level suppliers called Tier 2 suppliers. As­
sembled and tested automobiles are distributed to the customers through
a distribution network comprising of Dealers, Regional Sales Depots/of­
fices, parking Yards and Showrooms. Service and Spare parts supply is an
important activity for an Automotive Supply Chain. Owned and franchised
dealers, Multi-brand dealers, Small garages/ gas stations provide the nec­
essary after Sales service and Spare parts to the customers.

The beginning of a supply chain inevitably can be traced back to “Mother

Earth” ‘that is, the ultimate original source of all materials that flow through
the chain (e.g., iron ore, coal, petroleum, wood, etc.). An important recent
trend in supply chain management is the recovery, recycling, or reuse of
products from the end user which is named as Reverse Supply chain.

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Supply chains are essentially a series of linked suppliers and customers;

every customer is, in turn, a supplier to the next downstream organization
until a finished product reaches the end user.

From the focal firm's perspective, the supply chain includes upstream sup­
pliers, internal functions, and downstream customers. A firm's internal
functions include the different processes used in transforming the inputs
provided by the supplier network. In the case of an automobile company,
this includes all of its parts manufacturing (e.g., stamping, power train,
and components), which are eventually brought together in actual auto­
mobiles. Coordinating and scheduling these internal flows is challenging,
particularly in a large organization such as an automotive company.

Car manufacturers like Maruti Udyog Ltd or Hyundai produce cars in huge
volumes and variety. The takt time (time between two successive cars) in
their final assembly line is less than a minute, which means a finished car
rolls out in less than a minute. Considering huge variants of cars, in dif­
ferent colour combinations and every car requiring thousands of compo­
nents, the Supply chain for automobiles is a complex one.

For example, order-processing managers are responsible for translating

customer requirements into actual orders, which are put into the system. In
the case of an automotive company, these individuals work primarily with
the extensive dealer network to ensure that the right mix of automobiles and
service parts are available so that dealers can meet the needs of their
customers. Order processing also may involve extensive customer
interaction, including quoting prices, discussing delivery dates and other
shipment requirements, and after-market service. Another important internal
function is production scheduling, which translates orders into actual
production tasks. This may involve working with materials requirements
planning (MRP) systems, scheduling work centers, employees, capacity
planning, and machine maintenance The second major part of supply chain
management involves upstream external supply chain members. In order to
manage the flow of materials between all of the upstream organizations in
a supply chain, firms employ an array of personnel who ensure that the right
materials arrive at

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the right locations at the right time. The purchasing function serves as the
critical interface with the upstream supplier. Purchasing managers are re­
sponsible for ensuring that: 1) the right suppliers are selected; 2) suppliers
are meeting performance expectations; 3) appropriate contractual mech­
anisms are employed; and 4) an appropriate relationship is maintained
with all suppliers. They may also be responsible for driving improvement
in the supply base and acting as liaisons between suppliers and other in­
ternal members (engineering, accounting, etc.). Materials managers are
responsible for planning, forecasting, and scheduling material flows be­
tween suppliers in the chain. Materials managers play an important role
coordinating a wide range of activities. Materials managers work closely
with production schedulers to ensure that suppliers are able to deliver the
materials on time to the required locations, and that they have some vis­
ibility regarding future requirements so that they can plan ahead of actual
production and delivery dates.

Finally, a firm's external downstream supply chain encompasses all of the

downstream organizations, processes, and functions that the product
passes through on its way to the end customer. In the case of an automo­
tive company's distribution network, this includes its finished goods and
pipeline inventory, warehouses, dealer network, and sales operations. The
distribution Channel of Automotive Supply chain is relatively small
whereas for a retail supply chain, the length and breadth is very high to
reach millions of consumers.

All organizations are part of one or more supply chains. Whether a com­
pany sells directly to the end customer, provides a service, manufactures a
product, or extracts material from the earth, it can be characterized within
the context of its supply chain. Until recently, however, organizations fo­
cused on their direct customers and internal functions and placed rela­
tively little emphasis on other organizations within their supply chain net­
work.Three major developments in global markets and technologies have
brought supply chain management to the forefront of executive manage­
ment's attention:

1. Ever-increasing customer demands in areas of product and

service cost, quality, delivery, technology, and cycle time brought
\ about by global competition.
2. The emergence of and greater acceptance of higher-order
cooperative inter-organizational relationships.

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3. The information revolution.

Example Supply Chains

For an Auto Manufacturer like TATA Motors, companies like Delphi TVS,
Rane TRW, Lucas TVS etc., who supply the major aggregates (assemblies)
will be Tier 1 Suppliers.

Tier 1 supplier, Delphi TVS is supplying Fuel Injection Systems to TATA Mo­
tors, in the next level, Delphi TVS buys few components like machined
Casting & Forgings from Geekay Auto Components Company, who can be
called as Tier 2 Supplier.

Geekay Auto Components Company, Tier 2 Supplier will procure the raw
material needed for their castings from JSW Steels, the Tier 3 Supplier. JSW
steels will procure iron and coke from iron ore mine.

A typical Automotive Supply Chain has number of tiers of Suppliers for each
and every component, since the variety of vehicles manufactured is very
high.

A Garment Supply chain

Reverse Logistics: Reverse logistics includes all of the activities that are
mentioned in the definition of Logistics above. The difference is that re­
verse logistics encompasses all of these activities as they operate in re­
verse direction. Therefore, reverse logistics can be defined as:

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The process of planning, implementing, and controlling the efficient, cost

effective flow of raw materials, in-process inventory, finished goods and
related information from the point of consumption to the point of origin
for the purpose of recapturing value or proper disposal.

Reverse logistics is the process of moving goods from their typical final
destination for the purpose of capturing value, or proper disposal.

Remanufacturing and refurbishing activities also may also be included in

the definition of reverse logistics. Reverse logistics is more than reusing
containers and recycling packaging materials like collecting empty gas
cylinders or collecting back the Recyclable Glass Bottles (RGBs) of Pepsi or
Coca-Cola glass bottles.

In nutshell, reverse logistics is all about, how the firm should effectively
and efficiently get the products from where they are not wanted to where
they can be processed, reused, and salvaged. Also, the firm must deter­
mine the "disposition" of each product.

Hence, core activities involved in reverse logistics are : Return to Supplier,

Resell, Sell via special Outlets, Salvage , Recondition, Refurbish, Remanu­
facture, Reclaim Materials, Recycle and Landfill etc.,

It is a common practice to reuse packaging materials. Clearly, reusable

totes and pallets will be used many times before disposal. Often, damaged
totes and pallets can be refurbished and returned to use.

Reasons for Product Returns :

The reasons for a customer returning a product can be categorized under

the following three headings:

Manufacturing returns - quality-control rejections, raw material surplus,

production leftovers or by-products
Distribution returns - product recalls for replacements, commercial re­ turns
(unsold products and wrong or damaged deliveries), stock balancing returns

Customer returns - reimbursement guarantee returns, warranty returns,

service returns, end-of-use, end-of-life returns, recalls

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The latter two are related to retailers and manufacturers. The first one is
closely related to manufacturer and supplier.
Specific Example: Fast moving consumer goods

'Fast moving consumer goods' (FMCG) are products that have a quick
turnover and relatively low cost ones, generally including toiletries, soaps,
cosmetics, teeth-cleaning products like tooth paste and brushes, shaving
products and detergents, as well as other non-durables such as glassware,
bulbs, batteries, paper products and plastic goods. The factors reported as
causing product returns for FMCG retailers are:

Forecast accuracy and demand variability - imbalances between fore­

casted demand and market demand that leads to a stock-out situation, or
overstocking of goods which will have to be returned.

Promotional activities - overstocking can result from sales of limited pe­

riod discounted items, 'Buy one get one free' offers, etc.

New product introduction - it is often difficult to forecast the success of

new products, and overstocking may result if this is over-assessed.

Product range and safety stock policy- to meet consumer expectations of

variety and choice, companies tend to provide a wide range of stock keeping
units (SKUs), and there is inevitably overstocking of some SKUs.

Product life cycles - short product life cycles, especially in the electron­
ics (like mobile phones)and high-tech market can provide a competitive
advantage, but may lead to high levels of product returns if not managed
appropriately.

Logistics trade-offs - the cost of manufacturing and logistics are relatively

low compared to lost revenue from not having shelf availability can lead
to excessive stock holding. This has close relation to 'opportunity' costs.

Purchasing policies - products are often purchased ahead of seasonal

demand to minimise the prices paid for goods, which can affect the logis­
tics processes within the supply chain.

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High on-shelf availability - consumer expectations and the wish for

stock to be continuously available can lead to problems of overstocking,
resulting in greater levels of returns.

Legislative factors - discussed above, producers and retailers are likely to

have to take back products they sell post-consumer use. It becomes social
responsibility of companies to take back their products after its productive
usage.

Cash flow management - retailers may take advantage of existing agree­

ments regarding the return of goods to suppliers or manufacturers in ex­
change for credit, in order to ease their cash-flow position.

Liberal returns policies - typically for defective goods, such policies

result in damaged or non-resalable stock being returned to the retailer,
which then has to be disposed off appropriately.

Customer'no-faults found' - high levels of products are returned by cus­

tomers who are unable to follow the instruction manual, who then assume
there is a fault with the product.
Can Reverse Logistics become a Strategic Weapon...

Managing reverse logistics challenges effectively, is an essential, strategic

capability.

Johnson & Johnson had to recall one of its flagship products. Johnson &
Johnson was prepared with a fine-tuned reverse logistics system and was
immediately able to cleanse the channel of any possibly tainted product.
Because Johnson & Johnson acted so quickly and competently, a mere
three days after the crisis, an all-time high record sales had happened. Un­
doubtedly, the public would not have responded so positively had John-
son & Johnson not been able to quickly and efficiently handle its recalled
product through its existing system in reverse. This incident illustrates how
reverse logistics capabilities can be strategic, and how they can dramati­
cally impact the firm.

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A goal of almost every business is to retain the customers so that they will
not move to another supplier. An important service a supplier can offer to
its customers is the ability to take back unsold or defective, used and obso­
lete merchandise quickly, and credit the customers in a timely manner.

Firms in short product life cycle and high obsolescence product catego­
ries-such as mobile phones, Television sets, electronics, home appliances
should have a strong reverse logistics program. Given the competitive
pressure on such product firms, bottom line contributions provided by good
reverse logistics programs are important to the firms' overall profit­ ability.
"Exchange offers" by companies encourages the customers to buy new and
updated products.

Example: Nike persuades consumers to bring back their used shoes to the
store where they were purchased. These shoes are shipped back to Nike,
where they are shredded and made into basketball courts and running
tracks. Nike donates the material to make basketball courts, and donates
funds to help build and maintain those courts. Managing these reverse
flows is costly and complex. Some firms use their reverse logistics capabili­
ties for humane reasons, such as philanthropy.

Example: Leading e commerce like Amazon, Flipkart, and Snap deal used
to announce "Great Exchange Offer" where the customers can exchange
their old junk items for new products from their offers. Every year all the
leading e commerce run this campaign in the month of Feb and March and
give customer an opportunity to get good value of their old products in the
form of coupons which can be redeemed for the new products.. Handling
and disposing of used items poses a lot of challenge to the company but
this could be one of the strategies to boost sales.

Even though reverse logistics has strategic importance, the barriers to

good reverse logistics program is due to reasons : lesser importance of
reverse logistics relative to other issues, company policies, lack of systems,
competitive issues, management inattention, financial resources, person­
nel resources, and legal issues.

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The typical product/ components/parts flow in the case of an Air condi­

tioner is given below.

Steps for Effective Reverse Logistics Program:

1. Authorized personnel complete the appropriate forms and attach
them to the items being funneled to the recovery operation.
{Customer, service, and logistics processes must be defined and
communicated.)
2. Supply trucks can backhaul the older parts and materials to the
local supply location. {Schedules, transportation, networks must
be established and effectively managed.)
3. Dedicated staging locations at all supply locations as well as at
some customer locations specifically for materials bound for the
Reprocessing centers. {Customer processes and expectations
must be clearly defined and communicated.)

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4. .An intranet connection facilitates communications between the

processing centers, supply centers and customer locations.
5. A database of buyers categorized by certain classes of materials
should be maintained.
6. When the trucks arrive at the processing centers, sort the material,
categorize it according to buyer, then notify the appropriate
buyers that the material will be placed for bid.
7. Each lot of material is described and placed for auction on a
medium such as the company's web site. (Sales techniques and
mediums must be identified as well as processes, business rules,
and metrics.)
8. The winning bidder typically gets a specified time, e.g., an
additional five days to pay for and pick up the material. Buyers are
responsible for transport. (Expectations and business rules must
be developed and communicated.)
9. Track materials inbound and through the sorting, bid, sale and
release processes with a central accounting system. All cash
collected from sales should be sent by the buyer to a central
clearinghouse, which authorizes release of the material and
performs all the reporting, accounting and reconciliation activity.
(Central tracking system should be developed and analyzed.)
Overcoming the obstacles in Reverse Logistics:

• To have a clear 'Returns Management' policy.

• To develop strong reverse logistics strategies.
• To clearly outline financial, corporate, branding, marketing and
other objectives.
• To treat it as another business; it is not the returns department, it
is an operation.
• Have goals, objectives, and resources and let it be part of the
"Lifecycle" of the product.
• To design the reverse supply chain as part of the forward supply
chain.

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1.2 Logistics Vs Supply Chain

Both Logistics Management and Supply Chain Management are diverse
fields of study that are often felt like they may perhaps overlap. Logistics
Management deals with planning, implementing and controlling resource
ful, to and fro flow and storage of merchandise and services between the
point of manufacture and the point of utilization in order to congregate
customers' necessities. On the other hand, Supply Chain Management in­
corporates all the manufacturing operations, scheduling and inventory
control and resource management, location planning along with informa­
tion technology so as to coordinate purveyors, the company, and consum­
ers.Supply chain is the network of facilities (warehouses, factories,
terminals, ports,etc), vehicles (trucks, trains, planes and ocean vessels)
and the Information systems connecting the suppliers & customers.

Logistics is basically what happens in the supply chain and involves the
flow of material, information & money. Logistics activities (customer re­
sponse, inventory management, supply, transportation & warehousing)
connect and activate the objects in the supply chain. There is a difference
between the concept of supply chain management and the traditional
concept of logistics. Traditional logistics focuses its attention on activities
such as procurement, distribution, maintenance, and inventory
management. Supply chain management acknowledges all of
Traditional logistics and includes activities such as marketing, new prod­
uct development, finance, and customer service.
In the wider view of supply chain thinking, these additional
activities are now seen as part of the work needed to fulfill customer
requests. Supply chain management views the supply chain and the
organizations in it as a single entity. It brings a systems approach to
understanding and managing the different activities needed to
coordinate the flow of products and services to best serve the ultimate
customer. There are four stages in a supply chain: the supply network,
the internal supply chain (which are manufacturing plants), distribution
systems, and

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the end users. Moving up and down the stages are the three flows: mate­
ial or service flow, information flow and funds flow. Logistics is a term that
is frequently used to describe shipping and delivery service. The word "lo­
gistics" actually originated in the military, being used to define troop and
equipment movements within and across theaters of operation.

In the United States, the Council of Logistics Management defines Logis­

tics management as:
"The process of implementing and/or controlling the efficient and cost­
effective flow and storage of raw materials, in-process inventory, finished
goods, and related information from point-of-origin to point-of-consump­
tion for the purpose of conforming to customer requirements:'

During the Gulf War, U.S. Army Lt. Gen. William "Gus" Pagonis defined lo­
gistics as:

"The careful integration of transportation, supply, warehousing, mainte­

nance, procurement, contracting, and automation into a coherent func­
tional area in a way that prevents sub-optimization in any of these activ­
ities, and in a way that permits and enhances the accomplishment of a
given goal, objective, or mission:'

1.3 An Evolutionary View

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1.4 Drivers of Supply Chain Management

Each supply chain has its own unique set of market demands, customers
base and operating challenges and yet the drivers that influence Supply
chain efficiency remain essentially the same in every case. Companies in
any supply chain must make decisions individually and collectively re­
garding their actions at least in following six areas:

1. Demand Planning - What products does the market want? How

much of which products should be produced and by when? This
activity includes the creation of master production schedules that
take into account plant capacities, workload balancing, quality
control, and equipment maintenance.
2. Sourcing - functions a firm performs and functions that are
outsourced. This includes decision making between make or buy,
supplier selection, rating, monitoring etc.,
3. Inventory - What inventory should be stocked at each stage in
a supply chain? How much inventory should be held as raw
materials, semi finished, or finished goods? The primary purpose
of inventory is to act as a buffer against uncertainty in the supply
chain. However, holding inventory can be expensive, so what are
the optimal inventory levels and reorder points?
4. Facilities & Location - Where should facilities for production and
inventory storage be located? Where are the most cost efficient
locations for production and for storage of inventory? Should
existing facilities be used or new ones built? Once these decisions
are made they determine the possible paths available for product
to flow through for delivery to the final consumer.
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5. Transportation - How should inventory be moved from one supply

chain location to another? Air freight and truck delivery are
generally fast and reliable but they are expensive. Shipping by
sea or rail is much less expensive but usually involves longer
transit times and more uncertainty. This uncertainty must be
compensated for by stocking higher levels of inventory. When is
it better to use which mode of transportation?
6. Information - How much data should be collected and how much
information should be shared? Timely and accurate information
holds the promise of better coordination and better decision
making. With good information, people can make effective
decisions about what to produce and how much, about where to
locate inventory and how best to transport it.
The sum of these decisions will define the capabilities and effectiveness of
a company's supply chain. The things a company can do and the ways that
it can compete in its markets are all very much dependent on the effec­
tiveness of its supply chain. If a company's strategy is to serve a mass mar­
ket and compete on the basis of price, it had better have a supply chain that
is optimized for low cost. If a company's strategy is to serve a market
segment and compete on the basis of customer service and convenience,
it had better have a supply chain optimized for responsiveness.

1.5 Supply Chain for Competitive Advantage

The primary purpose of an efficient Supply chain is to fulfil customer de­
mand at the lowest possible cost.
The traditional understanding of logistics activity was that, logistics activ­
ity adds only 'cost 'to the product. A finished product is to be transported
to a customer, which adds transportation cost to the product, without
adding any 'value' to the product. With the evolution of the Supply chain
concept, there is a change in this traditional belief. Supply chain manage­
ment is not just about cost but it contributes to economic value addition.
An efficient supply chain strengthens top line as well as bottom line of an
organization.

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1.6 Supply Chains impacting top line and bottom line

Top-Line is where an organization reports the total revenues on their in­
come statement.
In contrast, bottom-line refers to Net Income (top line revenues minus ex­
penses). Bottom-line activities typically focus on cutting expenses in or­
der to improve inco

me.

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Logistics and supply chain management have an impact on revenue

growth because the improvement of service they can support can have
positive effects on sales and on customer retention.

The ability to deliver a product faster can make or break a sale. “If two al­
ternative [products] appear to be equal and one is immediately available
and the other will be available in a week, the customer evidently buys
the product, which is available immediately. FMCG products are good
candidates for this theory hence for similar products, the competition is
between their supply chains. An efficient supply chain ensures the avail­
ability of product, when the customer is looking for it. On time availability
increases the sales and revenue, which impacts top line.

Then, logistics and supply chain management have an impact on operat­

ing costs because many of them are a consequence of logistics and supply
chain management choices (e.g. transportation costs, warehousing costs
and so on).

With regard to fixed assets efficiency, the decisions made on number of

warehouses, Material Handling Equipment’s and vehicles often require
huge investments that affects bottom line.

By rationalizing the choices concerning these investments, logistics and

supply chain management are able to improve their efficiency, to reduce
the amount of capital required and to enhance the return on this capital.

Finally, logistic and supply chain management choices have a positive im­
pact on current assets efficiency because they are able to reduce the cash
to cash cycle time and the inventory level, in this way decreasing the re­
lated amount of invested capital.

1.7 Responsive and Efficient Supply Chains :

Responsiveness captures the firm's ability to handle the uncertainty of
market demand. Based on the nature of demand uncertainty, products
can be classified as functional products or innovative products.

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Functional products are those that satisfy the basic needs of a customer
and therefore have low variety, stable and predictable demand, long life
cycles and low profit margins e.g.: grocery.

Innovative products are those that try to satisfy a broad range of custom­
ers' wants with the features: high variety, unstable and very-hard-to pre­
dict demand, short life cycles, high profit margins and frequent stock-outs
and markdowns. Eg: fashion and technology products- high priced fashion
jewellery, bio-metric safety vaults etc.

Innovative products focus on capturing new markets and are designed to

be acceptable to changing customer demands.

An Efficient supply chain deals with functional products (grocery, news­

papers) that are often sold in high volumes and for which the demand can
be forecast. The organizations that produce such products focus on opera­
tions rather than product innovation. Because of the fair stability of their
product demand, such organizations can invest in large and financial-in­
tensive facilities, and improvement initiatives are focused on operations
rather than product innovation.

A Quick supply chain deals with innovative products (mobile phones,

white products) often with a high technical level and a demand that is dif­
ficult to forecast.

An Agile supply chain is similar to a quick supply chain in that it deals with­
innovative products for which the demand is difficult to forecast e.g. fash­
ion goods. Such products are in the introduction and growth stage of the
product life-cycle.

Market Responsive supply chains have similar characteristics to agile sup­

ply chains A Lean supply chain deals with functional products whose de­
mand can be accurately forecast and whose market share remains fairly
constant. These types of products (automobiles) are in the growth and
maturity stage of the product life-cycle. A lean Supply chain employs con­
tinuous improvement processes in order to eliminate waste or non-value
stops across the chain.

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A Leagile supply chain can be described as both lean and agile i.e. agile
enough to respond to what is actually selling (market driven) with avail­
ability as the market winner.

A Hybrid supply chain is similar to a leagile supply chain and deals with­
both functional and innovative products (automobiles, fork lifts) that are
in the introduction, growth and maturity phases of the product life-cycle.

Functional (predictable Innovative (Unpredictable

Aspects of demand
Demand) Demand)
Product Lifecycle More than 2 years 3 months to 1 year
Contribution margin (% of sales
5%to20% 20%to60%
price)
Low ( 10 to 20 variants per High ( often thousands of
Product variety
category) variants per category)
Likely forecast error 5%to20% 40%to 100%
Average stock-out rate 1%to2% 10%to40%
End-of-season mark markdown 0% 10%to 30%

Source : Supply Chain Management Text & cases By Janat Shah, "What is the Right Sup­ ply
Chain for Your Product?" Harvard Business Review-M.L.Fisher

1.8 Collaboration and Integration - Key to Supply Chain

Supply Chain Integration is defined as the extent to which all activities
within an organization, and the activities of its suppliers, customers, and
other supply chain members are integrated together.

There are two interrelated forms of integration along the supply chain: the
first type of integration involves co ordinating and integrating the forward
physical flow of deliveries between suppliers, manufacturers and custom­
ers. The other prevalent type of integration involves the backward co ordi­
nation of information technologies and the flow of data from customers to
manufacturers to suppliers.

Supply chain integration includes three stages from functional integration,

to internal integration, and then to external integration. Function­ al
integration establishes close relationships between functions such as

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shipping and inventory or purchasing and raw material management. This

stage is characterized by emphasis on the internal flow of the goods rather
than external customer satisfaction, and cost reduction rather than perfor­
mance improvement.

Internal integration involves the integration of all internal functions from

raw material management through production, shipping, and sales.

There is realization that there is little value in focusing on the flow of the
goods into the organization unless the flow is also well managed all the
way to the customers. This stage is characterized by full system visibility
from distribution to purchasing, and it requires different functions in an
organization to be coordinated and integrated to achieve customer val­
ue and satisfaction. External integration extends the scope of integration
outside the organization to embrace suppliers and customers.

External integration represents more than a change of scope. It also in­

cludes a change in attitude. The former adversarial relationships between
suppliers and customers change to one of mutual support and cooperation.

As supply chain members begin to work together, integration must oc­

cur between functions both internal to the organization {i.e., purchasing,
engineering, manufacturing, marketing, logistics, accounting, etc.) and ex­
ternal to the organization (i.e., end customers, retailers, distributors, ware­
houses, transportation providers, suppliers, agents, financial institutions,
etc.). Internal strategic integration requires that all company members
have access to an integrated information system, spanning multiple func­
tions and locations. This is often accomplished through a company-wide
ERP system, which links internal groups via a single integrated system.

External integration refers to the systems that link external suppliers and
customers to the focal company. External integration allows all supply
chain members to share critical information such as forecast demand, ac­
tual orders, Point of Sales data(POS) and inventory levels across the supply
chain.

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Systems used to integrate supply chain members include advanced plan­

ning systems, Internet linkages, network communications, and Electronic
Data Interchange (EDI).

ERP systems facilitate the integration of these processes by adopting a

single customer, product and supplier database. One master record with
multiple views is used for the enterprise. All processes use a common da­
tabase, through a powerful Relational Data base Management System.
(RDBMS).

Furthermore, information is captured only once, reducing the possibility

of inaccurate data entering the database. Information is provided to the
affected business process in real time, eliminating delays as a result of
information sharing. Specific transactions taking place in each business
process are visible to everyone in the organization; theoretically, if anyone
wants to find out where an order is in the process, or whether a supplier
has been paid, etc., he or she can do so. Furthermore, all business process­
es are linked with the workflow, such that standard workflow templates
for entering information about transactions are provided every step of the
way.

COLLABORATION:
As companies migrate toward more extended supply chains, collabo­
ration is becoming their most strategic activity. The means by which
companies within the supply chain work together toward mutual objec­
tives through the sharing of ideas, information, knowledge, risks, and
rewards.

Drivers of collaboration include the desire to access:

Technology owned by another company.

A technology that is too capital-intensive for the company to
invest in alone.
A competency that is too costly to acquire, develop, or maintain.
A new market effectively closed off by high entry cost or
preconditions (trade barriers, legislation).

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Potential collaboration partners are customers, material suppliers and

suppliers of services that support supply chain operations.

Different levels of collaboration among the Supply Chain partners are pos­
sible.

Transactional collaboration (efficient execution of transactions among

partners).

Cooperative collaboration (requires a higher degree of information sharing

such as demand plans, order confirmations, inventory levels, and delivery
status. The main technology used is EDI - Electronic data interchange).

Coordinated collaboration (Coordinated relationship requires more close

relationships as partners rely on each other’s capabilities. It is used for
strategically critical supply chain partners. An example of it can be VMI-
Vendor- Managed Inventory, where suppliers are responsible to maintain
agreed stock levels, based on usage or forecasts).
Synchronized collaboration (Collaboration here moves beyond borders of
supply chain operations to joint development projects. They can be
called strategic alliances).

The following important factors are to be managed effectively for suc­

cessful collaboration.

Company must ensure internal collaboration first.

The proper degree of collaboration needs to be defined for each

partner segments. Partners must be carefully selected, depending on
strategic importance, cultural fit, organizational fit, and technology fit.
The processes have to be linked with each of these key partners, and type
and level of integration that applies to each process link have to be
carefully evaluated.

Benefits, risks, gains and losses are to be shared. The overall objective of
collaboration is that it is more profitable for all parties involved. Supply
chain partners need to evaluate their relative strengths and capabilities
openly and critically. Important in this process is the requirement to

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"open the books" to managers outside the Corporate boundaries of one

particular firm where cross-company and cross-functional teams can
analyse cost structures and performance metrics. Trust is the key
component if supply-chain partners want to collaborate strategically,
rather than only on a tactical level.

Clear objectives and metrics regarding acceptable performance must be

set and clearly understood.

Potential areas for Supply chain collaboration are : Supply chain planning,
Linking with customers, Linking with suppliers, Outbound transportation
and fulfilment, Procurement, Inbound transportation and fulfilment, Link­
ing with channels and other partners, Manufacturing, New product de­
sign, Post sales service management.

To sum up, companies in a supply chain should create a collaborative at­

mosphere where mutual trust, sharing of risks, rewards and extensive in­
formation sharing should prevent sub optimizations in the supply chain.
It is suggested that collaboration will lead to more integrated supply
chains where independent companies together act as one single entity.
Actions and strategic decisions in the supply chain should be managed by
demand from end customers, since these finally will have a crucial impact
on how successful the supply chain members will be.

1.9 Collaborative Planning, Forecasting and Replenishment

(CPFR)
CPFR has a more comprehensive approach than earlier collaboration con­
cepts, and includes planning, forecast and replenishment processes. A
subgroup of Voluntary Interindustry Commerce Standards Association,
VICS,which holds the copyright on the name of CPFR, explains CPFR as "a
set of business processes that entities in a supply chain can use for collab­
oration on a number of buyer/seller functions, towards overall efficiency in
the supply chain" (www.cpfr.org)

As an example of what CPFR means, Lee (Lee, 2000) describes the CPFR
collaboration between Wal-Mart and Warner-Lambert very well:

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"Knowledge exchange is the basis for Wal-Mart's collaboration with War­

ner-Lambert (now part of Pfizer) on the forecasting and replenishment of
pharmaceuticals and health-care products. Retailers such as Wal-Mart
usually have the best knowledge of local consumer preferences through
their interactions with customers and their possession of point of sale (POS)
data. Pharmaceutical companies know about the properties of the drugs
they produce and can make use of external data, such as weather forecasts,
to help project demand patterns.

Both parties contribute their respective knowledge and collaborate close­

ly to determine the right replenishment plan in following ways:

• The influence of promotions in the creation of the sales forecast

(and its influence on inventory management policy)
• The influence of changing demand patterns in the creation of the
sales forecast (and its influence on inventory management policy)
• The Increased practice of holding right inventory levels to
guarantee product availability on the shelves
• To eliminate the lack of co-ordination between the store, the
purchasing process and logistics planning for retailers
• To eliminate the lack of general synchronisation (or co-ordination)
in the manufacturer's functional departments (sales/commercial,
distribution and production planning)

• To eliminate the multiple forecasts developed within the same

company (marketing, financing, purchasing, and logistics).
Today, VICS has standardized CPFR to be implemented with the help of a
nine-step model.

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The steps are :

1.Develop Collaboration arrangement

PLANNING
2. Create Joint Business Plan

3.Create Sales Forecast

4.Identify Exceptions for Sales Forecast

5. Resolve/ Collaborate on Exception items

FORECASTING
6.Create Order Forecast

7.Identify Exceptions for Order Forecasts

8.Resolve/ Collaborative on Exception items

9. Order generation REPLENISHMENT

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2 MANAGEMENT OF SUPPLY CHAINS

2.1 Performance measures - Introduction
Management veterans argue that measurement is a key to continuous im­
provement.

And this leads to variety of maxims like" you can't manage what you don't
measure" and "anything that gets measured gets done'

An effective measurement system has the following characteristics:

• Inclusiveness: measurement of all pertinent aspects

• Universality: allow for comparison under various operating
conditions
• Measurability: data required are measurable
• Consistency: measures consistent with organization goals
If companies are to survive and prosper in information age competition, they
must use measurement and management system derived from their
strategies and capabilities.

Performance Measurement can be defined as the process of quantifying

the efficiency and effectiveness of an action.

The objective of a supply chain is to gain competitive advantage, by im­

proving overall performance through taking a holistic perspective of the
supply chain.

Performance measurement is the "heart and soul" of the performance­

based management process. Flowing from the organizational mission and
the strategic planning process, it provides the data that will be collected,
analyzed, reported, and, ultimately, used to make sound business deci­
sions. It directs the business function by justifying budgetary expenditures,
documenting progress towards established objectives, identifying areas
of both strength and weakness, providing an on-going assessment of the
current "organizational climate;' and driving business improvement. In a
nutshell, performance measurement supports organizational existence.
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Performance measurements are becoming more and more important

when SCM is the subject of interest. In the related literature, drivers are
identified in performance measurements.

1. The changing nature of work. The cost of direct labour related

to cost of material has dropped rapidly since the 1950s.
2. Increased competition
3. Specific improvements initiatives ex JIT, TQM, BPR (Business
process reengineering)
4. National and international quality & Performance Excellence
awards
s. Changing organizational roles changing from control to
empowering employees by management by objectives.
6. Changing external demands. Firms in the public sector must
present information about their performance.
7. The power of information technology
A performance measure is composed of a number and a unit of measure.
The number gives a magnitude (how much) and the unit gives the num­
ber a meaning (what). Performance measures are always tied to a goal or
an objective (the target).

2.2 Types of Performance Measures

Generally, performance measures are divided into five types. These five
types are:

• Input Measures - Used to understand the human and capital

resources used to produce the outputs and outcomes.
• Process Measures - Used to understand the intermediate steps in
producing a product or service. In the area of warehousing for
example, a process measure could be the number of items that
were picked as scheduled.
• Output Measures - Used to measure the product or service
provided by the system or organization and delivered to
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customers. An example of a Distribution Centre's output would

be number of customer orders completed on time.

• Outcome Measures - Evaluate the expected, desired, or actual

result(s) to which the outputs of the activities of a service or
organization have an intended effect. For example, the outcome of
a performance measurement exercise would be an increase in
Customer service level or decrease in cost.
• Impact Measures - Measure the direct or indirect effects or
consequences resulting from achieving performance
measurement program goals. E.g.: By increasing OTIF (On time In
full), shelf availability increases as well as sales increases.
Performance measures can also be categorized as leading, lagging,
and/or behavioral. These types of measures are defined below:

• Lagging Measures - Measure performance after the fact like fill

rate percentage.
• Leading Measures - are more predictive of future performance
and include measures such as near misses of delivery dates,
procedural violations, or estimated logistics cost based on highly
correlated factors.
• Behavioral Measures - Measure the underlying culture or attitude
of the personnel or organization being measured. Examples
would include absenteeism, safety program implementation in
Warehouses, or employee satisfaction questionnaires.
Most performance measures can be grouped into one of the
following six general categories. However, certain organizations
may develop their own categories as appropriate depending on the
organization's mission:

1. Effectiveness: A process characteristic indicating the degree to

which the process output (work product) conforms to requirements.
(Are we doing the right things?)
2. Efficiency: A process characteristic indicating the degree to which
the process produces the required output at minimum resource
cost. (Are we doing things right?)
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3. Quality: The degree to which a product or service meets customer

requirements and expectations.

4. Timeliness: Measures whether a unit of work was done correctly

and on time. Criteria must be established to define what
constitutes timeliness for a given unit of work. The criterion is
usually based on customer requirements.
5. Productivity: The value added by the process divided by the value
of the labor and capital consumed.
6. Safety: Measures the overall health of the organization and the
working environment of its employees.

Some points to be considered when developing performance measures:

• Keep the number of performance measures at each management
level to a minimum. For any program, there are a large number
of potential performance measures. It is important to identify a
limited number, i.e., critical few, performance measures because
acquiring and using information is costly. Measure what you want
to have managed.
• Develop clear and understandable objectives and performance
measures. Performance measures should clarify the objective
and be understandable.
• Determine if the cost of the measure is worth the gain. The
decision to establish a measure should include a consideration
of how much it might cost to obtain data for that measure.
Sometimes the cost of obtaining a measurement may outweigh
any added value resulting from the measurement.
• Consider the cost of attaining the next level of improvement.
Establishing a measure that encourages reaching for a new or
higher level of improvement should take into account the cost of
implementing such a measure against the value of the additional
improvement.
• Assure that the measure is comprehensive. Comprehensive
measurement is desired - both the positive and negative effects
should be measured. In developing performance measures,
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consider measuring positive performance as well as minimizing

possible negative side-effects of the program.

• Consider performing a risk evaluation. The organization should

place greater emphasis on measuring high-risk process and lesser
emphasis on measuring medium- to low-risk processes.
• Consider the weight of conflicting performance measures.
Organizations frequently have several objectives that may not
always be totally consistent with each other. For example, an
objective of 100% service levels may conflict with an objective of
keeping low levels of Inventory.
• Develop consistent performance measures that promote
teamwork. Performance measures should be designed to
maximize teamwork between different organizational elements.
A procurement group awarding a contract to an unqualified low
bidder who delivers a defective product which results in both
schedule delays and increased costs for manufacturing group.

A PMS (Performance Measurement System) should overcome the

shortcomings like: short- term measures, finance based, internal focussed
and encouraging local optimisation.

Control of supply chain processes through measurement is crucial in

improving performance and that managers will be more likely to reach
overall corporate goals and business strategies with the support of a PMS.
Within supply chain management, performance measurement also facili­
tates inter-understanding and integration among supply chain members.
Supply chain members who are linked through such a system will better
respond to customer demand.

Implementation of supply chain PMS in industry has proved difficult due to

the complex characteristics of the supply chain, i.e. conflicting objectives
and mistrust, multiple tiers, incompatibility between ICT systems and lack of
understanding of supply chain practices.

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2.3 Supply chain performance Measurement Criteria

A well-designed PMS should help supply chain managers understand and
improve performance of supply chain operations. The following list of the
criteria will help to design an objective PMS.

Holistic approach - Performance measurement in the supply

chain should take a holistic system perspective beyond the
organisational boundaries. The performance of supply chains
needs to be assessed across the organisations in order to
encourage global optimisation along the supply chain channel.
• Process-based - Successful supply chain management requires
a change from managing individual functions to integrated
activities within key supply chain business processes
• Aligned with strategy - The performance measurement system
must be consistent with the overall strategy of the supply chain.
For instance, if the overall supply chain objective is short delivery
times, logistic strategies that emphasise low cost could be in
conflict.
• A dynamic system - An important criterion for performance
measurement system is that the system needs to be dynamic.
The supply chain is a dynamic system that evolves over time, and
the performance measurement system must have the ability to
change over time to incorporate the changes in the supply chain
and to continually remain relevant.
• Balanced approach - The purpose is to distribute performance
measurement on a set of parameters that is representative for
the most part of the business/supply chain. Supply chain
performance measurement systems should provide a balance
between financial and nonfinancial measures. Financial measures
are important for strategic decisions and external reporting,
while non-financial measures handle the day to day control of
manufacturing and distribution operations.
• A managerial tool - The performance measurement system is
supposed to be a managerial tool, and the system must be able
to arrange the transition from "measurement to "management'

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As a result, the performance measurement system needs to be

simple to understand and provide timely and accurate feedback.
• Cover strategic, tactical and operational level - The performance
measurement system should assess and give relevant
information to the appropriate level of management. Strategic
level measures influence the top level management decisions,
tactical level deals with resource allocation and operational level
measurements and metrics assess the results of decisions of low
level managers.
• Provide a forward looking (leading) perspective-the performance
measurement system should capture trends rather than snapshots
of the business
• Tool for improvement - The performance measurement system
should focus on improvement. New methods and concepts like
TPM (Total Productive Management) and TPS (Toyota Production
System), emphasise continuous improvement, which should result
in raising the performance expectation over time.
• Provide drill-down functionality-The performance measurement
system should give the managers the ability to pinpoint distinct
areas for improvement.
• Handling conflicting objectives - The performance measurement
system should assess the different trade-offs within a supply
chain and visualise the results to prevent sub-optimisation
• Simple - The performance measurement system should be easy to
understand at all levels in the organisations and it should contain
a limited number of relevant measures
• Comparability - The performance measurement system should
enable the supply chain to benchmark its performance to a set of
standards
• Relevant metrics - The performance measurement system should
only use relevant metrics that enable appropriate decision­
making.

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2.4 Performance measurement techniques- BSC,

Benchmarking

Various Performance Measurement Methods:

1. Financial Measurements :
Historically, enterprises used to measure their business performance with
financial performance metrics.

Commonly, the following finance based measures are used:

Return on investment (ROI) = Income/ Capital

Return of Capital employed {ROCE) = Net operating profit before interest

and tax/ Capital employed

Return on Net Assets (RONA) = (Income after taxes+ Interest- interest tax
shield+ capitalized interest)/ (Total assets - Total current liabilities)

Return on Assets or Inventory (ROA)= (Income after taxes+ Interest - inter­

est tax shield+ capitalized interest) /Total assets

Return on operating assets (ROOA) = Op. Profit/ Op. Assets

Residual Income (RI} = Income - ( Capital x Required rate of return}

Tracking of financial performance is insufficient to measure the supply

chain performance of today's Supply chain organizations for the following
reasons:

1. The measures do not provide any forward-looking perspective.

2. The measures do not relate to strategic, non-financial performance.
3. The measures do not directly tie to effectiveness and efficiency.
4. The measures do not focus on process oriented and cross-
organizational aspects.

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These reasons give raise to evolution of other performance measures.

Activity Based Costing (ABC):

ABC achieve their improved accuracy over traditional volume-based cost

systems by using multiple cost drivers (instead of just one or two} to trace
the cost of activities in a process to the products that consume the re­
sources used in those activities.

"Activity based costing is an information system that maintains and pro­

cesses data on a firm's activities and products. It identifies the activities
performed, it traces cost to these activities, and then uses various cost
drivers to trace the cost of activities to the products. These cost drivers
reflect the consumption of activities by the products. An ABC system is
used by management for a variety of purposes relating to both activities
and products"

ABC is no longer just a product costing system, instead, it is a database

that constrains a broad array of information on activities. This information
feeds a number of management uses. Actually, the use of ABC implies the
development of the following steps:

- the allocation of direct costs to products;

- the allocation of indirect costs to activities;

- the cost drivers identification;

- the allocation of activity costs to products, which is made measuring their

requirement of activities (expressed in cost driver units).

Using ABC, supply chain management can also identify the supply chain
cost drivers, that it must control and manage in order to improve supply
chain efficiency.

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2. Economic Value Added (EVA):

Economic Value Added (EVA) is the financial performance measure that

comes closer than any other to capturing the true economic profit of an
enterprise. EVA also is the performance measure most directly linked to the
creation of shareholder wealth over time. Stern Stewart & Co. (1991) guides
client companies through the implementation of a complete EVA­ based
financial management and incentive compensation system that gives
managers superior information and superior motivation to make decisions
that will create the greatest shareholder wealth in any publicly owned or
private enterprise.

According to the definition of EVA by Stern Stewart & Co., EVA is net op­
erating profit minus an appropriate charge for the opportunity cost of all
capital invested in an enterprise. As such, EVA is an estimate of true "eco­
nomic" profit, or the amount by which earnings exceed or fall short of the
required minimum rate of return that shareholders and lenders could get
by investing in other securities of comparable risk.

The equation of EVA as below:

EVA= Net Operating Profit After Taxes- [Capital x The Cost of Capital]

Supply chain management focus is to create value for the final customer:
only by offering an efficient and effective service to the client, can the sup­
ply chain can obtain a competitive advantage.

By assessing a charge for using capital, EVA makes managers care about
managing assets as well as income, and helps them properly assess the
tradeoffs between the two.

However, the value creation for the final customer is a means to achieve
another goal, which is the performance improvement and the long term
success of supply chain members.

EVA is a measure of the value created by a firm. It is determined as fol­

lows:

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EVA= NOPAT - WACC * C

or

EVA= (r-WACC) * C

where:

NOPAT = net operating profit after taxes

WACC = weighted average capital cost

C = invested capital

r= NOPAT /C

Using this indicator it is possible to verify whether management generates

a net operating profit after taxes higher than the cost of the capital neces­
sary to generate that profit.

The determination of EVA involves four steps:

1. first of all, it is necessary to calculate net operating profit after

taxes;
2. then, determining invested capital, inclusive of working capital
and fixed assets, is needed;
3. following this, it is necessary to find out weighted average capital
cost, which is the average cost of equity and debt;
4. Finally, it is necessary to compare net operating profit after taxes
and weighted average cost of invested capital: only if the first one
exceeds the second one does a firm generate value. On the
contrary, it destroys value.

Logistic and supply chain management choices affect the Economic Value
Added of a firm because they have an impact on all key variables in deter­
mining this indicator. In fact, they are able to affect:

- the level of revenue growth;

- the reduction in operating costs;

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- fixed assets efficiency;

- Current assets efficiency.

Are Financial Measures Sufficient?

Even though, in a business all activities boil down to ‘costs: Criticisms have
continued to surface about too much focus on financial measurements.
Some of the criticisms include the following: (1) Encouraging local optimi­
zation, (2) Focus on the past, (3) Have been obstacles to implementation
of just-in-time manufacturing, (4) Are not exact enough to be useful for
productivity measurement and improvement programs, (5) Are lagging
performance indicators, historical in nature, (6) Are the result of actions
and not the cause of them, (7) Do not measure and integrate all factors
that are of importance for a firm's success, (8) Are not externally focused,
(9) Are not suitable in modern manufacturing settings, (10) exclude some
important factors which influence market share and profit, (11) Do not re­
ally guide firms in their strategic choices.

3. The Balanced Scorecard (BSC)

Several models for balancing financial and non financial performance
measurements have been developed and one of the most well known is
the so called Balanced Scorecard, developed by Robert Kaplan and David
Norton.

BSC model of performance measurement, make use of set of 'metrics' to

have a balanced perspective. Explanation on metrics is given in Annex 1.

The BSC identifies a performance measurement scheme able to:

- express the strategic vision of a firm;

- connect strategic goals to suitable performance indicators;

- communicate objectives and measures to the whole organization;

- plan, program and suggest strategies and goals to achieve long term re-
sults;
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- develop and improve the strategic feed-back process.

To do this, the BSC is organized through indicators grouped in four differ­

ent perspectives, each one with special objectives, measures, targets and
initiatives to undertake performance improvement.

The measures are a mix of financial and operating indicators, concerning

both the short and the long term.

The perspectives are:

- the financial perspective, where financial results are considered;

- the customer perspective, to identify the goals in order to satisfy custom-

ers'needs and the measures useful to their monitoring;

- the internal business process perspective, useful to identify and monitor

key processes, indispensable to achieve the previous perspective goals;

- the learning and growth perspective, where goals and measures regard­
ing innovation and learning are stated.

The most interesting aspect of the application of the Balanced Scorecard to

the supply chain is the fact that it perfectly reflects the criteria that, in some
scholars' opinion, should characterize supply chain measures as:

- Business Process Perspective = waste reduction, time compression, flex­

ible response, unit cost reduction

- Customer Perspective= product quality, delivery time, flexibility

- Financial Perspective = benefits for supply chain operators, deriving on

one hand from cost reduction and on the other hand from the increase in
revenues; Higher profit margins , Improved cash flow, Revenue growth,
Higher return on assets.

- Learning & Growth Perspective= the capability to continuously improve

performance, as learning and innovation abilities are the basis of the main­
tenance and the improvement of supply chain performance.

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4. Bench Marking : One method to do performance measurements is to

perform a series of benchmarking tests on supply chain processes. Bench­
marking or goal setting on a number of areas in their supply chain includ­
ing productivity, inventory accuracy, shipping accuracy, storage density
and bin-to-bin time is possible. It is used for performance comparisons, to
set targets and helps to understand and adopt best practices.

Types of Benchmarking
Three types of benchmarking can be identified; internal which is focused
on the processes of a single company, external which examines processes
outside of a company's direct industry and competitive, which examines
processes at firms within the same industry.

Internal Benchmarking
The internal benchmarking allows a company with a number of facilities that
operate the same supply chain processes to compare and contrast the
ways in which the process is performed in those facilities. For example if a
company operates five distribution centers in different regions of the
country, then benchmarking process can examine a number of operations
that take place at each of the distribution centers and compare how they
are performed and what improvements can be made by comparing the
results of the benchmarking. If a company benchmarks the processes
around inventory accuracy, shipping accuracy and storage density, the re­
sults of the assessments of the facilities can help a company to improve on
those processes at all of the facilities.

External Benchmarking
For companies that have performed internal benchmarking and want to
investigate new ways in which to improve performance of their inter­ nal
processes, to become leaders, external benchmarking can produce
significant improvements. Many companies believe that their processes
are as efficient as possible, but quite often, the efficiencies are limited by
the knowledge within the company. The external benchmarking process
takes a company outside of its own sector and exposes them to different
methods and procedures. For example, a manufacturer and distributor of
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electrical components can compare their warehouse performances with

another distributor of similar components who had been recognized as
industry leader. In the next step, the electrical components manufacturer
can compare his warehouse performances with another auto components
manufacturer since the process 'warehousing' is treated common in this
benchmarking case.

Companies can benchmark their Supply chain performances against in­

dustry standards too. The data could be extracted from the reports of cor­
responding industry reports. For example, Industry associations publish
data on various parameters. Retail Association of India publishes reports
on various parameters about Indian Retail Sector. Similarly, Automobile
Association and Pharmaceutical associations publish reports periodically.
These data are useful for benchmarking one company's performance with
industry standards. International Associations conduct benchmarking
studies and provide data for comparisons. A study done in 2008 by Ware­
house Education Research Council (WERC} and DC Velocity on Warehouse
Benchmarking reveals the metrics and their values in table.

The most important challenges in benchmarking are:

a. Process comparability/Standardization

b. Common definitions

c. Finding appropriate supply chain/firms to benchmark

d. Data for comparisons from other firms.

Source: 2019 Warehouse Education Research Council and DC Velocity An­

nual Warehouse Benchmarking study

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5. Cost Based Performance Measures :The traditional objective of SCM is to

minimize the total Supply Chain Cost to meet fixed and given demand. All
the performance measures will be designed focussing the Supply chain cost
minimization. This kind of cost focussed measures have meaningful
applications in certain industries where the commodity is in shortage and
demand is always higher than the supply. Example could be Cement, where
in the challenge of Cement supply chain is reducing Supply chain cost.This
holds good for essential controlled commodities too.

On the cost side of performance measure, 1 inventory Turnover Ratio'

(ITO) is a key metric used by companies at the high level, to manage their
inventory. Inventory Turns or Inventory Turnover is the number of times that
inventory cycles or turns over per year.

The higher the inventory turns, the better the firm uses its inventory as­
sets. Another common measure is days of supply. A firm's days of supply is
found by dividing the average inventory level by the cost of one day's
sales.

Calculation:

Formula to calculate ITO: Cost of goods sold/ Average inventory at cost

Where Cost of goods sold = Sales - Gross profit or + Gross loss or

Opening stock+ Net purchases+ Direct Expenses - Closing stock and

Average inventory= (Opening stock+ Closing stock)/ 2

In the absence of required information, any one of the following formula

may be substituted as:

Inventory turnover ratio= Net sales/ Average inventory at cost

or

Net sales/ Average inventory at selling price or

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Net sales/ Inventory

Interpretation of ITO:

High turnover suggests efficient inventory control, sound sales policies,

trading in quality goods, reputation in the market, better competitive
capacity and so on.

Low turnover suggests the possibility of stock comprising of obsolete

items, slow moving products, poor selling policy, over investment in stock
etc.

ITO do not talk about service levels, ie stock outs or shortages.

Inventory Conversion Period:

How many days were taken to dispose off average inventory? It is known as
inventory conversion period and is calculated as:

Inventory conversion period= Days in the year/Inventory turnover ratio

or

No of days in the year x Average inventory at cost/Cost of goods sold

Example:

From the following particulars calculate (1) Inventory turnover ratio and
(2) Inventory conversion period.

Cost of goods sold is Rs 4,50,000, Opening stock was Rs.1,25,000, Closing

stock was Rs.1,75,000

Solution:

(1) Inventory turnover ratio= Cost of goods sold/ Average inventory

= 4,50,000 I 1,50,000*

=3times

*(1,25,000 + 1,75,000) I 2

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(2) Inventory conversion period= No. of days in the year/Inventory turn­

over ratio

=365/3

= 121.66 days (say) 122 days.

= 365 x Average inventory/ Cost of goods sold

= 365 X 1,50,000*/4,50,000

= 121.66 days (Approx.) 122 days.

*(1,25,000 + 1,75,000)/2

Impact of ITO: Example

If the annual cost of goods sold is Rs.10 million, and the average inventory is
Rs 2.5 million,

a. what is the inventory turns ratio ?

10/2.5 = 4

b. What would be the reduction in average inventory, if the inventory turns

were increased to 10 time per year

10,000,000/10 = Rs.1,000,000

c. If the cost of carrying inventory is 20 % of the average inventory, what is

the annual savings?

Reduction in Inventory= Rs.1,500,000

20% x 1,500,000= Rs.300,000

An indicative list of costs associated with Supply chain management are:

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Order Management

Cost Customer Service

Cost

Cost centers like Sales & Marketing and Customer Relationship Centres that
have to do with entering customer orders, reserving inventory, credit check,
consolidating orders, processing inquiries and quotes

Finished Goods Warehouse Cost

Distribution Centres and Warehouses that have to do with the storage,
receiving, picking, and shipment of finished products.

Outbound Transportation Cost

Logistics and Distribution division who takes care of the transportation (all
modes including export) of finished products.

Accounts Receivable Cost

Finance and Accounts divisions who do the processing and closure of
customer invoices including collection.

Material Acquisition Cost

Purchasing Cost
The departments associated with both the strategic as well as the tactical
parts of the purchasing process - Purchase and procurement departments,
Vendor development teams and Sourcing teams.

Raw Material and components In-plant Warehouse Cost

The costs associated with the receiving, storage, and transfer of raw
material and components into in-plant warehouses or stores.

Supplier Quality Cost

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The cost associated with supplier qualification, product verification and

ongoing quality systems for raw materials and components.

Inbound Transportation Cost

Costs incurred in transportation (all modes including import) of raw
material and/or purchased finished products.

Accounts Payable Cost

Cost of Accounts and finance divisions who do the processing and closure of
supplier invoices including credit and disputes.

Planning Cost

Demand Planning Cost

The cost allocated to forecasting and overall demand management activ­ ity.

Supply Planning Cost

The costs allocated to supply planning including overall supply planning,

distribution requirements planning, master production planning,
production scheduling.

Supply Chain Finance Control Cost

The cost involved in reconciling plans with financial plans, account and
control supply chain costs and report financial performance of the supply
chain.

Inventory Carrying Cost

Opportunity cost consisting of warehousing, capital and storage,

Cost associated with inventory as incoming stock level, work in progress,

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Service costs, consisting of costs associated with stock management and

insurance,

Cost held up as finished goods in transit,

Risk costs, consisting of costs associated with pilferage, deterioration,

damage.

Cost associated with scrap and rework.

Cost associated with shortage of inventory accounting for lost sales/lost

production.

The additional cost of shrinkage and obsolescence in the form of accruals

and/or write offs.

The cost allocated to the payment of taxes and insurance for inventory assets.

IT Cost for Supply The cost centers summarizing the fixed costs
associated with IT application costs to procure, supply plan, produce,
deliver, and Return.

IT Operational Cost for Supply Chain

The cost centers summarizing the ongoing expenses associated with
maintenance, upgrade, and development of IT costs to support all supply
chain activities.

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2.5 Formulation of Metrics

Supply Chain Performance Measurement with hierarchy of Metrics:

A metric is a verifiable measure, stated in either quantitative or qualitative
terms and defined with respect to a reference point. Ideally, metrics are
consistent withhow the operation delivers value to its customers as stated in
meaningful terms.

Metrics generally serve the following purpose:

1. Control: Metrics enable managers and workers to evaluate and control the
performance of the resources for which they are responsible.

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2. Communication: Metrics communicate performance not only to internal

workers and managers for purposes of control, but to external stake­
holders for other purposes as well.

3. Improvement: Metrics identify gaps (between performance and

expectation) that ideally point the way for intervention and improvement.
The size of the gap and the direction of the gap (positive or negative)
provide information and feedback that can be used to identify productive
process adjustments or other actions.

Performance metrics are typically organised in a hierarchy, to reflect the value

creation process in the supply chain. This hierarchical structure en­ ables to
understand the constituent factors of a high-level metric and identify
opportunities for improvement. At the top of the metric hierarchy are the
overall measures in three key typical performance areas, viz. Quality,
Efficiency and Delivery. At the highest level, the performance measurement
system (PMS) level integrates, coordinates metrics across the various
functions and aligns the metrics from the strategic to the operational levels.
The challenge is to design a structure for every activity, product, function, or
relationship to the metrics (i.e., grouping them together) and extracting an
overall sense of performance from them.

For the past several years, analyst firm AMR Research has attempted to rank
the most successful supply chains in the world, balancing out the opinions of
supply chain experts and AMR analysts with solid metrics (inventory turns,
return on assets and revenue growth). Taking all of those factors into
account, AMR then produces an annual list of the top supply chains. AMR
has published a full hierarchy of metrics that allows management to
assess overall performance at the highest level, diagnose problems via
process decomposition and make corrections at the tactical work Level.
The hierarchy published by them is given below.

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One Size Does not Fit all : A comprehensive list of metrics is given in the
Annex.

In addition, metrics will have to be designed to meet the specific

requirements of an activity based on the nature of commodity and service.
For example a warehouse providing spare parts support to a car
manufacturer will have a key performance measure as'Vehicle off the Road'-
VOR, which tracks number of cars that have become non-operational due to
the short­ age of a spare part.

Similarly a company in FMCG sector may fix the below mentioned perfor­
mance measures for their distribution centre that supports retail selling as:

Inaccurate Forecasts : difference between forecasted units and actual sales

Lost Sales : As a result of misdistribution,low delivery performance

Quality issues - Expiry/ Leakage/ Damage: Demand management of short

shelf life products.

Data I Information availability: Lack of integrated system across functions to

make data available on line for decision making.

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Total Delivery Cost: Inter depot transfers, truck detention, and high inven­
tory all add up to a high delivery cost.

Hence a generic method to design a metric would be:

PM max = x It > if the parameter for measurement is to be maximized

PM min = t / x > if the parameter for measurement is to be minimized

Where , PM max/min = the value of the performance measure ( usually

converted to percentage by multiplying with 100)

't' = Targeted Value of the variable (unit)

'x' = Measured value of the variable (unit) and t & x > 0

2.6 Function based Approaches in Supply Chain Performance Mea­

sures:
In a 'function' based performance measurement system, each functional area
measures its performance in its own terms.

Individuals working under these measurement systems tend to drive op­

erations toward improving their own area's performance, frequently at the
expense of the performance of other functional areas. When each func­
tional area sets its performance measures in isolation from those of others, it
often leads to functional silos and conflicting organizational goals.

A typical set of function- based supply chain-related performance mea­ sures

used by many manufacturers is as follows:

For Purchasing function, the measures would be : Supplier Performance

and Cost Per Unit Purchased.For Logistics division, it could be,
Transportation Costs and Warehouse Productivity.

These types of measures used in isolation of each other tend to create con­
flicting goals among functional areas as this: Customer Service and Sales - In
these functional areas, employees tend to drive operations toward satisfying
potentially smaller sized customer orders and carrying high levels

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oods inventories by stocking inventories in multiple locations close to customers to

shorten cycle times.

• Logistics - In this functional area, employees are measured by trans­

portation and warehousing costs, and inventory levels. Measured in this
context only, Logistics personnel tend to keep inventories low and batch
customer orders to ensure that trucks are shipped full and picking opera­
tions are minimized.

On the inbound side, these employees will want to receive full truckloads at
their warehouse docks to minimize receiving costs, usually at the ex­
pense of increased inventories.

Example - Measures for Transportation:

1. Cost per hour - Cost of the freight per hour over the last month.
2. Cost per distance - Cost of freight per distance (km) covered.
3. Cost per pallet- Cost of freight per shipment ship unit.
4. Cost per shipment - Cost of freight per shipment.
s. Percent on-time pickup - Percentage of time the freight was
picked up on time (within on-time parameters)
6. Percent on-time delivery - Percentage of time the freight was
delivered on time (within on-time parameters)
7. Percent times claims filed on shipments- Percentage of time
claims were filed on the shipment over the last month.
8. Total shipments- Total shipments in the current month.
9. Total cost - Total cost of the shipments this month.
10. Total cube - Total freight volume this month.

11. Total weight - Total freight weight this month

2.7 Process view of Supply Chain - Integrated measures

Supply chain as a ‘Process':

To integrate supply chains, companies are starting to break down the
functional silos by visualising their entire Supply chain activities as a single

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process. This is done by either creating departments responsible for an

overall process (Supply chain teams)or creating cross-functional teams that
drive an overall process, such as:

• Order fulfilment-(e.g., order-to-cash)

• New product development/introduction- (e.g., concept-to-first
sale or production batch)
• Total cycle time - (e.g., materials purchase to customer payment or
cash-to-cash)
CASH to CASH Cycle time : The metric represents the time it takes for the
money to flow back into the company after it has been spent on raw ma­
terials. It is one of the major metrics to determine how well the company is
managing the financial flows from both your suppliers (through accounts
payable) and your customers (through accounts receivable) - on an end to
end process. For example, a company that produces and sells goods has an
cash-to-cash cycle comprising four phases: - Purchase raw material and
produce goods, investing in inventory; - Sell goods, generating sales, which
may or may not be for cash; - Extend credit, creating accounts receivables,
and - Collect accounts receivables, generating cash. The longer the cash-to-
cash cycle, the more current assets are needed since it takes longer to
convert inventories and receivables into cash. In other words, the longer the
cash-to-cash cycle, the more net working capital is required. Another factor
for consideration is that purchases may be made on credit. By not paying for
purchases immediately (using trade credit), the company reduces its liquidity
needs. Similarly, the credit the company gives to its customers increases the
cash-to-cash cycle time as it takes longer for customers to pay to the
company. The information needed to calculate this measure can be found in
the annual income statement and balance sheet of the company. This
measure illustrates how quickly a company can convert its products into cash
through sales. The shorter the cycle, the more working capital a business
generates, and the less it has to borrow.

Calculation Formula

Cash to Cash Cycle Time in Days= AR days+ INV Days - AP Days,

Where:

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AR days= Accounts Receivable in days= (Accounts receivables x 365) /

Revenue
AP Days = Accounts Payable in days = (Accounts Payables x 365) I Cost of
Goods Sold
INV= Inventory Days= (Inventory x 365) / Cost of Goods Sold
To support these organizational changes, companies are supplementing
function based measures with process-based performance measures.
While this approach does not support the total elimination of function­
based measures, it places focus on the performance of an overall process,
using these measures as diagnostic information to assess what is affecting
overall performance.

In this, a process is defined as a structured and measured set of activities

designed to produce a specific output for a particular customer or market. In
the supply chain process model, each process that individually takes an
irreplaceable role is composed of a set of activities, each of which performs a
specific set of functions. A process will have sub processes. The
performance of each process is the aggregated results of the performance
of all its lower-hierarchy activities and sub- processes. Measuring the higher
process performance is transformed into assessing the activities and pro­
cesses performance in the lower hierarchies.

For example, the mission of the Warehousing process is receiving the right
materials from suppliers or plant, store them in proper manner, pick and
dispatch as per customers' requirements. Receiving, put-away, picking are
sub processes to warehousing.

The case of an automotive company is taken for example. This company is

a car manufacturing company producing cars, referred as Complete Built
Unit (CBU). Few model cars are imported as built units and sold in the
domestic market. Number of parts are procured from domestic as well as
overseas market. Finished cars are distributed through their dealer network.
They have to support after sales market with spare parts. They have
divided their entire Supply chain activities in to six sub processes viz.

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1. Ordering Process,

2. Production Management,

3. Material Follow up and procurement

4. Inbound Logistics,

5. Outbound Logistics,

6. Spare parts and

7.Claims.

The list of performance measures for the sub processes are given below.

1. ORDERING PROCESS

Order freezing decision meeting lead time

Percent deviation of local order forecasts from the realized sales (strategic)

Percent deviation of export order forecasts from the realized sales

(strategic)

Lead time of monthly production plan preparation

Percent order entries by dealer with respect to quote determined

Realization of dealer sales target

Performance of file transactions (Correctness of data transfer)

Coherence of the production program with respect to orders Late

orders quantity

Late orders delay time Make

to stock quantity

Modification frequency of local orders

Modification frequency of export orders

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Finished vehicles stock/ turnover (days) Order

to delivery lead time

2. PRODUCTION MANAGEMENT

Coherence between Product Distribution Plan(PDP) and MRP

Coherence between realized program and MRP

Frequency of postponed validation

Re-treatment quantity/frequency (based on type, period, vehicle)

Urgent order request quantity/frequency

Urgent request fulfillment cycle time

Frequency and percentage of monthly program changes

Amount of backorders

Number of simulations to correct the system mistakes Percentage

of local critical items with respect to total local items

Percentage of import critical items with respect to total import items

Production cycle time of CBU

Quantity/frequency of scrap orders

3. MATERIAL FOLLOW UP & PROCUREMENT

Order modification ratio (P/E change)

Number & Frequency of "Urgent material requests"from suppliers

Percentage of incoherencies between physical and system records of material

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Amount of items requested for inventory (to correct records)

Production with missing parts quantity/frequency

Line-stop durations and frequency

Quantities/ number of items transported by air, express cargo

Volume/weight transported by air, express cargo

Money spent for transportation by air, express cargo charged to suppliers Performance of
information systems
Performance of early/late delivery

Time spent for part missing vehicle completions

Frequency/percent change of mix Percentage/number

of alternative material usage Percentage/number of

nonstandard material usage

Percentage/number of items supplied from alternative suppliers

indirect labor hour for follow up

Quantity/percentage of items used which are not in BOM

Inbound stock levels in (Value/Days)

Number of items in JIT Number

of items in KANBAN

Number of items in negative stock

Percentage of firms in the Milk Run

Delivery volume percentage of Milk Run

4. INBOUND LOGISTICS

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Transport costs (road, Ship, air) Transport

lead times and deviations Extra customs

clearance cost Warehouse address

incoherencies

Warehouse efficiency ratio

Cycle time of the trucks in the plant

Percentage/number of unsuitable packaging from suppliers

Container delay costs

Import material customs clearance lead time

Information system incoherencies

Amount and area of empty/full containers

Percentage of wrong/missing/excess material delivered by suppliers

Container/special packaging equipment returning cost

5. OUTBOUND LOGISTICS (Vehicle delivery)

Delivery cost per vehicle

Number of vehicles returned from dealer

waiting time in the park area

Number of defected vehicle after assignment point

Number of defected vehicle in park area

Transport cycle time from invoicing until delivery to dealer

Dealer CBU stock (Waiting time at dealer)

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Factory CBU stock (Assembly line output to assignment point) Lead

time from point assignment to dealer

Ready-to-deliver CBU stock levels more than 3, 6,9,12 months

Performance of transporters (lead time)

Damaged cars during transport (unload from ship,loading, unload,missing

document)

Warranty cost/per vehicle (LOCAL/EXPORT)

5.1 IMPORTED CARS

Waiting time at port

Lead time from port to end customer

Transporter performance (Quality, lead time)

6. SPARE PARTS

Lead time of urgent orders

Amount of urgent orders (based on dealer)

Stock replenishment level (TURNOVER)

OTD lead time of normal orders (target 30 days)

Request fulfillment ratio (Service level)

Open orders ratio

Way bill mistakes (Feedback from dealer)

Suppliers' delivery performance (both OEM and Supplier)

Time needed between purchase order until ready-to-deliver

Packaging time

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Packaging cost

Percentage of correct material shipments

Lead time from temporary stock warehouse to permanent warehouse

7. CLAIM
Costs of service exceeding 24 hours

Cost of changing the customer's car with a new one Vehicle

hand over time (lead time from claim to hand over)

Destruction cost

Number of service calls.

2.8 Performance measures for Collaboration:

Global competition has caused organizations to rethink the need for co­
operative, mutually beneficial supply chain partnerships and the joint
improvement of inter-organizational processes through Collaboration.

Collaboration takes many different forms, including strategic alliances, joint

ventures, third party logistics, short- and long-term contracts, partnership
sourcing, and retailer-supplier partnerships. Collaboration at the strategic
level is concerned with decisions that influence the future direction of the
collaborative supply chain, for example, capital investment and
restructuring the supply network through acceptance or exclusion of
players. At the managerial level, the main concern is the optimization of
the flow of goods and involves forecasting, planning and resource control.
The operational level encompasses routine and repetitive tasks such as
production or transportation scheduling and stock control. To measure the
effective­ ness of collaboration, metrics can be formulated around
mechanisms such as:

1. Joint plan on product assortment

2. Joint plan on promotional events
3. Joint development of demand forecasts

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4. Joint resolution on forecast exceptions

s. Consultation on pricing policy
6. Joint decision on availability level
7. Joint decision on inventory requirements
s. Joint decision on optimal order quantity
9. Joint resolution on order exceptions
10. Flexibility in volume, schedule, time and cost.

2.9 The Supply Chain Council's SCOR Model

The Supply Chain Council (SCC) was set up between 1996 and 1997, with
members representing most industries and global geographies, including
BASF, Bayer, Colgate-Palmolive, Lucent technologies, Procter & Gamble,
Unilever and Siemens, as well as consulting organisations. The SCC de­
signed Supply Chain Operations Reference Model -SCOR model, which is
designed and maintained to support supply chains of various complexities
and across multiple industries. It spans all customer interactions (or­ der
entry through paid invoice), all physical material transactions (sup­ plier's
supplier to customer's customer, including equipment, supplies, spare
parts, bulk product and software) and all market transactions (from
understanding of aggregate demand to the fulfilment of each order).
http://supply-chain.org/scor

SCOR is a management tool. It is a process reference model for supply chain

management, spanning from the supplier's supplier to the customer's
customer. The SCOR-model has been developed to describe the business
activities associated with all phases of satisfying a customer's demand. By
describing supply chains using process building blocks, the Model can be
used to describe supply chains that are very simple or very complex using a
common set of definitions. As a result, dissimilar industries can be linked to
describe the depth and breadth of virtually any supply chain.

The SCOR model is based on five management processes:

Plan: balances Supply and demand

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Source: procurement of products and services

Make: transforming of products and services into finished goods

Deliver: delivery of products and services.

Return:reverse flow of goods back from the customer.

Performance Attributes -

SCOR identifies five core supply chain performance attributes: Reliability,

Responsiveness, Agility, Costs, and Asset Management

Directly associated with the performance attributes are the Level 1 strate­ gic
metrics.These Level 1 metrics are the calculations by which an organization
can measure how successful it is in achieving its desired positioning within
the market space.

Many metrics in the SCOR model are hierarchical, just as the process
elements are hierarchical. Level 1 metrics are created from lower level
calculations. Level 2 metrics are generally associated with a narrower
subset of processes. For example, Delivery Performance is calculated as the
total number of products delivered on time and in full based on a commit
date. Additionally, metrics (diagnostics) are used to diagnose variations in
performance against plan. For example, an organization may wish to
examine the correlation between the request dates and commit date.

3. GREEN SUPPLY CHAINS:

Supply chain management is the coordination and management of a
complex network of activities involved in delivering a finished product to
the end-user or customer. All stages of a product's life cycle will influence a
supply chain's environment burden, from resource extraction, to
manufacturing, use and reuse, final recycling, or disposal. Green SCM
recognizes the disproportionate environmental impact of supply chain
processes in an organization.

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Beyond this definition with adding the "green" component, it refers to

green supply chain management (GSCM) which is defined as "green
procurement+ green manufacturing+ green distribution+ reverse logistics'
The idea of GSCM is to eliminate or minimize waste (energy, emissions,
chemical/hazardous, solid wastes) along supply chain.

Regulation, along with a drive to improve efficiency and enhance corpo­ rate
reputation, has encouraged the majority of large organizations to look at how
they can measure and reduce carbon in their Supply chains. Hence carbon
reduction along the Supply chain becomes one of the standard business
practices to attain Sustainable Supply Chain Management.

3.1 Green House Gases (GHG):

As the Goldilocks Principle sums up, "Venus is too hot, Mars is too cold, and
Earth is just right: ‘The fact that Earth has an average surface temperature
comfortably between the boiling point and freezing point of water, and thus
is suitable for our sort of life, cannot be explained by suggesting that our
planet orbits at just the right distance from the sun to absorb just the right
amount of solar radiation. Our moderate temperatures are also the result of
having just the right kind of atmosphere. A planet's climate is decided by its
mass, its distance from the sun and the composition of its atmosphere.

Mars has a thin atmosphere, 0.03 % of its atmosphere is CO2 and the
temperature in the planet is (-) 53°C, which is Lower than our deep freeze!.

On the other hand, Venus has a thick cloud, 95 % of its atmosphere is CO2
and the temperature in the planet is(+) 470°C, sufficient to Bake a cake!

The Mars's blanket is too thin, and the Venus's blanket is too thick. In other
words, parts of our atmosphere act as an insulating blanket of just the right
thickness, trapping sufficient solar energy to keep the global average
temperature in a pleasant range. The' blanket' here is a collection of
atmospheric gases called 'greenhouse gases' based on the idea that the
gases also 'trap' heat like the glass walls of a greenhouse do.

Our Earth receives most of its energy, called radiation, from the Sun. This
energy is electromagnetic radiation in the form of Visible light, with small

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amounts of Infrared (IR} and Ultraviolet (UV). The incoming visible solar
energy has a very short wavelength and passes right through the
atmosphere. The Earth's surface absorbs the solar energy and releases it
back to the atmosphere as Infrared (IR} radiation, some of which goes right
back into space. But some of the IR radiation emitted by the Earth is
absorbed by greenhouse gases in the atmosphere and sent back towards the
Earth's surface. That warms the Earth's surface. Three main gases in our
atmosphere that contribute to the greenhouse effect are carbon dioxide,
methane, and water.

These gases allow incoming solar radiation and Prevent outgoing infrared
radiation causing a warming known as the greenhouse effect.

The warming due to greenhouse gases is expected to increase as humans

add more greenhouse gases to the atmosphere. Greenhouse Gases greatly
affect the temperature of the Earth, without them, the Earth's surface would
be about 33°C (59 °F} colder than at present. Some amounts of GHGs are
absorbed by the natural systems such as oceans and plant bio­ mass, which
are also referred to as sinks of GHGs. The buildup of GHGs in the atmosphere
is therefore the net emission from sources and removal by sinks. The effect
of manmade GHGs is equivalent to 1 % increase in power of sun

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Recognition and beginnings of a concerted global response to the

deterioration of the environment and its implications can be traced to the
United Nations Conference on Human Development held in Stockholm in
1972.

Concern on climate change increased through the 1980s, and an

Intergovernmental Panel on Climate Change (IPCC) was established by the
World Meteorological Organization (WMO) and the United Nations
Environment Programme (UNEP) as a scientific intergovernmental body to
provide an assessment of the latest scientific research and its policy
implications for mitigation and adaptation.

The 1990s witnessed the growing consolidation of the global response at

the international level. At the Rio Summit in 1992, the United Nations
Framework Convention on Climate Change (UNFCCC) was adopted. The
UNFCCC is the primary vehicle of Global Cooperation and Action for
Climate Change with the objective of stabilizing Greenhouse Gas (GHG)
concentration at a level that would prevent dangerous anthropogenic
interference with the climate system. The UNFCCC places the primary
responsibility of mitigation on industrialised countries.

The Convention entered into force on March 21st, 1994 after receiving the
requisite number of ratifications.

The first Conference of Parties (COP) to the Convention (UNFCCC), which

was held in April 1995, adopted the Berlin Mandate which led to the
formulation of Kyoto Protocol in 1997. As per the Kyoto Protocol,
industrialised countries (US has not ratified the Kyoto Protocol) have to
undertake quantified emission reductions over specified commitment
periods. Industrialised countries have binding commitments to reduce
their overall emissions of six greenhouse gases by at least 5.2 percent below
1990 levels in the period between 2008 and 2012, with specific targets
varying from country to country. The Protocol also provided the basis for
three mechanisms in meeting their national targets cost-effectively - an
emissions trading system, Joint Implementation (JI) of emissions-reduction
projects and a Clean Development Mechanism (CDM) to encourage joint
projects between Countries.

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Since progress towards meeting the objectives of the UNFCCC was not
satisfactory and the evidence on climate change became the subject matter
of intense debate following the publication of the 4th Report (2007) of IPCC,
in Bali, an Action Plan to enhance the implementation of the UNFCCC was
worked out. The Bali Action Plan (BAP} seeks to ensure full, effective and
sustained implementation of the UNFCCC through long-term cooperative
action of the Parties, up to and beyond 2012. Parties were expected to reach
an agreement on issues under negotiations as per the BAP at the CoP 15,
held at Copenhagen in December 2009. However, negotiations could not
be concluded and no agreed outcomes could be reached be­ cause of
continuing differences amongst parties over several contentious issues.
The two "Ad-hoc Working Groups" (AWGs) were given an extended period of
one more year with a mandate to reach an agreement at CoP 16 to be held
at Cancun (Mexico) from November 29 to December 1O, 2010.

The Copenhagen conference did lead to the emergence of the

"Copenhagen Accord" on climate change, negotiated by a group of
countries. The Accord, which could not achieve consensus, was noted by
the COP, and later supported by several countries under specific
conditions. There is an agreement on the broad scientific view that the
world must not exceed a 2 degrees celsius increase in warming on the basis
of equity, and in the con­ text of sustainable development. All participating
countries have agreed to communicate their mitigation commitments and
actions.

Commitments given by United States and India are given here.

United States
Currently the second largest emitter and largest cumulative contributor to
2
global emissions, accounting for approximately 16 percent of the world's
emissions (6,814 MMTCO2e). Per capita emissions are 23.1 metric tons of
CO e (10th highest in the world).

Action Commitment

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Announced a target to reduce emissions in the range of 17 percent below

2005 levels by 2020, 42 percent below 2005 levels by 2030, and 83 percent
below 2005 levels by 2050. These targets are aligned with the energy and
climate legislation passed by the House of Representatives.

India
India is currently the world's 7th largest emitter of global warming pollution
and 5th largest for emissions from fossil fuel combustion. It accounts for
approximately 4 percent of the world's emissions (1,866 million metric tons
of carbon dioxide equivalent (CO2e)). Per capita emissions are 1.7metric
tons of CO2e (154th highest in the world).

Action Commitment
India has made a commitment to reduce its emissions per unit of GDP 20 to
25 percent below 2005 levels by 2020. To meet and exceed this goal, India
is increasing fuel efficiency standards by 2011; adopting building energy
codes by 2012; increasing forest cover to sequester 10 percent of its annual
emissions; and increasing the fraction of electricity derived from wind,
solar, and small hydro from the current 8 percent to 20 percent by 2020.

3.2 lnventorization of Green House Gases

GHG lnventorization:

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The first step, to limit temperature rise to 2 degrees Celsius, would

therefore be to reduce the level of GHG emissions. The six greenhouse
gases covered by the Kyoto Protocol and internationally accepted are:

• Carbon Dioxide CO2

• Methane CH4
• Nitrous Oxide N20
◆ Sulphur Hexa Fluoride Sf6.
• Hydro Fluorocarbons HFC
• Perfluoro carbons PFC

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The burning of fossil fuels for energy and animal agriculture are two of the
biggest contributors to global warming, along with deforestation. Globally,
fossil fuel-based energy is responsible for about 60% of human greenhouse
gas emissions, with deforestation at about 18%, and animal agriculture
between 14% and 18% (estimates from the World Resources Institute, UN
Food and Agriculture Organization, and Pitesky et al. 2009).
To reduce the level of GHG emissions, current levels of emissions are to be
captured, which is done through GHG inventorization. GHG lnventorization

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is the quantified list of organization's greenhouse gas emissions and

sources. Any organization, may it be a manufacturing unit or service sector
unit, consumes traditional forms (coal based electricity, coal diesel, gasoline
etc) energy and hence emits GHG directly or indirectly. Identification of
sources for the green house gas emissions and calculating the quantity of
emissions occurring from that source with the help of established
guidelines is known as GHG inventorization of the emission source. When all
such sources coming under the "predefined boundary" of that organization
are inventoried for GHG generation, the resulting document is termed as GHG
inventory for that organization. Launched in 2008, the India GHG Inventory
Program is a national-level program for corporations to measure and manage
their GHG emissions based on internationally recognized standards and to
monitor their progress towards voluntary reduction goals. The program is a
crucial step in establishing a national model on emissions accounting, and in
creating business and institutional capacity to undertake comprehensive GHG
inventories and programs that can serve multiple business objectives
nationally as well as globally.

Carbon Di Oxide Equivalent : As seen above, in the action commitment

of countries,
2
a unit of measure
2
"CO2e" is being used, meaning Carbon Di2
Oxide equivalent. Even though six Green House Gases are internationally
accepted, for consistency, the GHG inventory should be based on units of
CO equivalent (CO eq). While the emissions of individual GHGs should be
individually accounted and reported, emissions of all non-CO gases should be
converted to units of CO2eq using respective Global Warming Potentials
(GWP). A complete list of internationally recognised GHGs with their GWPs is
given below and companies should use these values based on IPCC Second
Assessment Report to calculate CO2eq.

Fifth assessment report

IPCC (Intergovernmental panel on climate change) Fifth Assessment Report

The IPCC's Fifth Assessment Report (AR5) was completed in 2014. AR5 followed
the same general format as of AR4, with three Working Group reports and a
Synthesis report.]The Working Group I report (WG1) was published in September
2013, Conclusions of AR5 are summarized below:
Working Group I

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• "Warming of the climate system is unequivocal, and since the 1950s, many of the
observed changes are unprecedented over decades to millennia"[
• "Atmospheric concentrations of carbon dioxide, methane, and nitrous oxide have
increased to levels unprecedented in at least the last 800,000 years"
• Human influence on the climate system is clear.] It is extremely likely (95-100%
probability)] that human influence was the dominant cause of global warming
between 1951-2010
Working Group II

• Increasing magnitudes of [global] warming increase the likelihood of severe,

pervasive, and irreversible impacts"[
• A first step towards adaptation to future climate change is reducing vulnerability
and exposure to present climate variability"
• "The overall risks of climate change impacts can be reduced by limiting the rate and
magnitude of climate change
Working Group III

• Without new policies to mitigate climate change, projections suggest an increase in

global mean temperature in 2100 of 3.7 to 4.8 °C, relative to pre-industrial levels
(median values; the range is 2.5 to 7.8 °C including climate uncertainty).
• The current trajectory of global greenhouse gas emissions is not consistent with
limiting global warming to below 1.5 or 2 °C, relative to pre-industrial
levels. Pledges made as part of the Cancún Agreements are broadly consistent
with cost-effective scenarios that give a "likely" chance (66-100% probability) of
limiting global warming (in 2100) to below 3 °C, relative to pre-industrial levels
Representative Concentration Pathways
Projections in AR5 are based on "Representative Concentration Pathways"
(RCPsThe RCPs are consistent with a wide range of possible changes in future
anthropogenic greenhouse gas emissions. Projected changes in global mean
surface temperature and sea level are given in the main RCP article.
To convert to C0 2eq, multiply tons of any particular GHG by its relevant
GWP, as illustrated in the following example: A company's GHG inventory
contains 70, 00,000 tons of CO/year, 4.00,000
Tons of CH/year and 700 tons of N20 /year.

N2O(GWP[ N2O])

= 70, 00,000 (1) + 4, 00,000 (21) + 700 (310)

= 15,617,000 tons CO eq.

2

Global Warming Potential Values

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The following table includes the 100-year time horizon global warming potentials (GWP)
relative to CO2. This table is adapted from the IPCC Fifth Assessment Report, 2014 (AR5)i. The
AR5 values are the most recent, but the second assessment report (1995) and fourth
assessment report (2007) values are also listed because they are sometimes used for
inventory and reporting purposes. For more information, please see the IPCC website
(www.ipcc.ch). The use of the latest (AR5) values is recommended. Please note that the GWP
values provided here from the AR5 for non-CO2 gases do not include climate-carbon
feedbacks.

Global warming potential (GWP) values relative

to CO 2

GWP values for 100-year time horizon

Industrial Second Fourth Fifth Assessment
designation Chemical formula Assessment Assessment Report (AR5)
or common Report (SAR) Report (AR4)
name
Carbon dioxide CO2 1 1 1
Methane CH4 21 25 28
Nitrous oxide N2O 310 298 265

Substances controlled by the Montreal Protocol

CFC-11 CCl3F 3,800 4,750 4,660
CFC-12 CCl2F2 8,100 10,900 10,200
CFC-13 CClF3 14,400 13,900

CFC-113 CCl2FCClF2 4,800 6,130 5,820

CFC-114 CClF2CClF2 10,000 8,590

CFC-115 CClF2CF3 7,370 7,670

Halon-1301 CBrF3 5,400 7,140 6,290

Halon-1211 CBrClF2 1,890 1,750

Halon-2402 CBrF2CBrF2 1,640 1,470
Carbon tetrachloride CCl4 1,400 1,400 1,730

Methyl bromide CH3Br 5 2

Methyl chloroform CH3CCl3 100 146 160

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GWP values for 100-year time horizon

Industrial Second Fourth Fifth
designation Chemical formula or assessment Assessment Assessment
common
report (SAR) Report (AR4) Report (AR5)
name
HCFC-21 CHCl2F 148
HCFC-22 CHCLF2 1,500 1,810 1,760
HCFC-123 CHCl2CF3 90 77 79
HCFC-124 CHClFCF3 470 609 527
HCFC-141b CH3CCl2F 600 725 782
HCFC-142b CH3CClF2 1,800 2,310 1,980
HCFC-225ca CHCl2CF2CF3 122 127
HCFC-225cb CHClFCF2CClF2 595 525

Hydrofluorocarbons (HFCs)
HFC-23 CHF3 11,700 14,800 12,400
HFC-32 CH2F2 650 675 677
HFC-41 CH3F2 150 116
HFC-125 CHF2CF3 2,800 3,500 3,170
HFC-134 CHF2CHF2 1000 1,120
HFC-134a CH2FCF3 1,300 1,430 1,300
HFC-143 CH2FCHF2 300 328
HFC-143a CH3CF3 3,800 4,470 4,800
HFC-152 CH2FCH2F 16
HFC-152a CH3CHF2 140 124 138
HFC-161 CH3CH2F 4
HFC-227ea CF3CHFCF3 2,900 3,220 3,350
HFC-236cb CH2FCF2CF3 1,210
HFC-236ea CHF2CHFCF3 1,330
HFC-236fa CF3CH2CF3 6,300 9,810 8,060
HFC-245ca CH2FCF2CHF2 560 716
HFC-245fa CHF2CH2CF3 1,030 858
HFC-365mfc CH3CF2CH2CF3 794 804
HFC-43-10mee CF3CHFCHFCF2CF3 1,300 1,640 1,650

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GWP values for 100-year time horizon

Industrial Second Fourth Fifth
designation Chemical formula assessment Assessment Assessment
or common
name report (SAR) Report (AR4) Report (AR5)
Perfluorinated compounds
Sulfur hexafluoride SF6 23,900 22,800 23,500
Nitrogen trifluoride NF3 17,200 16,100
PFC-14 CF4 6,500 7,390 6,630
PFC-116 C2F6 9,200 12,200 11,100
PFC-218 C3F8 7,000 8,830 8,900
PFC-318 c-C4F8 8,700 10,300 9,540

PFC-31-10 C4F10 7,000 8,860 9,200

PFC-41-12 C5F12 7,500 9,160 8,550
PFC-51-14 C6F14 7,400 9,300 7,910
PCF-91-18 C10F18 >7,500 7,190
Trifluoromethyl sulfur SF5CF3 17,700 17,400
pentafluoride

Perfluorocyclopropane c-C3F6 9,200

Fluorinated ethers
HFE-125 CHF2OCF3 14,900 12,400
HFE-134 CHF2OCHF2 6,320 5,560
HFE-143a CH3OCF3 756 523
HCFE-235da2 CHF2OCHClCF3 350 491
HFE-245cb2 CH3OCF2CF3 708 654
HFE-245fa2 CHF2OCH2CF3 659 812
HFE-347mcc3 CH3OCF2CF2CF3 575 530
HFE-347pcf2 CHF2CF2OCH2CF3 580 889
HFE-356pcc3 CH3OCF2CF2CHF2 110 413
HFE-449sl (HFE-7100) C4F9OCH3 297 421
HFE-569sf2 (HFE-7200) C4F9OC2H5 59 57
HFE-43-10pccc124 CHF2OCF2OC2F4OCHF2 1,8702,820
(H-Galden 1040x)
HFE-236ca12 (HG-10) CHF2OCF2OCHF2 2,800 5,350

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GWP values for 100-year time horizon

Industrial Second Fourth Fifth
designation Chemical formula assessment Assessment Assessment
or common
name report (SAR) Report (AR4) Report (AR5)
HFE-338pcc13 (HG-01) CHF2OCF2CF2OCHF2 1,500 2,910
HFE-227ea CF3CHFOCF3 6,450
HFE-236ea2 CHF2OCHFCF3 1,790
HFE-236fa CF3CH2OCF3 979
HFE-245fa1 CHF2CH2OCF3 828
HFE 263fb2 CF3CH2OCH3 1
HFE-329mcc2 CHF2CF2OCF2CF3 3,070
HFE-338mcf2 CF3CH2OCF2CF3 929
HFE-347mcf2 CHF2CH2OCF2CF3 854

HFE-356mec3 CH3OCF2CHFCF3 387

HFE-356pcf2 CHF2CH2OCF2CHF2 719
HFE-356pcf3 CHF2OCH2CF2CHF2 446
HFE 365mcf3 CF3CF2CH2OCH3 <1
HFE-374pc2 CHF2CF2OCH2CH3 627

Perfluoropolyethers
PFPMIE CF3OCF(CF3)CF2OCF2OCF3 10,300 9,710

Hydrocarbons and other compounds - direct effects

Chloroform CHCl3 4 16
Methylene chloride CH2Cl2 9 8.7 9
Methyl chloride CH3Cl 13 12
Halon-1201 CHBrF2 376

IPCC data sources for more information:

• AR4 values: https://www.ipcc.ch/publications_and_data/ar4/wg1/en/ch2s2-10-2.html
• AR5 values: https://www.ipcc.ch/pdf/assessment-
report/ar5/wg1/WG1AR5_Chapter08_FINAL.pdf
(p. 73-79)

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3.3 Direct and indirect emissions:

It is essential for companies adopting effective and innovative GHG emis­
sion management practices to set operational boundaries that are com­
prehensive with respect to direct and indirect emissions. Direct GHG
emissions are emissions from sources that are owned or controlled by the
company. Indirect GHG emissions are emissions that are a consequence
of the activities of the company, but occur at sources owned or controlled
by another company.

The classification of direct and indirect emissions is dependent on the

consolidation approach (equity share or control) for setting the
organisational boundary.

3.4 The concept of ''Scope":

To clearly demarcate direct and indirect emission sources and to improve
transparency, GHG Protocol has Corporate Standard approach of three
"scopes" (scope 1, scope 2, and scope 3) defined for GHG accounting
and reporting purposes. Scopes 1 and 2 are defined in a way that ensures
that two or more companies will not account for same emissions in the
same scope. This makes the scopes amenable for use in GHG
programmes where double counting matters. Companies should
separately account for and report on scopes 1 and 2 at a minimum.

Scope 1: Direct GHG emissions

2
Direct GHG emissions occur from sources that are owned or
controlled by a company, for example, emissions from combustion in
owned or con­ trolled boilers, furnaces, vehicles, etc.; emissions from
chemical production in owned or controlled process equipment. Direct
CO emissions from the combustion of biomass should be included in
scope 1 and also reported separately. GHG emissions not covered by
the Kyoto Protocol, e.g. CFCs, HCFCs, cannot be included in scope 1 but
may be reported separately.

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Scope 2: Electricity indirect GHG emissions

Scope 2 accounts for GHG emissions from the generation of purchased
electricity consumed by a company. Purchased electricity is defined as
electricity that is purchased or otherwise brought into the organisational
boundary of the company. Scope 2 emissions physically occur at the
facility where electricity is generated.

Scope 3: Other indirect GHG emissions -

Scope 3 is an optional reporting category that allows for the treatment
of all other indirect emissions. Scope 3 emissions are a consequence
of the activities of a company, but occur from sources not owned or
controlled by the company. Some examples of scope 3 activities are
extraction and production of purchased materials; transportation of
purchased fuels; and use of sold products and services.

Example: Fuel burnt for transporting raw material through trucks is covered under
Scope 3.

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CO2 inventorization for Fuel burnt in vehicles used for raw material
trans­ port.

On an average, 20 vehicles with an average mileage of 8 km/I are used

to deliver raw materials. These vehicles use diesel to travel 100 km each
day and are in operation for 300 days in a year.

Emission factor for diesel: 2.7458 kg CO/I

Annual CO2 emissions= 20 x 100 km x 300 x 2.7458 kgC02

8km/l

= 2, 05,935 kg CO2

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3.5 Greening The Supply chains: As understood above, the organi­

zations have commitments to reduce their carbon footprints. Green supply
chain management (GSCM) can be defined as the integration of environ­
mental thinking into supply chain management, including green design
(marketing and engineering), green procurement practices (e.g. certifying
suppliers, purchasing environmentally sound materials/products), total
quality environmental management (internal performance measurement,
pollution prevention), environmentally friendly packaging and transpor­
tation, to the various product end-of-life practices defined by the "Re's" of
reduction, reuse, remanufacturing and recycling.

Many progressive companies, such as Walmart, Amazon, Hewlett Packard,

and Patagonia, have capitalized on the opportunities of green supply chain
management and are therefore very concerned with the environmental
burden of their supply chain processes. Throughout the supply chain,
customers and therefore firms designing and operating supply chains are
particularly susceptible to reducing their carbon emissions.

The carbon emissions in the supply chain arise from various processes,
from the procurement of raw materials to the dispatching of finished
goods. At the supplier stage, the processing of raw materials and prepar­
ing the semi-finished parts emits hydrocarbons, oxides of sulfur(SOx) and
wastages in the form of gaseous and acidic compounds. At the stage of
the logistics service provider (logistics), the levels and types of carbon

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emissions depend on the mode of transportation, choice of fuel used, and

distance travelled. Diesel engine vehicles such as heavy trucks emit carbon
dioxide(C02), nitrous oxide(N20), particulate matter (PM), and volatile or­
ganic compounds. The total carbon emissions at the stage of the manu­
facturer (manufacturing plant) can be measured from direct and indirect
emissions of the different manufacturing processes such as processing
the raw materials, cleaning them, furbishing, molding and processing un­
til final assembly of the product. Finally, the total carbon emissions at the
stage of the distribution center (warehouse) depend on the type of pack­
aging used, trade policy,consumer density, and the level of reuse.

The emissions across the supply chains can thought of, from two broad
category of sources - stationary source (emissions from material process­
ing, manufacturing, and warehousing) and non-stationary source (emis­
sions from inbound and out- bound logistics).

The environmental management approaches range from ISO 14000 to to­

tal quality management programs and Lean Management practices cer­
tainly contribute to reduced carbon emissions along the Supply chains.
ISO 14000 family includes, among others: environmental management
systems, environmental performance indicators, life cycle assessments,
eco-labels, and product design (www.iso.org).

One of the most widely utilized standards is the environmental manage­

ment system (EMS) standard ISO 14001which ensures that, if a partici­
pating organization adheres to the requirements of the standard, it will
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increase the chance to reduce its environmental impacts relative to non­

participating organizations.
An indicative list of GSCM practices for reducing carbon emissions across
the Supply chains can be grouped under two headings (Internal & Exter­
nal) as follows :

3.6 Internal management for GSCM:

• Commitment of GSCM by senior managers
• Support for GSCM by mid-level managers
• Cross-functional cooperation for environmental improvements
• Total quality environmental management
• Environmental compliance and auditing programs ISO 14001
certification
• Recycled content usage
• Innovation with environmental conscience
• Design of products for reduced consumption of material/energy
• Design of products for reuse, recycle, recovery of material,
component parts
• Design of products to avoid or reduce use of hazardous products
and/or their manufacturing process
• The amount of renewable energy used to manufacture
• To use only Emission Controlled trucks & Fork Lifts
• Investment recovery (sale) of excess inventories/materials
• Sale of scrap and used materials
• Sale of excess capital equipment
• End of Life solutions

External GSCM practices: (a) Suppliers and Customers

• Providing design specification to suppliers that include
environmental requirements for purchased item
• Cooperation with suppliers for environmental objectives
• Environmental audit for suppliers' internal management

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• Second-tier supplier environmentally friendly practice

evaluation.
• Environmental Regulations, ISO 14000 accredited suppliers
• Direct Energy Cost Reduction (Energy Efficiency of Sourceable
Items)
• Indirect Energy Cost Reduction (Reduce Packaging to Reduce
Transportation Costs), procurement of BEE certified appliances
• Substitutes of Commodity Items with Sustainable Equivalents
- Eg Elimination of Substances of Concern - lead, cadmium,
mercury and hexavalent chromium, asbestos, PVC and volatile
organic compounds (VOC)
• Reduced Water Consumption
• Sourcing Materials with Higher Recycled Content
• Recyclable packaging materials, Plastic totes, containers
avoiding carton boxes, polythene bags
• Cooperation with customer for eco-design
• Cooperation with customers for cleaner production
• Cooperation with customers for green packaging

(b) GREEN WAREHOUSES:

• Site - Preserving Existing plants/ wildlife
• Water Management - Recycling / rainwater harvesting /
conservation
• Heat Resistant Roof
• Reduced lighting power density, natural lighting
• Material use, waste recovery, reduced Inventory
• Indoor Environmental Quality, natural ventilation
• Efficient MHEs
• Optimized energy use/ Renewal energy uses
• LEED certification
• Recyclable pallets

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(c) GREEN LOGISTICS :

• Need for transport - minimize the overall needs of transport.

• Placement of distribution hubs - place distribution hubs where the
effect is as large as possible and where intermodal solutions are
available.
• Transportation mode and fill rate - dimension for pipelines with
train, boat or full trucks where it is possible.Transportation by air
emits 600-1260 g CO2/tkm, truck emits 80-340 g CO2/tkm, rail
emits 20-40 g CO2/tkm, barges emit 13-40 g CO2/tkm. Tkm is Tons
Kilometre.
• Flexibility - make the solution flexible, so that it is possible to make
real procurements of 3PL and forwarders and it is possible to adjust
for future flows.

3.7 GSCM success stories:

1. Wal-Mart's 3PL provider in Canada has done the following :

• Changed the way it ships products to 10 stores in Nova Scotia and

Prince Edward Island from road to rail which led to reduction of
carbon emissions by 2,600 tons.
• In addition, the 3PL provider converted 20 truck generators to
electric power, saving about 10,000 gallons of fuel.
• These two measures combined are expected to yield more than
$2 million in annual cost savings.
• Wal-Mart switched from cardboard shipping crates to reusable
plastic. This change allows boxes to be used about 60 times instead
of just once. Adoption of plastic crates is expected to save
$4.5 million and reduce waste by more than 1,400 tons annually.

2. Wal-Mart, "Sustainability 360":

• "Sustainability 360"is a company-wide emphasis on sustainability
extending beyond Wal-Mart's direct environmental footprint to
engage associates, suppliers, communities and customers. Wal­
Mart follows Packaging Scorecard for suppliers that evaluates the

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"green quotient" of product packaging based on a number

of attributes, such as greenhouse gas emissions related to

production, materials used, product to packaging ratio, cube
utilization (transportation), recycled content usage, innovation,
the amount of renewable energy used to manufacture the
packaging, and the recovery value of the raw materials and
emissions related to transportation of the packaging materials.
• This effort is aligned with an initiative to reduce overall packaging
by 5 percent, expected to prevent millions of pounds of trash
from reaching landfills and save 667,000 metric tons of carbon
dioxide from entering the atmosphere

3. FORD MOTOR COMPANY:

Material recovery starts and ends with great design !!!

Ford connected with the value chain to increase use of recovered materi­
als in vehicle production, Issued recycling guidelines to its worldwide sup­
pliers and Engineers including those that will make cars and trucks easier
to disassemble.

Four billion pounds of recycled material are incorporated into vehicle de­
sign. Some design innovations for use of recycled materials include:

• grille reinforcements from plastic soft drink bottles.

• grilles from used computer housings and telephones.
• splash shields from spent battery casings.
• air cleaner assemblies and engine fan modules from used carpet.
• Salvaged plastic bumpers become new bumper reinforcements.
• Used tires become new ones or brake pedals or floor mats.

4. Fed Ex Initiatives:
• A major purchaser of renewable energy:
Renewable Energy Credits in year 2008 - 25,000 MWh. In FY 09,

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the company bought 34,216 MWh.

• Solar electric systems - cumulative capacity of 3.92 MW, up from
1.5 MW in 2008.

• 329 hybrid delivery trucks in its fleet

• In the process of replacing its fleet of MD-11F
planes with wide­ body 777F planes to reduce fuel
consumption 18%
• FedEx also is replacing its 727s with 757s, which it
expects to cut fuel consumption 47%.
• In its packaging, about 70 % recycled fiber used.

4. SUPPLY CHAIN RISK MANAGEMENT:

Supply chain risk management can be defined as the" end-to-end manage­
ment of the flow of goods and services in the supply chain to ensure unin­
terrupted service at the promised level to the customer at known cost:'

The objective of Supply chain risk management could be to design and

maintain business continuity plans to ensure operations can be carried
out without change if a crisis hits.

Supply chain Risk management is the process of systematically identify­

ing, analysing and dealing with risks to Supply chain.

Best business strategies like Increased outsourcing, Globalization, Lean

manufacturing, Just-in-time inventory have helped organizations to mini­
mize costs and freed them to focus on core competencies. At the same
time, these strategies designed with best intentions can become a fierce
competitor and leave the organization vulnerable.

Supply chain disruptions can reduce company's revenue, cut into market
share, inflate the costs, over run of budget, and threaten production and

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distribution. Such disruptions also may damage credibility with investors

and other stakeholders, thereby driving up the cost of capital.

Given the devastation caused by the Japanese Tsunami and the Thai mon­
soon floods it is no surprise that a recent survey of 100 executives at large
multinational corporations (FM Global Supply Chain Risk Study 2011) re­
vealed significant concerns that a large supply chain risk, more than any
other, as having the greatest potential to disrupt their top revenue driver.
Similarly, Georgia Institute of Technology Professor Vinod Singhal and Uni­
versity of Western Ontario Associate Professor Kevin Hendricks have calcu­
lated that it can take at least two years or more for companies to recover
from a supply chain failure.

Supply chain Risks:

political and currency risks

cyber attacks

Failed communications with suppliers

terrorism,

Traditional property-related risks, such as fire, natural disasters, power-grid

blackouts and equipment breakdowns.

4.1 Drivers / Sources of risks in Supply Chains :

Risks are generated as a result of risk 'drivers' that are either internal or ex­
ternal to the company.

External Drivers:
Demand risk

Demand risk relates to potential or actual disturbances to flow of product,

information, and cash, emanating from within the network, between the
focal company and the market. Eg :Loss of major accounts, Volatility of

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demand, Concentration of customer base, Short life cycles, Innovative

competitors

Supply risk
Supply risk is the upstream equivalent of demand risk, it relates to poten­
tial or actual disturbances to the flow of product or information emanat­
ing within the network, upstream of the focal company. Therefore, it is risk
associated with a company's suppliers, or supplier's suppliers being un­
able to deliver the materials the company needs to effectively meet its
production requirements/demand forecasts.

Eg : Dependency on key suppliers, Consolidation in supply markets, Qual­

ity and management issues arising from off-shore sourcing, potential dis­
ruption at 2nd tier level, Length and variability of replenishment lead­
times

Environmental
Environmental risk is the risk associated with external and, from the com­
pany's perspective, uncontrollable events. Examples would include port
spillage, events such as earthquake, cyclone, volcanic or terrorist activity.

Internal Drivers

Process risk
Processes are the sequences of value-adding and managerial activities
undertaken by the company. Process risk relates to disruptions to these
processes. Eg: Manufacturing yield variability, Lengthy set-up times and
inflexible processes, Equipment reliability, Limited capacity/bottlenecks,
Outsourcing key business processes

Control risk
Controls are the assumptions, rules, systems and procedures that govern
how an organization exerts control over the processes. In terms of the
supply chain they may be order quantities, batch sizes, safety stock poli­

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cies etc. Control risk is therefore the risk arising from the application or
misapplication of these rules. Eg: Asymmetric power relationships, Poor
visibility along the pipeline, Inappropriate rules that distort demand, Lack
of collaborative planning and forecasts, Bullwhip effects due to multiple
echelons

4.2 Documented Cases:

1. Nokia & Ericsson Vs Philips :

Both Ericsson and Nokia were facing a shortage of a critical cellular phone
component (radio frequency chips} after a key supplier in New Mexico
(Philips's semiconductor plant} caught fire during March 2000. Ericsson
was slow in reacting to this crisis and lost 400 million euros in sales. In con­
trast, Nokia had the foresight to design their mobile phones based on the
modular product design concept and to source their chips from multiple
suppliers. After learning about Philips's supply disruption, Nokia respond­
ed immediately by reconfiguring the design of their basic phones so that
the modified phones could accept slightly different chips from Philips's
ther plants and other suppliers. Consequently, Nokia satisfied customer
demand smoothly and obtained a stronger market position.

** FLEXIBLE PRODUCT CONFIGURATIONS :Nokia changed product con­

figurations in the nick of time to meet customer demand during a supply
disruption.

2. Li and Fung :

When the Indonesian Rupiah devalued by more than 50% in 1997, many
Indonesian suppliers were unable to pay for the imported components or
materials and, hence, were unable to produce the finished items for their
US customers. This event sent a shock wave to many US customers who
had outsourced their manufacturing operations to Indonesia. In contrast,
The Limited and Warner Bros. continued to receive their shipments of
clothes and toys from their Indonesian suppliers without noticing any
problem during the currency crisis in Indonesia. They were unaffected be­
cause they had outsourced their sourcing and production operations to Li
and Fung (www.lifung.com), the largest trading company in Hong Kong
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for durable goods such as textiles and toys. Instead of passing the prob­
lems back to their US customers, Li and Fung shifted some production to
other suppliers in Asia and provided financial assistance such as line of
credit, loans, etc. to those affected suppliers in Indonesia to ensure that
their US customers would receive their orders as planned.§ With a supply
network of 4,000 suppliers throughout Asia, Li and Fung were able to serve
their customers in a cost-effective and time-efficient manner. Despite the
economic crisis in Asia, this special capability enabled Li and Fung to earn
its reputation in Asia and enjoy continuous growth in sales from 5 billion
to 17 billion Hong Kong dollars from 1993 to 1999.

**Li and Fung changed its supply plan in a flash to meet customer de­
mand during a currency crisis.

3. DELL:
After an earthquake hit Taiwan in 1999, several Taiwanese factories in­
formed Apple and Dell that they were unable to deliver computer com­
ponents for a few weeks. When Apple faced component shortages for its

iBook and G4 computers, Apple encountered major complaints from cus­

tomers after trying to convince its customers to accept a slower version of
G4computers. In contrast, Dell's customers continued to receive DelI com­
puters without even noticing any component shortage problem. Instead
of alerting their customers regarding shortages of certain components,
Dell offered special price incentives to entice their online customers to buy
computers that utilised components from other countries. The capability
to influence customer choice enabled Dell to improve its earnings in 1999
by 41% even during a supply crunch.

** Dell changed its pricing strategy just in time to satisfy customers during
supply shortage.

4. Sundaram Fasteners Limited (SFL)and GM Cars:

SFL supply to about 28 different plants of General Motors in North Amer­
ica. Basically SFL have to ensure zero-defect and no default in despatches
to any of the plants. SFL supply around four million Radiator Caps to Gen­

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eral Motors every year. SFL has the manufacturing plant in South India,
which is well connected by land, sea and air. SFl's Indian consignments
are shipped from both Chennai and Tuticorin ports. SFL is supplying radia­
tor caps to General Motors (GM) through the US West Coast. Warehouses
at USA and Europe take care of JIT supplies.

Few years back, strike on the US West Coast ports halted cargo movement.
The shipments had to come to a halt. SFL, therefore, airlifted radiator caps
to GM in Detroit, spending almost double the value of the caps on just air­
freight. General Motors has about 30,000 suppliers worldwide and every
year there are about 150 to 180 suppliers in the fray for "The supplier of
the year" Award. SFL has got this award for the third time.

Long-term Orientation : SFL was focussed on long-term orientation and

commitment to meet the delivery schedules which was made possible
through Flexible mode of transportation.
Essentially, an established robust supply chain strategy would enable a
firm to deploy the associated contingency plans efficiently and effectively
when facing a disruption.Therefore,having a robust supply chain strategy
could make a firm become more resilient.
4.3Supply chain risk management
The supply disruptions cannot be predicted, hence the goal of a 'Supply
chain Risk Management' program is not to predict what or when - but in­
stead be prepared and able to respond in an informed and planned man­
ner to minimize the impact of a disruption.

Supply Chain Risk management or Business Continuity Management is

the integration and management of organizations within a supply chain
to minimize risk and reduce the likelihood of disruptions through cooper­
ative organizational relationships, effective business processes, and high
levels of information sharing.

The high-level set of processes associated with management of risk begins

by mapping the supply chain measuring the risk of critical nodes, identify­
ing appropriate risk-reduction mechanisms for the critical high-risk nodes,
and deploying specific actions to mitigate the risk at these nodes.

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Supply chains are complex and dynamic networks comprised of supply

chain components or nodes.

Typically, risk is characterized by both the probability of an event and its

severity given that an event occurs. Risks or disruptions in the supply chain
are not only increasing in frequency, but also the severity of their impact can
be costly and potentially bring portions of the supply chain to a complete halt.
First, the supply chain nodes must be mapped at a high level to understand
the supply chain design and material flow.

In the diagram given below, the distribution channel and information

flow is mapped. Each box is a node. Finished Goods are stored in 'Regional
Warehouse' and by brainstorming, we can list what can go wrong in this
Regional Warehouse. This would necessitate a detailed activity map start­
ing from the receipt of the truck, unloading, unpacking etc., Potential risk
elements can be listed down, called as risk identification.

Several tools and techniques could be used for risk identification, includ­
ing the following:

• Supply chain risk self-assessments

• Questionnaires
• Brainstorming sessions
• Interviews
• Audits or physical inspections
• Supply chain diagnostics
• Hazard and operability (HAZOP) studies
• Incident databases
• Expert judgment
• Decision trees
• Process reviews (flow charts)
• Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis
• Scenario analysis
• Value chain analysis
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• Business model analysis

Next, is measuring supply chain risk, which is a function of the probability

of a disruption at nodes and the severity of the impact on the entire net­
work based on a disruption at a single node.

Where probability is a measure of likelihood, relative frequency or propor­

tion of times an event occurs.

Probability of an event= Number of times that the event occurs/ number

of observations.
In the last 100 deliveries from a supplier, 32 arrived more than a day late.
So this gives an empirical probability of 32/100 = 0.32 that deliveries are
more than a day late.
Supply chain disruptions can be generally classified into:

Low-Likelihood, High-Impact disruptions: the disruptions with very low

probability of occurrence but significant consequences if they occur (for
example, labor strike, terrorist attack or natural disaster).
These disruptions should be given high impact number. If we follow a
scale, 1 to 5, then high impact disruptions will carry an impact of 5.

High-Likelihood, Low-Impact disruptions: the events that might happen

more frequently with less damage to the supply chain operation (for ex­
ample, late delivery or missing quality requirements).

These disruptions should be given low impact number

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4.4 RISK VALUE:

After mapping Supply chain nodes and listing impact & probability of oc­
currence, the risk priority is followed through Risk value which is calcu­
lated as multiplication of probability of disruption and its impact.

Risk Value= Probability x Impact of disruption.

When there is a 10 percent chance that a delivery will be delayed, and any
delay would cost Rs20000, then expected value of delay = 0.1 x 20000 =
2,000.

This Risk Value is used to assign 'priorities' to each and identifying the
ones that need most attention. The result of this risk value finding exercis
is to have an ordered list of prioritized risks - at the top of the list are the
most significant risks, and at the bottom are the least significant.

Creating a supply chain risk map with estimates of disruption probabili­

ties and associated impact estimates is not an impossible activity to de­
velop. This can be achieved by a serious brainstorming exercise coupled
with solid market intelligence relayed by subject matter experts. Even if
conducted on an annual basis, such an exercise can serve as a mechanism
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to identify nodes that require the greatest managerial attention to avoid a

major disruption.

One outcome of these exercises would be that executives quickly real­

ize the scope and scale of the problem. In a global sourcing network, the
number of nodes increases, which by definition increases the risk of the
network as a whole, which requires early warning detection.

4.5 Risk Management Methods:

Once prioritization is done based on the Risk value, then management
techniques can be worked out to manage those risks, which will increase
the preparedness. Few organizations have established 'Supply chain Risk
management' teams and the team members are trained to react in the
event of shortage of any supplies. Organizations used to exercise 'mock
drills' to check, how their Supply chain team members react to an unex­
pected shortage of Critical item. Some of the techniques are:

Traditional Excess Resources techniques extra inventory, multiple suppli­

ers.

• Expediting
• Safety Stock
• Supplier qualification/assessment tools
• C-TPAT and other customs programs
• Risk enumeration, severity analysis, and contingency planning
• Relationship management and joint planning
• Supply chain education and risk management training

• Process control (to facilitate management by exception)

• Cross-functional risk planning at partner locations
• Demand/supply forecast reviews across entire supply chain
• Weekly teleconferences or meetings on potential new risks
• Optimization of supply chain system
• Robust Vendor rating

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• Defined communication network protocols and mechanisms

• Daily status meetings
• Defined hierarchical meetings to share key performance indicators
• Defined contingency plan responsibilities with decision-making
authority for critical events at all nodes
• Defined or self-executing contingency plans
• Post event analysis and lessons learned meetings
• Diversification planning to reduce constrained node options
• Disruption Discovery Visibility Systems:
• Risk monitoring systems
• Inventory visibility systems
• Event management systems (managing by exception)
• Deploy RFID at strategic nodes in supply chain
• Predictive analysis modeling tools-early awareness of impending
disruptions
• Command group to analyze end-to-end supply chain operations
• Network redesign
• Using Insurance
• Product or process re-design
• Some of these techniques are next described :

Excess Resources
One of the easiest strategies to reduce risk for companies managing glob­
al supply chains is the application of excess resources to buffer the firm
against any potential disruptions. This approach is most common when
the magnitude of a potential disruption is high, or when the probability of
a disruption is also known. This might include the following:

Increase buffer of inventory held at warehouses, manufacturing locations,

and distribution centers, and assess inventory buffers in domestic distri­
bution channels at a part level, to assess contingency and scenario plan­
ning.

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Increase planned lead-times beyond actual lead-times to allow a greater

buffer for response.

Add additional personnel or shifts that will under-utilize resources but

provide greater flexibility to react when a disruption occurs.

Use two or more suppliers for a critical input into a product or service.
Many times, single supplier having manufacturing facilities in multiple lo­
cations is preferred.

Supply Chain Planning and Collaboration Risk Reducers

Applying excess resources and deploying visibility systems are both re­
active strategies to risk. That is, they reduce the impact of the disruption
but do not address the probability of the disruption occurring in the first
place. A second approach is to attempt to prevent disruptions from oc­
curring through ongoing supply chain planning and risk reduction, which
reduces the probability of a disruptive event. Prevention involves first un­
derstanding the key players in one's Supply chain channel, and establish­
ing the need to work together to minimize the potential for disruptions.
Once these relationships are established, the partners can meet in an open
environment to identify the leverage points that represent risk, and work
collaboratively to plan in advance for potential problems, or better yet,
eliminate these risks altogether. In sourcing function, Global procurement
and logistics personnel play a key role in establishing and laying the foun-
dation for a more robust supply chain by getting the right players involved
early on in designing the global sourcing channel.

In the earliest stages of sourcing strategy development (involving the so­

licitation, negotiation with and contracting of sources of material supply),
a global sourcing team should:

Perform on-site supplier evaluations and screen suppliers that may have
poor logistics planning, poor second-tier supplier management, and low
process reliability, to identify high potential disruptors.

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Require each potential supplier to produce a detailed plan of disruption

awareness, and identify contingency plans that can be executed if disrup­
tions occur within the supplier's own facility or supply base.

Establish supplier's capability to establish information sharing with cus­

tomers, to provide updated information on the visibility of material flows.
Ideally, this information should be shared throughout the network elec­
tronically. Factor in, the expected costs of disruptions and problem resolu­
tion into the total cost of sourcing from a particular supplier, to elevate this
parameter in the eyes of the team making the final decision.

Once a given supplier has been selected by the sourcing team, an ongoing
dialogue with the supplier, as well as the transportation and warehouse
providers in the channel, should be established to include: Employ weekly
teleconferences with critical partners to identify current issues that may
disrupt daily operations, and tactics to reduce them.

Foster security enhancements that comply with new initiatives in Cus­

toms, Trade Partnership against Terrorism, Container Security Initiative,
and others.

Enable disruption incident reporting following a major disruption event to

identify root cause and failure mode and effects analysis to learn from and
prevent recurrence of similar events.

Perform training and education to improve decision-making capabilities,

and equip managers and associates in the channel with plans and pro­
cesses for managing disruptions when and if they occur.

Deploy Visibility Systems to Ensure Quicker Response to Disruptions;

This approach involves a higher level of investment in deploying a visibility

system to quickly identify the disruption, which reduces the time required
to quickly react and take action to prevent the disruption from impacting
customers. When a disruption occurs, key executives need a quick way to
be alerted that a problem occurred. These types of event and alerting sys­
tems often fall into the category of visibility and enterprise risk planning

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models. Such models span system-wide nodes in the supply chain, and
can be found in many different forms.

Launch "exception "event planning systems that are able to discover

critical logistics events that exceed normal planning parameters on an
exception basis. When discovered, an alert can be sent to executives via
SMS, phone call, e-mail, or other communication form. The alert can
trigger managerial action to mitigate the impact of the disruption as
quickly as possible. This area includes gathering supply chain intelligence
and monitoring the supply base to allow proactive maneuvers against
material flow disruptions.
Implement inventory visibility systems to track demand, inventory, and
capacity levels at key nodes in the supply chain, including ports and ship­
ping locations. Barcodes and RFID deployment will help in getting real
time information.
Employ predictive analysis systems, incorporating intelligent search
agents and dynamic risk indexes at major nodes in the supply chain to
identify potential problems.
Facilitate real-time supply chain reconfiguration to enable real-time re­
scheduling of shipments or contingency plans in response to disruption
discovery.

For example, every truck route from the point of origin to destination
should have an alternate route, already identified and tested. In case of
any hurdle in the original route, consignment should be routed through
the alternate route.
Mapping supply chain ports of entry, road/rail routes, identifying pressure
points, and prioritizing top risk areas - then identifying how to reconfigure
channels to minimize the amount of freight going through these channels
-help to reduce delays.

The most extensive approach that can be used by firms to mitigate risks in
complex supply chains is to rely on increased planning, collaboration, and
education of partners in the supply chain.

References :
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+ ESSENTIALS of Supply Chain Management by Michael Hugos -

John Wiley & Sons, Inc.
5. The Logistics of Supply Chain Management By Edward Frazelle
- McGraw-Hill
6. Corporate GHG Inventory Program Guide - CII GBC

Annex 1: PERFORMANCE MEASURES and EXPLANATIONS

Where ever needed parameter on Numerator and Denominator are listed

which can be converted to percentage also.

Term Numerator Denominator

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Perfect order A perfect order is defined as an

fulfillment order that meets alI of the
following
standards:
. Delivered complete; all items
on order are delivered in the
quantities requested

. Delivered on time to customers

request date, using the custom-
ers definition on time-delivery.

• Documentation supporting the

order including packing slips,
bills of lading, invoices, etc. is
complete and accurate

. Perfect conditions; correct con-

figuration, customer -ready, no
damage.
% of The total time an The total
downtime due equipment/ operation is idle available time of
to non due to no WIP in queue for that equipment
availability of that particular equipment/ or machine
WIP operation.

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% of faultless The number of invoices issued The total number

invoices Without error. Examples of of invoices
potential invoice defects are: processed in the
. Change from customer measurement
purchase order without proper period.
customer involvement
. Wrong customer information
(e.g. name, address, telephone
number)
. Wrong product information
(e.g. part number, product
description)
. Wrong price (e.g. discounts not
applied)
. Wrong quantity or wrong
terms or wrong date
%of invoice Number of EDI generated invoices Total Number of
receipts and Invoices
payments
generated via
EDI
% of potential The number of suppliers who The total number
suppliers become qualified of suppliers who
selected were selected for
which become qualification in the
qualified measurement
period.

% of qualified The number of qualified suppliers The total number

suppliers which who meet defined requirements of qualified
meet defined suppliers used
requirements as sources in the
measurement
period.

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x
% of receipts received with out Number of receipts with quantity Total Number of
item and quantity verification Total number of variance receipts
requiring corrective actions

% of single and Number of single and / or The total numbers

I or sole source selections sole source selections of suppliers awarded
. orders

% supplier contracts negotiated The number of contracts The total number

meeting target terms and negotiated meeting all business of contracts
conditions for quality, de livery, requirements processed in the
flexibility and cost measurement period.

% Orders/ lines processed The number of orders / lines that Total orders /lines
complete total orders/ lines are processed processed within the
complete processed measurement period
within the measurement
period.

% Orders/ lines received The number of orders / lines that Total orders /lines
complete Total orders/ lines are received received in the
complete measurement period

% Orders I lines received The number or orders / lines that The total orders
damage free are processed damage free /lines processed in
the measurement
period.
% Orders/ lines received defect The number of orders I lines that The total orders /
free are received defect free lines processed in the
measurement
period.

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%Schedules generated within suppliers The number schedules The total

lead time generated within the suppliers sched- ules
lead time generated in
the
measurement
period.
Average days per engineering change Number of days each The total
engineering change impacts the number of
delivery date cahnges

Average days per schedule change Number of days each schedule

change impacts the delivery date

Assets turns Total gross product revenue Total net

assets
Capacity Utilisation A measure of how intensively a
re- source is being used to
produce a
good or service. Some factors
that should be considered are
internal manufacturing capacity,
constraining processes, direct
labour availability and key
components / ma terials
availability.

Cash-to-cash cycle time Cash-to-cash cycle =

inventory cycle time days
of supply + days sales out
standing -average payments
period for materials (time it takes
for a Rupee to flow back into a
company after its been spent for
raw materials). For services, this
represents the time from the
point where a company pays for
the resources consumed in the
performance of a service to the
time that the company received
payment from the customer for
those services.

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Damage& Reductions of actual quantities of

Shrinkage items in stock, in process or in tran­
sit. This loss may be caused by sc
rap,theft,deterioration,evaporatio
n etc.,
Delivery per­ The percentage of orders that are
formance to fulfilled on or before the original
customer com- scheduled or committed date.
Ment date
Delivery perfor- The percentage of orders that is
mance to cus­ delivered on the customers re­
tomer request quested date.
date

Demand / sup- Costs associated with forecasting,

ply planning developing finished goods or end
costs item inventory plans and co-ordi­
nating demand / supply process
across entire supply chain, includ­
ing all channels.

Distribution Includes costsfor warehouse space

costs and management, finished goods
receiving and stocking, processing
shipments, picking and consolidat­
ing, selecting carrier and staging
products / systems.
ECO ( engineer­ Time total time required from re­
ing change quest for change-from customer,
order) cycle engineering, production or qual­
time ity control to revise a blueprint or
design released by engineering to
implementing the change within
the make operation.

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ECO cost Costs incurred from revisions to a

blueprint or design released by
engineering to modify or correct a
part. The request for the change
can be from a customer or from
production quality control or an­
other department.
End -of -life Inventory on hand which will satis­
inventory fy future demand for products that
are no longer in production at your
entity.

Field finished The inventory which is kept at loca­

goods inven­ tions outside the four walls of the
tory days of manufacturing plant, i.e. distribu­
supply tion centre, warehouse.

Fill rates The percentage of ship-from-stock

orders shipped within 24 hours of
order receipt. Some companies fol­
low percentage of orders fulfilled
from the shelf stock.
Finishes goods Sum of all costs associated with
inventory carry- finished goods inventory: opportu-
ing costs nity cost, shrinkage, insurance and
taxes, total obsolescence, channel
obsolescence and field sample ob­
solescence.
Finished goods Gross finished goods inventory (value of
inventory Days transfers/
of supply 365 days).

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Forecast Forecast accuracy is calculated for

accuracy products and/or families for mar-
kets/distribution channels, in unit
measurement.

Forecast Accuracy=

Forecast Sum - Sum of Variance

Where:

Forecast Sum = The sum of the

units forecasted to be shipped in
each month based upon the fore-
cast generated at the critical time
fence.

Sum of Variances= The sum of the

absolute values, at the forecasted
line item level, of the differences
between each month's forecast as
defined above and actual demand
for the same month
Incoming mate- Number of received parts which The total number
rial quality fail inspection of parts received.

lntra-manufac- Time between the acceptance of a

turing re-plan regenerated forecast by the end-
cycle product producing location and
the reflection of the revised plan in
the master production schedule of
all the affected plants, excluding
external vendors.
Inventory ac- The absolute value of the sum of
curacy the variance between physical in-
ventory and perpetual inventory.

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Inventory cycle The absolute value of the sum of The total number
counting accu­ the variance between physical in- of cycle counts
racy inventory and perpetual inventory performed ex­
. Or the number of accurate part pressed as a
cycle counts percentage.
Total gross value of inventory at
standard cost before reserves for
Inventory days excess and obsolescence. Only (COGS divided by
of supply 365
includes inventory in company )
books, future liabilities should not
be included. Annual average of the
sum of all gross inventories (raw
materials & WIP, plant FG, field
samples, other)
Inventory obso- The annual obsolete and scrap re-
lescence as a % serves taken for inventory obsoles­
of total inven­ cence expressed as a percentage
tory of annual average gross inventory
value.
Item I product/ The time required for a specific
grade change- machine, resource, work centre,
over time process, or line to convert from
the production of the last good
piece of item / product / grade of
A to the first good piece of item/
product/ grade of B.
Number of Total number of revisions to a blue­
ECOs print or design released by engi-
neering to modify or correct a part,
ECOs are some-
Engineering Change Orders (ECO).
times called as
The request for the change can be
Engineering
from a customer or from produc­
Design Modifi­
tion quality control or another de­
cations. (EDMs)
partment.

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On time in full Number of orders for which not all

of the items on order are delivered
in the quantities requested.
Order entry and Includes costs for maintaining the
maintenance customer database, credit check,
costs accepting new orders and adding
them to the order system as well as
later order modifications.
Order entry Including release to manufactur-
complete to ing, order configuration verifi-
order ready for cation, production scheduling,
shipment time build, pick/ pack and prepare for
shipment time, in calendar days.
Order fulfill- The average actual lead times con­
ment cycle time sistently achieved, from customer
signature / authorization to order
receipt, order receipt to order entry
complete, order entry complete to
start -build, start -build to order
ready for shipment, order for ship­
ment to customer receipt of order
and customer receipt of order to
installation complete.

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Order manage- • The aggregation of the

ment costs following cost elements
(contained in this glossary).

• Create customer order costs

• Order entry and

maintenance costs

• Contract I program and

channel management costs

• Installation planning costs

• Order fulfillment costs

• Distribution costs

• Transportation costs

• Installation costs

• Customer invoicing /
accounting costs

Order manage- • The total amount of time

ment cycle time required converting a
customer order into a
receipt by the customer.
Order ready • Including total transit time
for shipment (all components to
to customer consolidation point), queue
receipt of order time and additional transit to
time customer receipt of order,
• in calendar days.
Order receipt • Time required, in calendar
to order entry days, for order revalidation,
complete time configuration check, credit
check and scheduling of
received orders.
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Overhead cost Costs incurred in the operation of

a business that cannot be directly
related to the individual products
or services produced. These costs,
such as light, heat, supervision and
maintenance, are grouped in sev­
eral pools and distributed to units
of product or service by some stan­
dard allocation method such as
direct labour hours, direct labour
dollars, or direct materials dollars.
Package cycle The total time required to
time perform a series of activities that
containerise completed products
for storage or sale end -users.

(within certain industries, packag­

ing may include cleaning or steril­
ization.)
Packaging cost The cost to package product as a
finished good, not including in­
termediate handling of materials,
based on given number of deliv­
ered finished goods.
Product acqui- Product acquisition costs include
sition costs cost incurred for the production of
product :sum of product manage­
ment and planning, supplier qual­
ity engineering, inbound freight
and duties, receiving and product
storage, incoming inspection,
product process engineering and
tooling costs.

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Product man- Product (commodity) manage-

agement and ment and planning -All cost asso-
planning costs dated with supplier sourcing, con­
as a% of prod- tract negotiation and qualification
uct acquisition and the preparation, placement
costs and tracking of a purchase order
expressed as percentage of prod­
uct and tracking of a purchase or­
der expressed as a percentage of
product acquisition costs. This cat­
egory includes all costs related to
buyer/ planners.
Products struc- Recipes/ formulas/ BOMs that de-
ture fine the composition of a product.
Product struc- Total time from demand to release
ture cycle time of product structure BOM
Production Administrative costs associated
material admin- with the handling/ storage/ move-
istrative cost ment of materials.
Production Time required for moving material
material cycle to point of use.
time
Production ma- Cost of handling / movement of
terial handling materials used to support produc-
cost tion.
Production ma- Cost of material damaged from
terial handling handling / storage/ movement as a
damage percentage of total material cost.

Production ma- Cost of storage space used for the

terial storage production materials.
cost
Raw material & Raw material & WIP inventory days (Value of transfers
WIP inventory of supply are calculated as gross / 365 days.)
days of supply raw material and WIP inventory

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Raw material Raw material or product inventory (Value of transfers/

or product days days of supply are calculated as 365 days.)
of supply gross raw material or product in-
ventory.
Raw materials The costs associated with break-
shrinkage age, pilferage and deterioration
of
raw materials inventories.
Receiving and The total amount of time required
put away cycle for moving materials from an in-
time bound location to an internal stor-
age location.
Re-plan The time between the initial ere-
cycle time ation of the regenerated forecast
and its reflection in the master
production schedule of the end-
product production facilities.
Return on A financial measure of the relative
as- sets income producing value of an as-
set. It is calculated as net income
divided by total assets.
Scheduled The measure of the cost of people,
re- source information systems,
cost management direction, and any
other costs associated with
providing schedules
for manufacturing.
Scrap expense Expenses incurred from material
falling outside of specifications
and processing characteristics
that make rework impractical.
Shrinkage The cost associated with
breakage, pilferage, and
deterioration of inventories.
SKU= Stock keeping unit

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Supplier cycle The time required for a supplier to

time complete a single cycle, beginning
with the receipt of an order and
ending with the fulfillment of that
order.
Supplier fill rate The percentage of time a supplier
completes a commitment to a cus-
tomer to ship or deliver an order
within 24 hours.

Supplier on- The percentage of orders that are

time delivery fulfilled on or before the original
performance customer requested date ( suppli-
ers performance measured by the
customer).
Time and/or Desired state source identification
cost reduc- cycle metric compared to the As-
tion related to Is state source identification cycle
source identifi- metric.
cation.
Total internal Direct and indirect costs that can
and /or exter- be attributed to inaccurate pro-
nal costs that duction details. Includes rework,
are the result scrap, recalIs, preparation, etc.
of inaccurate
production rule
details
Total source Total elapsed time from the time of
cycle time to requirement identification to the
completion time product is in the appropriate
stocking location within the
supply chain and the supplier
payment is authorized.

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Green Supply Percentage of proactive vs reac­

Chain tive expenditures, Percentage of
Measures production and office materials
re­ cycled, Money spent on
green Operating expenditures,
Disposal costs, Recycling
revenues, Fines and penalties,
Greenhouse gas emissions
inventorization,Hazardous
material output reduction, no.of
Certified suppliers, number of
Accidents and spills, reduction in
Energy consumption, Percent­
age of facilities certified for
green, Percentage of product
remanufactured
No.of Green products
introduced, Percentage of
Employees trained on green,
Number of Community
complaints, number of Recalls,
Percentage of renewable
resource use, Customer returns,
number of Violations reported by
employees, number of
Employees with incentives
related to environmental goals,
Percentage of products re­
claimed after use, Functional
product eco-efficiency.

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GLOSSARY
Activity-based costing (ABC)
A technique for allocating indirect costs to production activities, making
indirect costs more comparable to direct costs and permitting a better as­
sessment of the true cost of creating each product.

Advance shipping notice (ASN)

A document sent by a supplier to a customer to indicate when an order
will be shipped. ASNs are usually transmitted electronically.

Advanced planning and scheduling system (APS)

A type of software that uses mathematical models and related techniques
to find optimal solutions to complex production and supply problems.

Aggregate forecast
A forecast based on product or customer data that has been grouped by
similarity.

Aggregation
The practice of grouping similar products or customers to simplify plan­
ning and achieve more stable forecasts.

Assemble-to-order strategy (ATO)

The practice of building product components in advance of demand, but
postponing final assembly until demand is realized. An intermediate strat­
egy between the make-to-stock and make-to-order strategies.

Available to promise (ATP)

The inventory status of a product that is currently on hand and available
for immediate shipment.

Back scheduling
The practice of scheduling activities by working backward from the
planned completion date, adding activities to the schedule in the reverse
order in which they will be executed

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Backhaul
A shipment that moves in the opposite direction along a route just taken
by a vehicle in making a delivery, allowing it to make use of its hauling
capacity on the return trip.

Bill of lading
A document listing all the goods contained within a shipment and stating
the terms governing its transportation.

Bill of materials (BOM)

A listing of the parts and materials that become part of a finished product,
organized in a hierarchical structure that reflects their components, subas­
semblies, or intermediate forms.
Bullwhip effect - An alternative name for demand amplification.

Captive exchange
A private electronic exchange that is owned by one or more of the par­
ticipating organizations and restricted to selected trading partners of the
owning organizations.

Carrier - A company that specializes in transporting goods.

Carrying cost
The cost of holding goods in stock. Expressed usually as a percentage of
the inventory value and includes cost of capital, warehousing, deprecia­
tion, insurance, taxation, obsolescence, and shrinkage. Also called inven­
tory cost or holding cost.

Cash-to-cash time
A measure of the efficiency with which cash is used in the business. Calcu­
lated as the interval between the time a company pays for raw materials
and the time it receives payment for the finished goods produced from
those materials.

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Collaborative planning, forecasting, and replenishment

(CPFR)
A program aiming integration, that uses the Internet or technology to
achieve cooperation across the members of a supply chain to better fore­
cast, plan, and execute the flow of goods.

Consignment Inventory
An inventory control practice in which a supplier maintains ownership of
inventory on a customer's site until the inventory is sold, monitoring its
level and replenishing it as needed.

Constraint
In an optimization procedure, a mathematical expression or equation
that restricts the range of solutions the method model will evaluate. A
typical constraint would be an upper bound on capital spending in the
design of a supply chain. Refer: linear programming.

Consumer
The individual or organization who acquires a product in order to use it for
its intended purpose rather than reselling it to someone else. A consumer
becomes ultimate customer.

Continuous replenishment program (CR)

An extension of the quick response (QR) program to cover the full range of
retail merchandise and to add the techniques of supplier forecasting and
vendor-managed inventory.

Continuous review
An inventory replenishment policy in which a continuous count of inven­
tory is maintained at all times, with orders being placed whenever the
count falls below a set threshold. Refer: periodic review.

Cross docking
Products are moved directly from receiving docks to shipping docks, with
no intermediate storage. Two steps could be skipped in cross docking:
put away and Picking. Also called as "X docking"

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Customer
The individual or organization that purchases a product or service in a sup­
ply chain transaction.

Customer service level (CSL)

The target level of product availability for a particular region and product.
Service level can be specified in wide a variety of ways, ranging from the
maximum distance of inventory from a customer's site to the percent of
orders that can be filled from inventory within a specified time

Cycle stock
The amount of inventory required to support the operations of a facility,
with no reserve to cover unforeseen events. Refer: safety stock.

Cycle time
This term is used to denote the interval between successive repetitions of
a cyclical process, as in the cycle time of a machine or assembly line.

Days on hand
A measure of inventory level, calculated by dividing the quantity on hand
by the average daily consumption or sales.

Delayed differentiation
A technique in which products with characteristics in common are left in
their common form until demand is realized, allowing a better match of
production to realized demand. Also called as postponement.

Delphi technique
A procedure in which forecasts generated by multiple analysts are repeat­
edly combined and reviewed until a consensus forecast is reached.

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Demand amplification
The tendency for fluctuations in demand to increase as they move up the
supply chain. Often referred to as the bullwhip effect in supply chain con­
text.
Demand lumping
A phenomenon in which an otherwise smooth flow of demand up a sup­
ply chain is grouped into larger chunks than is necessary to meet opera­
tional requirements. Demand lumping is a major contributor to demand
amplification. It is known to be caused by batching, forward buying, and
hoarding.

Dependent demand
Demand for item (called lower level or child item) that does not occur un­ til
there is a demand for another item (called higher level or parent item). Also,
where demand for the higher level or parent item can be satisfied only if the
lower level or child items are available.

Distribution center (DC)

A storage facility in which goods may be staged, sorted, assembled, pack­
aged, and/or stored temporarily as they pass through a particular segment
of a supply chain. Distribution centers differ from warehouses primarily in
the focus on facilitating distribution rather than holding inventory.

Distribution network
The set of facilities and lanes that transports finished goods from a pro­
duction facility to the downstream customers of that facility.

Dynamic forecasting
The practice of revising current forecasts at the end of each period to in­
corporate the data for that period rather than leaving these forecasts un­
changed over successive periods. Refer: static forecasting.

Echelon
In a distribution network, a set or layer of facilities functionally equidistant
from the production facility that serves them. Comparable to a tier in a
procurement network.
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Echelon inventory
When centrally managed, the total inventory distributed across the ech­
elons of a distribution network.
Economic order quantity (EOQ)
The calculated amount of inventory that should be ordered at one time to
minimize the total cost of replenishment, taking into account the oppos­
ing effects of order costs and holding costs.

Electronic auction (E Auction)

An auction conducted entirely over the Internet, with sellers submitting
products to a Web site and buyers using e-mail or Web browsers to place
their bids.

Electronic catalog
A directory of products stored in digital form, usually accessible over the
Web, that provides access to product by type and supplier

Electronic data interchange (EDI)

A set of protocols for transferring information regarding demand and sup­
ply over private electronic networks.

Electronic distribution
The practice of shipping products in electronic form across the Internet
or other electronic medium. Electronic distribution is used for music, doc­
uments, software, photographs, tickets, and other products that can be
transmitted in digital form.

Electronic exchange
A digital marketplace, accessible over the Web that brings together buyers
and sellers of a particular type of product and provides them with tools for
carrying out transactions.

Enterprise resource planning system (ERP)

A suite of software that combines tactical-level applications for production
and distribution planning with execution systems for order management,
inventory control, accounting, Finance, HR and related operations.

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Finished goods (FG) inventory

The store of completed products on the output side of a production
facility.
Forecast horizon
The date furthest in the future for which events are predicted in a fore­
cast.

Forward buying
The practice of buying supplies before they are needed to take advantage
of favorable prices or avoid potential shortages.

Fulfillment cycle
The sequence of events in a supplier organization that manage the three
key flows in the fulfillment process: order flow, product flow, and cash
flow.

Fulfillment lead time

The interval between the time an order is placed with a supplier and the
time the goods are received by the customer.

Full pallet
A pallet of goods that contains only a single kind of product.

Full truckload shipment {FTL)

A shipment of goods that consumes the capacity of a truck, requiring the

truck to be dedicated to the shipment.

Independent demand
The demand for a product on the part of its end consumers. So named be­
cause it is the ultimate source of demand, and doesn't depend on a source
of demand further down in the supply chain.

Inter-modal transportation
The practice of using more than one medium of transportation, such as
rail and ship, within a single shipment.

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In-transit inventory
Inventory that is currently in a transportation lane between two facilities

Inventory turnover ratio (ITO)

A measure of how quickly inventory is used once it arrives at a facility, cal­

culated as the annual sales of a product divided by its average inventory
level. It can also be calculated as Cost of Goods Sold (COGS) divided by
Aggregated average Inventory.

Inventory velocity
The speed with which inventory moves through the supply chain. Despite
the way the term is commonly used, it does not represent a measure of
performance, and companies that seek to increase their inventory velocity
continue to rely on such traditional measures as the inventory turnover
ratio and days on hand.

Item fill rate

The percentage of line items, calculated across all orders, for which the full
quantity of the requested product is available for immediate shipment.
Percentage of customer or consumption orders satisfied from stock at
hand. It is a measure of an inventory's ability to meet demand. Also called
as demand satisfaction rate.

Judgmental techniques
The collection offorecasting techniques based on cause-and-effectreason­
ing rather than statistical analysis. Also known as subjective techniques.

Just-in-time manufacturing (JIT)

The practice of reducing inventory levels by scheduling materials to arrive
just as they are needed in the production process.

Keiretsu
The Japanese term for a type of integration in which a manufacturing firm
takes partial ownership positions in key suppliers and appoints its own
personnel to some management positions

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Less-than-truckload shipment (LTL)

A shipment of goods that consumes only a fraction of the capacity of a
truck, requiring that the truck be shared with other shipments.

Level component
In time-series analysis, the portion of the forecast demand that is constant
and unvarying. Refer trend, seasonal, and random components also.

Linear programming {LP)

A technique for finding optimal solutions to mathematical models in which
all relations between inputs and outputs are in linear form.

Make-to-order {MTO) strategy

The practice of making products in response to realized demand rather
than making them to stock in advance of demand.

Make-to-stock {MTS) strategy

The practice of making products in advance of demand and holding them
in finished goods inventory until demand is realized.

Mathematical model
A representation of a real-world system, such as a supply chain, that is con­
structed out of mathematical terms and relations. Mathematical models
are expressed as formulas and/or procedures for solving equations to pre­
dict the behavior of the system.

Mean absolute percentage error {MAPE)

A measure of the average deviation between forecast values and their cor­
responding observed values, regardless of the direction (sign) of those de­
viations.

Merge in transit
A technique in which separate shipments are combined en route and de­
livered as a single unit

Mixed pallet
A pallet of goods that contains two or more kinds of products.
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Mode of transportation
The medium by which a vehicle moves products from one facility to an­
other. The primary modes are truck, rail, boat, barge, airplane, and pipe­
line

Monte Carlo method

The technique of running a simulation model repeatedly using random
variables on each run in order to understand behavior of the model across
normal variations business conditions.

Moving average
Moving averages try to estimate the next period's value by averaging the
value of the last few periods immediately prior. The mean value obtained
by summing the last N values of a measure and dividing by N, where N is
set according to need. It could be 3 months or 5 months etc., Used in fore­
casting and other applications to obtain a typical value for recent obser­
vations of some measure. Increasing the value of N produces more stable
values that are less sensitive to recent changes.

Objective function
In linear programming, the equation that defines the quantity being op­
timized, such as total cost or a weighted combination of cost and other
performance measures.

On-time delivery (OTO)

A measure of fulfillment effectiveness, calculated as the percentage of or­
ders that arrive at the customer site within the agreed-upon time.

Optimization
Using a mathematical or procedural technique to explore the space of all
possible configurations of a system and identify the configuration that
maximizes (or minimizes) a designated output measure. Optimization is
usually carried out a specialized program called an optimizer. Refer: linear
programming.

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Optimizer
A software program capable of automating the process of optimizing a
system using a particular mathematical or procedural technique.

Order cost
The fixed cost of placing an order, follow up, regardless of the quantities
involved.

Order fill rate

The percentage of orders for which the full quantities of all products on
the order are available for immediate shipment.

Packing slip
A document enclosed with a shipment that lists the goods included in that
shipment together with information about the origin, destination, and
means of transport

Pareto Analysis
A technique for analyzing sales data to determine the extent to which a
small number of products accounts for the majority of sales. A common
result, often stated as the 80:20 rule, is that 80% of sales come from 20% of
the products. Named as ABC analysis in Inventory related topics

Perfect order
A measure of fulfillment effectiveness, calculated as the percentage of or­
ders that ship complete, arrive on time, contain the correct goods, are free
of damage, and have accurate paperwork.

Periodic review
An inventory replenishment policy in which inventory is counted at fixed
intervals and orders are placed whenever the current count falls below a
set threshold.

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Positioning strategy
The set of attributes on which a company chooses to differentiate itself
from its competition, together with methods for improving those attri-
butes and communicating them to potential customers. In the manufac­
turing sector, the most common attributes are quality of product, quality
of service, and price.

Postponement
An alternate term for delayed differentiation.

Primary packaging
The level of packaging that immediately encloses a product, such as a bot­
tle, box, can, or blister pack.

Private exchange
An electronic exchange with membership rules that exclude parties that
would otherwise be qualified to buy and sell the products handled on the
exchange.

Procurement network
The set of facilities and lanes that transports raw materials to a production
facility from the upstream suppliers of that facility. A procurement net­
work may be divided into tiers.

Production facility
A facility that exists primarily to create products from raw materials, stor­
ing materials and products only as necessary to support production op­
erations.

Public exchange
An electronic exchange that is open to all qualified buyers and sellers of
the products handled on the exchange.

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Pull
A supply chain in which inventory is produced only in response to realized
demand at each stage of the chain, with product being"pulled" down the
chain by actual orders.
Push
A supply chain in which inventory is produced in advance of demand and
"pushed" down the chain toward the consumer.

Push-pull boundary
The point in a supply chain in which the driving force switches from pull to
push, with pull operating downstream to the consumer and push acting
upstream from the extractor.

Random component
In time-series analysis, the variability in demand that remains after the sys­
tematic components have been removed. In other words, the aspect of
demand that can't be forecast by the model.

Raw materials inventory

The inventory of incoming materials maintained at a production facility for
use in the production process.

Reorder point (ROP)

The level or count at which the inventory for a particular product is
replenished.

Replenishment cycle
The sequence of events within a customer organization that manage the
three key flows in the replenishment process: order flow, product flow,
and cash flow.

Replenishment lead time

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The interval between the time a company places an order for raw
materials and the time it receives those materials.

Replenishment policy
The set of rules by which a firm decides when to replenish its inventory,
how large to make its orders, and how much inventory to maintain on site.

Reverse auction
An auction in which customers post requests for quotes and suppliers bid
against each other to win the business.

Risk pooling
An inventory management technique in which the safety stock neces­
sary to handle expected fluctuations in supply and demand is reduced by
treating two or more physically separate inventories as a single logical in­
ventory.

Safety stock
The amount of inventory that must be maintained in order to handle fluc­
tuations in supply and demand.

Seasonal component
In time-series analysis, the portion of the forecast demand that varies in a
cyclical manner over the course of the year.

Secondary packaging
The level of packaging that groups a standard number of primary pack­
ages together for convenience in handling, storage, and sales. The most
common form of secondary packaging is the carton.

Shrinkage
The reduction in inventory that occurs through pilferage, misplacement,
loss of moisture and related forms of attrition.

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Simulation model
A representation of a real-world system, such as a supply chain, that is con­
structed out of software objects that represent real-world objects. Simula­
tion models are expressed as computer programs that execute the models
to observe their expected behavior.

Static forecasting
The practice of generating a forecast and then leaving it unchanged until
a new forecast is created.

Stock-out
The situation in which there is not enough inventory on hand to fill a re­
ceived order.

Storage facility
A facility that exists primarily to hold goods in anticipation of future de­
mand. Some storage facilities may also perform final assembly and pack­
aging in order to move these operations closer to the end consumer as
Value addition.

Subjective techniques
The collection of forecasting techniques based on cause-and-effect rea­
soning rather than statistical analysis. Also known as judgmental tech­
niques.

Supplier
The organization that provides a product or service in a supply chain trans­
action.

Supply chain
A network of facilities and transportation that transforms raw materials
into finished products and delivers those products to consumers.

Supply chain management (SCM)

The set of activities involved in designing, planning, and executing the
flow of demand, supply, and cash across a supply chain.

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Systematic component
In time-series analysis, any component of demand (level, trend, or season­
al) that can be predicted from the model. In other words, everything but
the random component.

Tier
In a procurement network, a set or layer of facilities functionally equidis­
tant from the production facility they serve. Comparable to an echelon in
a distribution network.

Time-series analysis
A forecasting technique in which future values of a measure are predicted
from a mathematical analysis of historical values of that measure.

Tracking signal
A measure of the bias of a forecast to either overestimate or underesti­
mate the observed value.

Transportation lane
A designated pathway for moving goods from one facility to the next
within in a supply chain. Lanes are categorized as highways, railways, wa­
terways, air lanes, and pipelines.

Trans shipment
A technique in which goods are shipped laterally within the same echelon
of a distribution system, such as between warehouses or between retail
stores.

Trend component
In time-series analysis, the portion of the forecast demand that shows a
constant, linear increase over time.

Value Added Services (VAS)

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Value Added Services (VAS) is a common terminology used in Warehouse

context which can be any service that a Warehouse provides to the cli­
ents in addition to performing traditional functions of a warehouse. VAS
includes labelling, kitting, sorting, low level assemblies etc.,

Vendor-managed inventory (VMI)

An inventory control practice in which a supplier monitors and replenishes
inventory on a customer's site.

Vertical integration
The practice of owning facilities across a large segment of a supply chain
in order to control as much of the chain as possible.
Virtual integration
A practice in which members of a supply chain collaborate closely with
each other in order to gain the benefits of centralized supply chain man­
agement while retaining independent ownership and control.

Warehouse
A storage facility that holds controlled quantities of goods in a particular
location within a supply chain.

Web services
A set of technologies that allows software programs to invoke each other's
functions using XML and standard Internet protocols.

Work-in-process inventory (WIP)

Inventory currently being used in a production process or held for use
within the production area. Includes all materials that have been removed
from raw materials inventory but not yet deposited in finished goods
inventory.

XML
The extensible markup language for communicating data in a structured
format over the Internet.

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 About us
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the
development of India, partnering industry, Government, and civil society, through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive
role in India's development process. Founded in 1895 and celebrating 125 years in 2020, India's premier
business association has more than 9100 members, from the private as well as public sectors, including
SMEs and MNCs, and an indirect membership of over 300,000 enterprises from 291 national and regional
sectoral industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and
enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized
services and strategic global linkages. It also provides a platform for consensus-building and networking on
key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship
programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated
and inclusive development across diverse domains including affirmative action, healthcare, education,
livelihood, diversity management, skill development, empowerment of women, and water, to name a few.
India is now set to become a US$ 5 trillion economy in the next five years and Indian industry will remain the
principal growth engine for achieving this target. With the theme for 2019-20 as 'Competitiveness of India Inc -
India@75: Forging Ahead', CII will focus on five priority areas which would enable the country to stay on a
solid growth track. These are - employment generation, rural-urban connect, energy security, environmental
sustainability and governance.
With 68 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia, China,
Egypt, France, Germany, Indonesia, Singapore, South Africa, UAE, UK, and USA, as well as institutional
partnerships with 394 counterpart organizations in 133 countries, CII serves as a reference point for Indian
industry and the international business community.
To address the need of sharpening India Inc’s competitive edge through better Logistics and Supply Chain
practices, CII Institute of Logistics (CIL) was established in 2004 by the confederation of Indian Industry as a
center of Excellence in Logistics and Supply Chain. With a relentless aspiration to enhance logistics
competitiveness in the industry, CIL provides a complete range of services such as:
 Supply Chain Consultancy
 Corporate Training
 Research
 Warehouse Certification
 Supply Chain Transformation

Confederation of Indian Industry

Phase II, “B” Block, 9th Floor, IITM Madras Research Park , Kanagam Road , Taramani.
Chennai -600 113, Tamil Nadu , India
Phone : +91-44-66360300 Website : www.ciiscmconnect.com / www.cii.in
email : scm@cii.in
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SCM Pro

Module 2
Competitive Drivers of Supply Chain
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Disclaimer

The Contents presented here are for the sole purpose of reference for
SCM Pro Certification program by the CII Institute of Logistics subject to
the condition that it shall not by way of trade or otherwise circulated in any
form or used without the Cll's prior consent.

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Table of Contents:
COMPETITIVE DRIVERS OF SUPPLY CHAIN
Section 1: Demand Planning & Forecasting:…………..6
1.1. Introduction ............................................................................... 7

1.2. Characteristics of forecasts ....................................................... 8

1.3. Components of a forecast ....................................................... 10

1.4. Forecasting methods: Qualitative ............................................ 11

1.5. Forecasting methods: Quantitative ...................................... 12

1.6. Estimating forecast error ......................................................... 13

1.7. TIme-series forecasting models ............................................. 14

1.7.1. Moving average .......................................................... 15

1.7.2. Weighted moving average........................................... 18

1.7.3. Simple exponential smoothing ................................. 21

1.7.4. Trend-corrected exponential smoothing .................. 24

1.7.5. Seasonality-corrected exponential smoothing ......... 26

1.7.6. Trend and Seasonality corrected

exponential smoothing……………………………….30

1.8. Selecting a particular forecasting method ............................... 34

Section 2: Procurement decision ................................37

2.1. Introduction ................................................................................ 37

2.2. Procurement cycle....................................................................................38

2.3. Vendor evaluation ................................................................... 40

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2.4 Case Study on vendor evaluation………………………….. ..42

Section 3: Managing inventories in a Supply Chain ... 48

3.1. Introduction ......................................................................... 48

3.2. Inventory types ....................................................................... 50

3.3. Inventory-related costs ........................................................... 52

3.4. Basic EOQ model ....................................................................... 54

3.5. Capturing uncertainty: Safety stock ....................................... 56

3.5.1. Continuous review policy .......................................... 57

3.5.2. Periodic review policy ................................................. 61

3.5.3. Impact of service level on safety stock ........................ 63

3.5.4. Impact of demand and supply uncertainty on safety

stock ……………………………………………………………...64

3.6. Managing inventory for short life-cycle products ................. 66

3.7. Selective inventory control................................................... 67

3.8. Vendor Managed Inventory…………………………………..69

Section 4: Materials Requirements Planning ............... 71

4.1. Introduction…………………………………………………….71

4.2. MRP inputs ............................................................................. 73

4.3. MRP processing.......................................................................... 75

4.4. MRP outputs ........................................................................... 77

4.5. MRP II ……………………………………………………………………..80

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Section 5: Logistics & Transportation Management... 81

5.1. Introduction .............................................................................. 81
5.2. Transportation ..................................................................... 82

5.3. Drivers of Transportation decisions .................... ……………83

5.4. Impact of speed on transportation decisions ........................ 89

5.5. Impact of demand uncertainty on transportation decisions .. 91

5.6. Distribution network design ............................... ……………92

5.7. Comparison of distribution network design .......................... 97

5.8. Other distribution networks in practice .............. …………..101

5.9. Warehousing……………………………………………………..102

5.10. Storage and handling equipment ................... …………….106

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MODULE 2:
COMPETITIVE DRIVERS OF SUPPLY CHAIN
Section 1: Demand Planning & Forecasting
This section is designed to cover the following:

• Overview on demand planning and forecasting

• Characteristics of forecasts
• Components of a forecast
• Forecasting methods: Qualitative
i. Jury of executive opinion method
ii. Delphi method
iii. Market research
• Forecasting methods: Quantitative
• Estimating forecast errors
• Time-series forecasting models:
i. Moving average
ii. Weighted moving average
iii. Exponential smoothing
iv. Naive forecast
v. Trend-corrected exponential smoothing
vi. Seasonality-corrected exponential smoothing
vii. Trend and seasonality corrected exponential smoothing
• Selection of a particular forecasting tool

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Introduction:
• Demand planning and forecasting is considered to be the very first step
in determining the long-term capacity needs, yearly business plan, and
supply chain activities of an organization. It is pervasive amongst all
kinds of industries including consumer durables, FMCG, automobiles,
electronics, hospitality, airlines etc. For example, consider the CEO of an
automobile manufacturing plant trying to decide on the size of the plant,
the total number of staff needed with varied level of skill as also the total
quantity of different types of supplies required to manufacture the final
products. Is it possible for the CEO to find out the requisite input values
without having a forecast demand of the final product? Similarly is it
possible for the CEO of a hotel to determine the size of the hotel, the
number of staff required to manage the hotel without generating a
forecast demand of customers? Different organizations utilize different
types of forecasting techniques depending on the situation they face.
Some of them rely on qualitative forecasting techniques while others
primarily depend on quantitative tools. Yet there are few other
organizations which apply a mix of both qualitative and quantitative
forecasting tools. However, none of the forecasting techniques yields
precise outcomes. Forecasting itself is fraught with errors even if the most
sophisticated forecasting tool is applied. This does not imply that
forecasting is a futile exercise. Rather supply chain manager should try to
understand that forecasted values can never be perfect. The Manager
should not think that, a forecast given by Sales & marketing division is
the commitment given by them to sell the products in the market, rather A
forecast is a formal request from Sales and Marketing to the Supply
Management function to have the product, materials and capacity
available according to the quantity and at the time that they anticipate the
demand will occur from the Customer to ship the product to their
premises.
It tries to capture the estimated demand of a product or service for a future
period which serves as a basis for determining the supply and capacity
requirements of an organization. Managers should aim at minimizing the
forecasting errors associated with a particular forecasting technique.

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1.2. Characteristics of forecasts:

Supply chain managers should be aware of the following characteristics
of forecasts:
i. Forecasts are almost always wrong.
No forecasting method can predict the future demand with precision.
There are a number of factors e.g. the past trend, prevailing economic
condition, promotional efforts etc. which influence the future demand of
a product or service. A firm should apply a particular forecasting tool in
order to get a close estimate of the demand of its product. Along with the
demand, the firm should also estimate the forecast error. This gives an
idea to the planner to develop contingency measures in terms of keeping
provisions for safety stock and safety capacity which take care of the
widely fluctuating demand.

ii. Long-term forecasts are usually less accurate than short-term

forecasts.
It is easier to predict the condition of tomorrow's weather today than to
do the same seven days in advance. The same phenomenon also applies
to business. In a retail store, forecasting the weekly demand of a product
for the next week will be more accurate than the forecast for a weekly
demand of a time period that is several months down the line. This
observation has an important implication for a firm and motivates it to
reduce the lead time of various processes and take into account current
information. This will allow the firm to keep much less safety stock and also
P a g e |8to respond to the actual demand of customers.

iii. Aggregate forecasts are usually more accurate than disaggregate

forecasts.
Forecast demand of a family of products is usually more accurate than the
forecast of an individual product. For example, it is easy to forecast the total
demand of hatchback cars produced by Maruti Suzuki than to predict the
demand of only WagonR in a planning horizon. Further the aggregate
forecast demand of surf excel in a period is more accurate than the
forecast demand of 500 gm pack. Further the aggregation could also be
made along the time line or geography. Forecast demand of

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computers in a state is considered to provide a more reliable picture than
the same available in the capital of that state. Recognizing this characteristic
feature of forecasts, the firms should, as far as possible, attempt to utilize
aggregate forecasts.
iv. In general, the farther up the supply chain a company is, the greater
is the distortion of information it receives.
The best example of this is the bullwhip effect, in which order variation is
amplified as orders move farther from the end customer. As a result, the
farther up the supply chain an enterprise is, the larger is the forecast error.
Collaborative forecasting helps upstream enterprises reduce forecast error.

Even though, forecast can never be 100% accurate, forecasts are essential
for planning activities. Annual Forecasts help organizations for 'capacity
planning' which could be deciding on number of production plants, number
of warehouses, number of trucks, blocking supplier capacity etc.,

Quarterly forecasts help to decide on 'Resource Planning: whereas month­

ly forecasts help to make commitments on resources, like order delivery
date or shipment date.

Automobile manufacturers have the 'C+3' or 'M+3' ordering policy, while

ordering to their Suppliers. C or M means the immediate following month
and the quantity ordered is 100% firm. For other 3 months, mentioned as
+3, it is a rolling forecast. With a rolling forecast the number of periods in the
forecast remain constant. The monthly forecasts are given for 3 months then
as each month is passed, another month is added onto the end of the
forecast. So, in this ordering policy, there will be always a forecast for 3
monthly periods out into the future.

This rolling forecast reflects the market dynamics and facilitates the sup­
pliers to plan their production schedules meticulously.

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1.3. Components of a forecast:

The components of a forecast can be broken down into a systematic and
a random component. The systematic component measures the expected
value of demand which consists of (1) level, (2) trend and (3) seasonal­
ity. Level is the current deseasonalized demand, which tries to capture
the short-term patterns of demand that are not repetitive in nature. This
short-term pattern lasts for a few periods, which could be in either direc­
tion,upward or downward.Trend indicates the rate of growth or decline in
demand for the next periods. During the growth and decline stages of the
product life-cycle, a consistent trend pattern in terms of growth or decline
can be observed. Seasonality tries to capture the predictable seasonal
fluctuations in demand when demand is influenced by seasonal factors.
For example, the sales of air conditioners shoot up every summer and dip
during the winter. Thus if we plot the data for several years, we shall find
the same pattern repeating every year.

Random component is that part of the forecast that cannot be explained

by the historical demand patterns. A company cannot and should not at­
tempt to forecast the direction of the random component. It should only
predict the random component's size and variability which provide
measure of forecast error. A good forecasting method has an error whose
size is comparable to the random component of demand. The forecast er­
ror measures the difference between forecast and actual demand

(Figure 1.1: Systematic components of forecast (Source: Shah, 2009, Supply Chain
Management, Pearson Education)

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The above diagram captures the three elements namely level, trend and
seasonality of systematic component of forecast.

1.4. Forecasting methods: Qualitative

Qualitative forecasting methods are basically subjective in nature and de­
pend on human judgment. They are most suitable when very little
historical data is available.

1.4.1. Jury of executive opinion method:

This method involves securing opinions from a group of experts on expected
future sales and subsequently combining them into the estimate of future
sales. It takes into account variety of factors like the latest developments,
consumer preferences, prevailing economic conditions, past trend etc. into
the subjective judgment of experts provided by the experts. This has an
appeal to those mangers who tend to prefer their judgment based on
subjective opinions. It is a very quick and relatively inexpensive method of
developing an estimate of forecast demand. However, the method suffers
from the biases of the experts underlying subjective judgment. This method
is applicable for finding out the forecast demand of both new as well as
existing products.

1.4.2. Delphi method:

This method involves eliciting responses from a panel of experts in arriving
at a forecast and proceeds through a series of rounds. It is an iterative
process wherein the experts are asked to express individual views in an
unstructured questionnaire sent to them by the moderator. The first round
of Delphi method is, in general, exploratory in nature. The responses
received from the experts are summarized and another set of questionnaire
is designed on the basis of the summarized responses. This summary of
the responses along with the second round questionnaire is again sent back
to the same experts without disclosing their identity with a view to further
seeking their opinions in the context of the summarized responses.
Sometimes experts are also asked to reconsider their views in the light of

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the views expressed by the whole panel. This process continues for one or
few more rounds till a reasonable degree of consensus is reached. This
method is able to maintain the anonymity of experts thus enabling them
to express their own individual opinions based on their expertise. It thus
eliminates the influence that the authority usually has over groups. How­
ever, it is a very time-consuming method. This method is useful when a
new product is launched in the market and customers do not have any
idea about the product. In addition, this is very relevant when major
technological changes are expected in the market.

1.4.3. Market Research:

The first two qualitative methods attempt to seek opinions from the
experts following different approaches for the purpose of arriving at a
demand estimate. This method involves eliciting opinions from the
potential customers through market survey for the purpose of estimating
the market size, nature and characteristics of market etc. The market
survey may be carried out through interview with the focus groups;
telephonic interview or direct interview or simple questionnaire survey.
Based on the inputs received from the sample market survey, an
estimate of demand for the product is projected. This method is relevant
when a new product is at the conception stage and firms attempt to know
the purchase preferences of the potential representative customers.
When a firm does some innovations in its existing products and wants to
know the perception of customers towards the new offerings, this method
is useful. This is a relatively expensive method of forecasting.

1.5. Forecasting methods: Quantitative

Quantitative forecasting methods use historical data and statistical
techniques to predict the future demand. Such forecasting methods are
considered objective, rather than subjective because they follow certain
rules in determining forecast values. There are two main types of
quantitative forecasting methods: (1) time-series and (2) causal methods.

A time-series consists of observations arranged in a chronological order.

With this model, the chronology of observations and the respective values
are utilized to forecast the demand. This method is based on the

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assumption that past demand history is a good indicator of future demand.
These methods are most appropriate when the basic demand pattern
does not vary significantly from one year to the next.

Causal forecasting methods assume that the demand forecast is highly

correlated with certain factors prevailing in the environment, for example,
GDP growth rate, interest rate, promotional efforts by a firm etc. Demand
for car can be related to the economic condition of individual households.
Similarly the demand for software professionals in a region depends on
the growth of IT firm in that region. There could be single or multiple causal
variables which might influence the demand. In case there are multiple
causal variables, multiple regression method is used in which the relevant
parameters of the causal models are estimated using past data. Causal
models are suitable for medium to long term forecasting. Both time-series
as well as causal forecasting models tries to predict the systematic
component of demand.

1.6. Estimating forecast error:

Every forecasting method tries to estimate the systematic component of
demand and not the random component. The accuracy of a forecasting
method depends on how well the systematic component of demand has
been forecasted. The extent of accuracy of a forecasting method is captured
through the magnitude of random component, which in essence, reflects
the forecast error associated with the forecasting method. The forecast error
for period t is the difference between the actual demand and the forecast
for that time period, i.e.

Forecast error (t) = Actual demand (t) - Forecast (t)

The forecast error, actual demand and the forecast are denoted by Et, Dt
and Ft respectively. There are four popular measures of forecast error,
which are discussed in brief.

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Mean error (ME) simply calculates average error over n time periods. It
may so happen that in some periods, error is positive while in other
periods, the same may turn out to be negative. Thus the overall mean
error may come out be somewhere close to zero, which implies that the
mean error fails to capture the magnitude of error associated with a
particular forecasting method. However, closer to zero value of ME
indicates that the forecasting method is almost unbiased. MAD
overcomes the limitation of ME method by way of considering the
absolute difference between actual demand and forecast values and
finding out the average over n time periods. Thus it can estimate the
magnitude of forecast error. MSE method also captures the magnitude
of forecast error. However, in this method, smaller difference between
actual and forecast demand is associated with smaller value of MSE and
higher difference between actual and forecast demand is associated with
higher value of MSE. Thus MSE attaches higher penalty to higher value of
forecast error. MAPE considers the absolute deviations between actual
demand and its forecast as a percentage of actual demand and finds out
its mean over n time periods.

Further MAD can be used to estimate the standard deviation of forecast

error assuming that the forecast error is normally distributed.

This measure of standard deviation is useful in determining the safety

stocks required in managing inventory.

1.7. Time-series forecasting methods:

In time-series, the systematic component of demand is computed using
the following forms of the equations:

Multiplicative: Systematic component = level X trend X seasonal factor

Additive: Systematic component= level+ trend+ seasonal factor

Mixed: Systematic component= (level + trend) X seasonal factor

Mixed method seems to produce better forecasts than the other two and
the same has been used in the subsequent models. Further there exist
both static and adaptive time-series forecasting methods. Static method

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assumes that the estimates of level, trend and seasonality within the
systematic component do not vary as new demand is observed. In this
case, we estimate each of these parameters based on historical data and
then use the same for all future forecasts.

In static forecasting method, the forecast for period t+I in period tis as
follows:

L = estimate of level, i.e. the deseasonalized demand during period t = 0

T = estimate of trend

St+I = estimate of seasonal factor for period t+I

Static method does not incorporate the changes taking place in the external
environment and as such does not appear to reflect the reality. On the
contrary, the adaptive method of forecasting updates the estimates of level,
trend and seasonality after each demand observation. In adaptive
forecasting method, the forecast for period t+I in period t is given as:

Lt = estimate of level at the end of period t

Tt = estimate of trend at the end of period t
St+I = estimate of seasonal factor for period t+I

The forecasting models discussed in the subsequent sections are all

adaptive in nature.

1.7.1. Moving average

Moving average method is used when the systematic component of
demand consists of only level and does not have trend or seasonality i.e.

Systematic component of demand = level

The level in period t is estimated as the average demand over the

most recent n periods. This represents an n-period moving average and is
determined as follows:

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Lt = (Dt + Dt - 1+ .....+ Dt - n + 1) / n (2.1.7)

Where Dt indicates the actual demand observed in period t

Thus forecast for period (t+1) is the same as the level in period t computed
from the actual demand observed over the most recent periods, i.e.

Ft+1 =Lt (2.1.8)

Further forecast for future period n is also same as the level in period t,
i.e.

Ft+n = Lt (2.1.9)

The new moving average is computed by adding the latest observation

and dropping the oldest one, i.e.

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The moving average method accounts for the effects of random variations
by averaging out the demand data of the most recent periods. The more
periods are included in the average, the more it corrects for random
variations. However, with more number of periods, moving average
method becomes less sensitive to the actual changes in the data. This
method fails to recognize trend, for example, upward trend or downward
trend in the demand of a product. Nor can this method capture the
seasonal fluctuation in demand. This method is quite popular in practice
and finds applications when demand of a product does not show much
variation from period to period. Example 1: Monthly demand of a
particular variety of mobile phone for the year 201O is as follows:

Month Demand Month Demand

January 200 July 170
February 190 August 172
March 180 September 178
April 210 October 230
May 195 November 225
June 175 December 224

Find out the forecast demand of mobile phone for the month of January,
2011 by employing three-month moving average of demand. Also find out
the forecast error by employing the four measures of forecasting error.

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Table1.1: Forecasting through 3-month moving average

Month Demand Level {L) Forecast Error Abs Squared

{D) {F) error error
Jan 200
Feb 190
Mar 180 190
April 210 193.33 190 20 20 400
May 195 195 193.33 1.67 1.67 2.78
June 175 193.33 195 -20 20 400
July 170 180 193.33 -23.33 23.33 544.44
August 172 172.33 180 -8 8 64
September 178 173.33 172.33 5.67 5.67 32.11
October 230 193.33 173.33 56.67 56.67 3211.11
November 225 211 193.33 31.67 31.67 1002.78
December 224 226.33 211 13 13 169
226.33

Mean error MAD MSE MAPE

8.59 20 647.35 9.7

Thus forecast for the month of January, 2011 is 226.33. The details of the
calculations shown in above table are borrowed from the solutions given in
an excel file.
1.7.2. Weighted moving average:
While simple moving average method attaches equal weight to the all
the periods of past demand, weighted moving method tends to put more
weight on the most recent data and relatively less weight to the data of
the distant periods. Here also the systematic component of demand
consists of only level and does not have trend or seasonality i.e.
Systematic component of demand = level

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However, this method could be made somewhat sensitive to the upward

or downward trend by adjusting the weights to be attached to the data of
different periods. For example, when the demand shows a downward
trend, greater weight might be placed on earlier periods.

The level in period t is estimated as the weighted average demand over

the most recent n periods. This represents an n-period moving average
and is determined as follows:

Lt=(Dt*Wt+ Dt -1 * Wt-1+.....+ Dt - n + 1*Wt - n + 1) (2.1.12)

Where Wt+Wt - 1 + .......+ Wt - n + 1 = 1
Thus forecast for period (t+1) is the same as the level in period t computed
from the actual demand and its corresponding weights observed over the
most recent periods, i.e.

Ft+l =Lt (2.1.13)

The new moving average is computed by adding the latest observation

and dropping the oldest one, i.e.

Lt+1 = (Dt + 1*Wt+1 + Dt*Wt+.....+ Dt - n + 2 *Wt - n + 2) (2.1.14)

Ft+2 = Lt+l (2.1.15)

The weights placed on the periods on which averaging is carried out

remain the same although demand data of the corresponding periods
might change.

Example 2: Refer to example 1. Assume a 3-period weighted moving

average and the weights placed on the periods starting from earlier
period to the most recent one are 0.25, 0.35 and 0.40 respectively. Find
out the forecast demand of mobile phone for the month of January, 2011.
Also find out the forecast error by employing the four measures of
forecasting error.

Solution: In this problem, the weights 0.25, 0.35 and 0.40 are placed on
the demand of period 1, period 2 and period 3 respectively in all the cases
while computing the forecast demand of the next period.

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Month Demand Level {L) Forecast Error Abs Squared

{D) {F) error error
Jan 200
Feb 190
Mar 180 188.5
April 210 194.5 188.5 21.5 21.5 462.25
May 195 196.5 194.5 0.5 0.5 0.25
June 175 190.75 196.5 -21.5 21.5 462.25
July 170 178 190.75 -20.75 20.75 430.5625
August 172 172.05 178 -6 6 36
September 178 173.9 172.05 5.95 5.95 35.4025
October 230 197.3 173.9 56.1 56.1 3147.21
November 225 215 197.3 27.7 27.7 767.29
December 224 225.85 215 9 9 81
225.85

Mean error MAD MSE MAPE

8.055 18.777 602.468 9.17

Thus forecast for the month of

January, 2011 is 225.85. The details
of the calculations shown in above
table are borrowed from the
solutions given in an excel file.

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1.7.3. Simple exponential smoothing:

Simple exponential smoothing is a special form of moving average meth­
od in which the forecast for the next period is calculated as the weighted
average of the current period's actual demand and forecast. The weighted
average of actual demand and forecast demand of the current period is
carried out through smoothing constant (a) whose value ranges from O to
1. The formula for the simple exponential smoothing is:
Ft+ 1== α Dt +(1-α )Ft (2.1.16)
Ft+ 1: Forecast for time period (t+1)

Ft: Forecast for time period t

Dt: Actual demand for time period t

a: Smoothing constant used to weight Dt and Ft (O<=α<=1}

Simple exponential smoothing does not have any observable trend and

seasonality. In this case,

Systematic component of demand = Level (Lt)

The current forecast for all future periods is equal to the current estimate
of level and is given as

Ft + 1 = Lt and Ft + 1 = Lt (2.1.17)

After observing demand D t+1 for period t+1, the formula of 2.1.12 could
be rewritten as

Ft + 2 = Lt+1 = α Dt + 1+(1- α )Lt (2.1.18)

The initial estimate of level (LO) is taken to be the average of all historical
data. Given demand data for periods 1 through n, we have the following:

(2.1.19)

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In simple exponential smoothing, closer the value of a is to 1, the greater

is the weight put on the most recent actual demand and closer its value is
to 0, the more emphasis is put on the past forecasts. The value of a is
chosen through trial and error method and that particular value is
selected which results in the minimum value of MAD. The general rule of
determining this value is: the greater is the randomness in the time series
data, the lower should be the value of a and vice-versa. Like simple moving
average method, simple exponential smoothing does not incorporate
trend into its forecast. However, it could be made somewhat more
sensitive to trend than simple moving average by carefully selecting the
value of a.

Example 2: Refer to example 1. Assume the value of a = 0.2. Find out the
forecast demand of mobile phone for the month of January, 2011. Also find
out the forecast error by employing the four measures of forecasting error.
Solution: Consider the value of initial level (LO) to be the average of the
actual demand observed in 12 months during 2010, which comes out to be
195.36.

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Table1.2: Forecasting through simple exponential smoothing

De-
Pe- Absolute Squared
Month mand Level Forecast Error
riod error error
(D)
0 195.36
1 Jan 200 196.29 195.36 4.63 4.63 21.49
2 Feb 190 195.03 196.29 -6.29 6.29 39.57
3 Mar 180 192.03 195.03 -15.03 15.032 225.98
4 April 210 195.62 192.03 17.97 17.97 323.058
5 May 195 195.49 195.62 -0.62 0.62 0.385
6 June 175 191.39 195.49 -20.49 20.49 420.11
7 July 170 187.12 191.39 -21.39 21.39 457.85
8 August 172 184.09 187.12 -15.12 15.11 228.55
September
9 178 182.87 184.09 -6.094 6.094 37.140

October
10 230 192.30 182.87 47.12 47.124 2220.72

November
11 225 198.840 192.30 32.69 32.69 1069.265

December
12 224 203.87 198.84 25.16 25.16 633.010

203.87

Mean error MAD MSE MAPE

3.545 17.72 473.09 8.80

Thus forecast demand for the month of January, 2011 is 203.87. The details
of the calculations shown in above table are borrowed from the solutions.

Naive Forecast:
According to naive forecasting method, forecast for the next period is
considered equal to the actual demand of the current period. This method
assumes that the past demand does not have any relevance on future
demand and demand of only the immediate preceding period will have

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impact on the demand of the immediate succeeding period. Thus current

demand is the best estimator of the future demand.

Ft+1 =Dt (2.1.20)

This approach neither incorporates any element of systematic

component, i.e. level, trend or seasonality, nor does it account for the
random component into its forecast. Nevertheless, it is quite a popular
method in practice, particularly for those products like groceries, staple
food items etc. which exhibit stable demand pattern. Naive forecast could
be treated as an extreme case of exponential smoothing where the value
of α is considered to be 1.

By applying naive forecast to the example given above, the forecast

demand of mobile phone for the month of January 2011 will be the same
as the actual demand observed in December, 2010, i.e. it will be224.

1.7.4. Trend-corrected exponential smoothing

This particular method is applicable when demand consists of both level
and trend in the systematic component but no seasonality, i.e.

Systematic component of demand = level + trend

The initial estimate of level and trend is obtained by running a linear

regression between demand Dt and time period t of the form

Dt = at+b

The underlying relationship between demand and time is assumed to be

linear because there is no seasonality. The constant 'b' measures the
estimate of demand at period t = 0 and is our estimate of initial level LO.
The slope 'a' measures the rate of change in demand per period and is
our initial estimate of the trend TO.

In period t, given estimates of Lt and Tt, the forecast for future periods is
expressed as

Ft+1 = Lt+ Tt and Ft+n = Lt+nTt (2.1.21)

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After observing demand for period t, the revised estimates of level and
trend are as follows:

α is a smoothing constant for

the level (O<=a<=1) and is a smoothing constant for the trend (0<= <=1).
Example 3: Refer to example 1. Assume the value of a = 0.2 and = 0.3. Find
out the forecast demand of mobile phone for the month of January, 2011.
Also find out the forecast error by employing the four measures of
forecasting error.
Solution: The initial level (LO) and trend (TO) are determined through
running a linear regression between the actual demand (Dt) and the periods
(t) through Jan to Dec, 2010. The value of LO and TO came out to be 179.95
and 2.43 respectively.
Table1.2: Forecasting through trend-corrected exponential smooth­
ing

De- Fore-
Level Trend Absolute Squared
Month mand cast Error
(Lt) (Tt) error error
(D) (Ft+1)
179.95 2.43
Jan 200 185.90 3.48 182.38 10.60 10.60 112.54
Feb 190 189.51 3.52 189.38 -3.03 3.03 9.22
Mar 180 190.43 2.74 193.036 -13.17 13.17 173.47
April 210 196.53 3.75 193.17 9.71 9.71 94.32
May 195 199.23 3.43 200.28 -7.66 7.66 58.74
June 175 197.13 1.77 202.66 -23.90 23.90 571.48
July 170 193.12 0.039 198.90 -23.16 23.16 536.59
August 172 188.93 -1.23 193.16 -15.70 15.70 246.53
Sept 178 185.76 -1.81 187.70 -5.95 5.95 35.39
Oct 230 193.16 0.95 183.95 35.88 35.88 1288.08
Nov 225 200.28 2.80 194.11 21.90 21.90 479.94
Dec 224 207.27 4.058 203.092 12.66 12.66 160.46
211.33

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Mean error MAD MSE MAPE

-0.15 15.28 313.90 7.794

Thus forecast for the month of January, 2011 is 211.33. The details of the
calculations shown in above table are borrowed from the solutions given
in the excel file.

1.7.5. Seasonality-corrected exponential smoothing:

This particular method is applicable when demand consists of level and

seasonality in the systematic component but no trend, i.e.

Systematic component of demand = level X seasonal factor

The seasonal factor is represented by periodicity (p). The periodicity (p)

is the number of periods after which the seasonal cycle repeats itself. For
example, suppose there are four quarters in a year and each quarter
exhibits four different patterns of demand. The demand pattern of quarter
1 of the current year will be repeated again in quarter 1 of the next year
after 4 periods. In this case, the periodicity (p) is 4.Similarly if 12 months of
a year represent 12 different patterns of demand, then the demand
pattern of January in the current year will be repeated again in January
of the next year after 12 periods. In this case, the periodicity (p) becomes
12,We need
initial estimates of level{Lo) and seasonal factors 1
(S,S2…S p) to forecast
the demand for future period. The forecast for future period (t+1) is given

by
On observing demand for period (t+1), the estimates of level and seasonal
factors are computed as follows:

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α is a smoothing constant for level (0<=a<=1) and vis a smoothing

constant for seasonality (0<=y<=1).\

The steps followed for finding seasonal factors through this method
are as follows:
Step 1: Observe the periodicity of demand on the basis of which the value of p is
found out.

Step 2: Obtain the de seasonalized demand Dt with the help of the follow­
formula

For illustration, consider the value of p=4 and estimate the deseasonalized
demand for period 3 (t=3). Thus

Step 3: Find out the seasonal factor (St) of each individual period by di­
viding actual demand Dr by the deseasonalized demand Dr of the
corresponding period.

Step 4: Estimate the average value of seasonal factor (St) by taking the
average of individual seasonal factors of the same quarters over the
seasonal cycles.

Suppose there are 12 periods (quarters) with periodicity (p) of 4 and 3

seasonal cycles (years).

The average value of seasonal factor (St) is determined as follows:

S1=(S1+Ss+S9)/3 (2.1.29)

S2 = (S2 + S6 + S10) I 3 (2.1.30)

S3 = (S3 + S1 + S11) / 3 (2.1.31)

S4 = (S4+Ss+S12)/3 (2.1.32)

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In Delhi, demand for air-conditioners increases during summer while the
same dips during winter. On the contrary, the demand for room heater/
blower shoots up during winter and the same decreases sharply in other
periods. Thus forecast demand of these products in Delhi could be found
out by utilizing seasonality-corrected exponential smoothing.

Example 4: Refer to example 1. Consider the data pertaining to the

demand of 12 months given in the problem to be analogous to the
demand data of 12 quarters of 3 years. Assume the value of a = 0.2 and
y = 0.4. Find out the forecast demand of mobile phone for the month of
January, 2011. Also find out the forecast error by employing the four
measures of forecasting error.
Solution: Consider the value of initial level {LO) to be the average of the
actual demand observed in 12 quarters over 3 years. This turns out to be
195.75.

Table1.4: Forecasting through seasonality-corrected exponential

smoothing

Period Demand Level (Lt) Deseasonalized Seasonality Average sea-

(Dt) demand �𝐷𝐷𝑡𝑡
��� (St ) sonality 𝑆𝑆̅t
0 195.75
1 200 197.69 0.974
2 190 194.92 1.032
3 180 193.98 194.37 0.926 0.946
4 210 196.23 191.87 1.0944 1.023
5 195 196.40 188.75 1.033 0.989
6 175 191.79 182.75 0.957 1.009
7 170 189.65 175.87 0.966 0.938
8 172 184.73 180.62 0.952 1.042
9 178 183.71 194.37 0.915 0.990
10 230 194.36 207.75 1.107 0.970
11 225 204.30 0.921
12 224 208.34 0.997
13 0.982

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Period Forecast (F) Error Absolute error Squared error

0
1 190.745 9.254 9.254 85.646
2 204.042 -14.042 14.042 197.196
3 184.465 -4.465 4.465 19.938
4 198.515 11.484 11.484 131.884
5 194.153 0.846 0.846 0.717
6 198.226 -23.226 23.226 539.449
7 180.089 -10.09 10.09 101.807
8 197.630 -25.63 25.63 656.911
9 183.030 -5.030 5.030 25.302
10 178.303 51.696 51.696 2672.578
11 179.193 45.806 45.806 2098.229
12 203.832 20.167 20.167 406.742
13 204.605

Mean error MAD MSE MAPE

4.73 18.478 578.03 6.145

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Thus forecast for the month of January, 2011 is 204.605 as given in period
13 of the above table. The details of the calculations shown in above table
are borrowed from the solutions given in the excel file.

1.7.6. Trend and Seasonality-corrected exponential smoothing

This particular method is applicable when demand consists of level, trend

and seasonality in the systematic component, i.e.

Systematic component of demand = (level + trend) X seasonal factor

We need initial estimates of level (LO), trend (TO) and seasonal factors (S1,
52.......Sp) to forecast the demand for future period. The forecast for
future period (t+1) is given by

On observing demand for period (t+1), the estimates of level, trend and
seasonal factors are computed as follows:

a is a smoothing constant for level (0<=α<=1), is a smoothing constant

for trend and y is the same for seasonality (0<=y<=1). Observe that in each
case, the revised estimate is the weighted average of the observed value
and the old estimate.

The steps followed for finding out seasonality factors, initial level and initial
trend are as follows:

Step 1 to step 2 is exactly the same as described in seasonality-corrected

exponential smoothing method.

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Step 3: Run a linear regression between time periods and deseasonalized

demand data and find out the initial estimates of level (LJ, trend (T
0 )

Step 4: Find out the estimates of deseasonalized demand (Dt) data of all
periods by utilizing the linear relationship of the form.

Dt=Lo+To*t

Step 5: Find out the estimates of seasonality factor of each individual

period by dividing each D, by the estimate of D, of the corresponding
period.

Step 6: This step is the same as followed in step 4 of seasonality-corrected

exponential smoothing method.

Forecast demand of air-conditioners and room heaters in Delhi could

also be found out through trend and seasonality-corrected exponential
smoothing depending on whether sale of these products shows an in­
creasing or decreasing trend. In addition, the demand of electronic goods
like micro-oven, refrigerator, TV, camera etc. increases during festival sea­
son and does not fluctuate much during other periods. Thus forecast
demand of these products also could be determined through this method.

Example 5: Refer to example 4. Consider the data pertaining to the de­

mand of 12 months given in the problem to be analogous to the demand
data of 12 quarters spread over 3 years. Assume the value of a= 0.2,
= 0.3 and y = 0.4. Find out the forecast demand of mobile phone for the
month of January, 2011. Also find out the forecast error by employing the
four measures of forecasting error.

Solution: After deseasonalizing the demand data, the same is run through
a linear regression considering time as independent variable and demand
data for the corresponding periods as dependent variable. The initial
estimates of level and trend came out to be 183.73 and 0.8913 respectively.
The relevant calculations are shown in the following table.

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Table 1.5: Forecasting through trend & seasonality-corrected

exponential smoothing

Period De- Initial Deseason- Seasonality (St) Average season-

mand deseasonal- alized Ality 𝑆𝑆�t
(D) ized de- D,=Lo+To*t
� t)
mand (𝐷𝐷
0
1 200 184.6213 1.083298623 1.015929515
2 190 185.5126 1.024189193 1.047884137
3 180 194.375 186.4039 0.965645032 1.007704009
4 210 191.875 187.2952 1.121224676 1.058172853
5 195 188.75 188.1865 1.036206104 1.037163397
6 175 182.75 189.0778 0.925544934 1.03464023
7 170 175.875 189.9691 0.894882378 0.990771668
8 172 180.625 190.8604 0.901182225 1.078571495
9 178 194.375 191.7517 0.928283817 1.032631307
10 230 207.75 192.643 1.193918284 0.995522002
11 225 193.5343 1.162584617 0.964848198
12 224 194.4256 1.152111656 1.033907944

13 1.026909978

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Period Level Trend Forecast Error Absolute Squared er-

error ror
0 183.753 0.891
1 187.088 1.6244 187.5856 12.4144 12.4144 154.11747
2 187.233 1.1807 197.7491 -7.7490 7.74908 60.048268
3 186.456 0.5933 189.8661 -9.8660 9.8660 97.339394
4 189.330 1.2776 197.931 12.0690 12.0690 145.66169
5 190.089 1.1219 197.6922 -2.6921 2.6921 7.2479091
6 186.797 -0.2022 197.8349 -22.8349 22.8349 521.43397
7 183.592 -1.1029 184.873 -14.873 14.873 221.20599
8 177.885 -2.4841 196.8282 -24.8282 24.8281 616.43740
9 174.796 -2.6657 181.1252 -3.1252 3.1252 9.766942
10 183.911 0.8685 171.3598 58.6402 58.6402 3438.67308
11 194.463 3.7735 178.2846 46.7154 46.7154 2182.3331
12 201.920 4.8785 204.9587 19.04127 19.0412 362.56984
13 212.3638

Mean error MAD MSE MAPE

5.2426 19.570 651.40 9.636

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Thus forecast for the month of January, 2011 is 212.3638 as given in period
13 of the above table. The details of the calculations shown in above table
are borrowed from the solutions given in the excel file.

1.8. Selecting a particular forecasting method:

Now the issue before the manager is to select an appropriate forecasting
method which will be unbiased in nature and should also reflect the
demand pattern of the product observed in the recent past. The thumb
rule indicates that the manager should choose that particular method
which would produce minimum forecast error. Another problem faced by
the manager is the availability of several measures of forecast error. These
different measures produce different results of forecast error. Under this
situation, which measure should be given more relative importance is a
question of judgment and discretion to be exercised by the manager.

The manager should, first of all, take into consideration the nature of
industry and the type of the products for which forecast demand needs to
be found out. By looking at the patterns of demand, a manger can roughly
select a few forecasting methods which later need to be compared
through different estimates of forecast error on the same set of demand
data. At this stage, the manager can specify the relative importance to be
attached to different measures of forecast error. Thus the process of
selecting a particular forecasting method consists of three elements: (1)
Short listing of a few forecasting methods based on the patterns of
demand observed in the recent past, (2) Prioritizing the measures of
forecast error based on the preferences of the manager and (3) Comparison
of forecast error values on the prioritized measures of forecast error.

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(1) Short listing of a few forecasting methods:

If the product exhibits only random fluctuations of demand and does not
show any consistent pattern in growth or decline, nor does it reveal any
pattern of seasonal fluctuation, then probably simple moving average or
simple exponential smoothing might produce a reasonable result of fore­
cast demand. If the product shows seasonal fluctuation in demand,
seasonality needs to be incorporated into the forecasting method and in that
case seasonality-adjusted exponential smoothing might produce better
forecast for future. In addition, if the product displays both seasonal
fluctuation as well as a trend (either growth or decline) in demand, both
seasonality and trend are to be incorporated into the forecasting method. In
this case, trend and seasonality-adjusted forecasting method most probably
would generate better forecast. However, in all the above cases, the
performance of the forecasting methods needs to be assessed on different
measures of forecast error.

(2) Prioritization of the measures of forecast error:

This particular element is concerned with the prioritization of the measures

of forecast error. Since different measures of forecast error yield different
values of forecast error on the same set of data, manager must have a clear
idea on the relative importance to be attached to a particular measure of
forecast error. First, if the manager feels that the forecasting method should
be free from any bias, then he should attach due importance to the estimate
of Mean Error, an unbiased estimate of forecast error. Second, if the slight
deviations of the actual demand from the forecast degrades the image of
the firm in terms of providing a satisfactory level of service to its customers
(when actual demand turns out to be high compared to forecast) or
adversely affects the cost effectiveness of the firm by way of carrying unsold
inventory (when actual demand is low compared to its forecast), then the
manager should attach maximum importance to the estimate of MSE. Third,
if the manager feels that more importance should be given to the absolute
deviations computed as a percentage of the actual

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demand over the past periods, he should consider MAPE as reflecting his
preferences. Fourth, if the manager feels that the absolute deviations
calculated over the past periods satisfies his objective of capturing fore­
cast error, then he should attach due importance to the estimate of MAD.
However, it is advisable on the part of the manager not to rely only on a
single measure of forecast error.

(3) Comparison of forecast error values on the prioritized measures of

forecast error:

Once the measures of forecast error are prioritized, the values of forecast
error produced by the forecasting tools need to be compared with each
other. That particular forecasting method should be selected which
consistently yields the least values of forecast error on the prioritized
measures of forecast error.

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SECTION 2: PROCUREMENT DECISION

This section is designed to cover the following:

• Overview on procurement
• Procurement cycle
• Vendor evaluation and selection
• Case study on vendor evaluation

2.1. Introduction:
Procurement constitutes a very important function of any business firm,
whether it is in the business of manufacturing or service. A firm's major
proportion of working capital remains blocked in the form of raw
materials and other inputs purchased from different sources. Thus
judicious disposition and management of cash is extremely essential
while making payment to the suppliers of inputs. The most important
aspect of procurement is the quality and the quantity of inputs sourced
from various vendors. The quality of the input items determines the
quality of the finished products which in turn, creates an image of an
organization. Further if the input items are procured in insufficient
quantity, the firm may fail to deliver the required quantity of finished
goods to its customers in time. On the other hand, if the same is procured
in excess, the firm will have to bear additional financial burden in terms of
the opportunity cost of funds tied in unused items, inventory carrying cost
of the unused items lying in the store etc. Further the unused items are
likely to become obsolete and lose its economic value (depending on the
type of the items) with the passage of time. While procuring materials from
a supplier, the capacity of the supplier in terms of infrastructural facilities,
financial resources, technological knowhow, commitment towards quality
and delivery schedule, experience in dealing with similar type of
customers etc. should be properly ascertained. Otherwise sometimes
quality of the materials delivered by the supplier may not adhere to the
prescribed specifications. Or the materials might not be delivered in time
when it is urgently required. Thus procurement involves sourcing right
material from right supplier/s in right time with right quantity.

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2.2. Procurement cycle:

Procurement cycle involves following activities:

+ Step 1: Identification of requirements of an item by User

Department in terms of type, quality and quantity etc.
+ Step 2: Identification of the right sources of supply and invitation
of quotations.
+ Step 3: Comparison of quotations, negotiation with the vendors
and placing of purchase order.
+ Step 4: Keeping track of purchase order.
+ Step 5: Inspection of quality, quantity etc. and receipt of purchase
order.
All the activities mentioned above encompass one complete procurement
cycle.

Step 1: Need identification:

In a typical manufacturing or service organization, needs for an item are

raised by both functional and supporting departments in a prescribed
form and sent to the Stores Department. The categories of the items
demanded by the User Department are varying in nature both in terms
of volume and variety. The requisition of the item includes a (i) brief
description about the item, (ii) necessary quantity and quality and (iii) the
desired delivery date.

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In addition, the User Department is also required to mention the urgency

and criticality of the item. Once the requisition is received by the Stores
Personnel, the availability of the item with the Stores Department is
checked. If the item is available in the Stores, the same is issued to the
User Department. Otherwise the Stores Department forwards the
requisition to the Purchase Department with appropriate remarks.
Step 2: Identification of the right sources of supply and invitation of
quotation:
The Purchase Department should identify suppliers who have the
capability of supplying the desired goods. If right suppliers are not listed
in the record, quotation of the item has to be invited from various
suppliers through tenders. Tenders may be floated in newspapers,
magazines and the company websites for a specified period within which
the vendors will have to submit the quotations.
Step 3: Comparison of quotations, negotiation with the vendors and
placing of purchase order.
Quotations submitted by the suppliers are compared on price, quality,
delivery schedule and other relevant parameters which enable the
purchasing firm to do short listing of the vendors. Subsequently a select
few vendors may be invited to make a brief presentation of their firms,
products and other related factors affecting the quality, quantity and
delivery schedule of the item. During this stage, negotiation with the
vendors on one-to-one basis may also be carried out on price and other
terms and conditions. Finally a single supplier or more than a supplier is
selected and purchase order is placed. Copy of the purchase order is sent
to the Stores Department, Accounts Department and if necessary, may
also be sent to the User Department.

Step 4: Keeping track of purchase order.

Purchasing Department will have to follow-up the status of the purchase
order with the vendor/s from time to time, particularly in case of large
orders or those with high lead time. This allows the Purchasing
Department to find out potential delays and communicate this information
to the User Department

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Conversely, the Purchasing Department should also communicate

changes in the required quantities or delivery schedule of the User
Department to the vendor/s in order to enable them to incorporate
changes in their original plan.
Step 5: Inspection of quality, quantity etc. and receipt of purchase or­
der.

Inspection of quality may be carried out at the suppliers' premises or may

also be performed in the receiving yard of Stores Department. Further it
may also be carried out at the inspection laboratory. It depends on the
type of the item to be tested, whether only sample inspection is sufficient
or 100% inspection of all the items are to be performed. In addition, the
incoming shipments need to be checked for quantity and other
performance specifications. The vendor/s must communicate to the
Purchase Department, Stores Department, Accounts Department as also
the User Department that the goods have been shipped along with
appropriate in­ voice. Once the incoming shipments are checked and
satisfactory results are found, the goods are taken to the Stores and kept in
designated places. A goods receipt note (GRN) is prepared by the
receiving personnel and a copy is sent to the Accounts Department with
suitable remarks for release of payment to the vendor/s. If goods
delivered by the vendor/s are not found satisfactory, they are to be
returned to their premises. In addition, if only some percentage of the
shipments is found in good condition, the Accounts Department may be
instructed to release a partial payment to the vendor/s with the condition
that they will have to take back the unsatisfactory portion of the shipment
to their premises.
2.3. Vendor evaluation:
The underlying purpose behind supplier evaluation is to reduce the risk
and uncertainty associated with procurement, maximize overall value to
the organization and build long-term relationship with suppliers. It has
become a strategic issue in today's competitive business environment in
view of its enormous potential of improving overall supply chain
performance. However, procuring huge number of items of different
categories from large number of suppliers as also its management
appears to be a Herculean task.

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A number of researchers have attempted to simplify this exercise by

applying portfolio models. The fundamental approaches of these portfolio
models are identical in nature as all of them have three steps in common.
The first step involves analysis of products/items and their classification
based on certain criteria while the second step entails analysis of the
supply market required to deliver the products/items. The final step is
associated with the development of strategies and action plans in order to
match the product requirements with the supplier relationships.

The portfolio models to supply management, as mentioned above, may

be considered as preliminary step to carrying out detailed investigation on
identifying the criteria deemed essential for evaluating the performance
of suppliers. Several studies have been carried out to identify the criteria
governing the evaluation and selection of suppliers. Traditional models of
supplier evaluation mostly relied on three most important factors namely
quality, cost and delivery performance history for evaluating the
performance of suppliers. Other important criteria like technological and
financial capability of suppliers, quality system adopted at suppliers'
premises etc. were not given much importance in traditional models.
However, with the increasing demand of customers coupled with the
complexity of sup­ ply environment, the less tangible factors have also
become equally important along with the most visible factors for supplier
evaluation. The following list shows different criteria of supplier evaluation
considered important from the perspective of different researchers.

• Price
• Quality/ Reliability of the product
• Technical support/ After sales support
• Ability to meet delivery schedule/ Delivery lead time
• Quality system at suppliers' place/ quality policy /quality
philosophy
• Technological capability/ Innovation capability/ R & D capability
• Breadth of product line/ Ability of a supplier to supply a number
of items
• Sensitivity of suppliers to buyers' requirements

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• Willingness of suppliers to share information

• Existence of IT/ Communication system
• Integrity of vendor/Vendor's image
• Financial capability of the supplier
• Business volume/ Amount of past business
• Geographic proximity of suppliers
• Support in new product development
The above list attempts to cover almost all aspects of supplier evaluation.
However, every criterion may not be relevant to a particular item and hence
to the suppliers supplying that item. Once the criteria governing supplier
evaluation is finalized, the next step is to apply a suitable method to
evaluate the suppliers on the selected criteria. A number of methods have
been employed by different researchers ranging from simplistic
perceptions to advanced models like fuzzy set theory and AHP fuzzy
approach for evaluating the performance of suppliers. Studies have
revealed that supplier evaluation process, being multi-dimensional in
nature, should incorporate both quantitative as well as qualitative
criteria. Studies have further revealed that the supplier evaluation is
basically a multi-criteria decision making (MCDM) problem involving
group decision making under multiple criteria at different levels.
2.4. Case Study on vendor evaluation:
The following example shows a part of the case study carried out in a
large Engineering organization located in eastern Uttar Pradesh which
is primarily engaged in the manufacture of diesel locomotives employing
thousands of workforce at different levels. It has to procure a large
number of components, spare parts etc. from numerous suppliers.
Several senior level professionals of the organization working in Stores
and Purchase department were consulted about the current practices
being adopted with regard to evaluation of suppliers supplying high value
and critical items. Discussion with the professionals reveals that the
organization under study, being a public sector organization, is not
following any objective method for evaluation of suppliers even for high
value and critical items. It is at present attaching maximum importance
to the price of

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the components and not giving due importance to other relevant criteria
like quality, reliability, quality system at suppliers premises, delivery
schedule, service response time etc. However, the professionals feel that
in the changing scenario, both tangible as well as intangible factors need
to be taken into consideration for proper evaluation and selection of
suppliers. Keeping this in mind, the details of the criteria pertaining to
supplier evaluation were identified through literature review and shown
to the above professionals. At this juncture, further discussions took place
with the said professionals and the list of criteria was modified making it
suitable for suppliers supplying high value and critical items to the
organization under study. Broadly four criteria were identified which were
broken down into seventeen sub-criteria. Figure 2.2.1 reveals the
hierarchical structure of criteria and sub-criteria in detail.

Major Criteria: C1 : Technical factors; C2: Commercial factors; C3:

Communication & miscellaneous support provided by suppliers; C4:
Financial performance of suppliers Sub-Criteria: C11 : Quality/Reliability;
C12 : Quality system at suppliers' place; C13: Technological capability and
innovation of suppliers; C14: Breadth of product line; C15: Technical
support/ After sales support C21: Price; C22: Ability to meet delivery
schedule;
C23: Payment terms and conditions; C24: Geographic proximity C 3 1 : Service
response time; C32: Sensitivity of suppliers to buyer's requirement; C33 :
Willingness of suppliers to share vital information; C34 : Support in Value

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Engineering;C35 support in developing new product specification; C41

Financial capability of suppliers; C42: Supplier's volume of business with
the buyer with respect to supplier's turnover; C43: Supplier's volume of
business with respect to buyer's total annual turnover.

Figure 2.1: Hierarchy of supplier evaluation criteria

Saaty's pair-wise comparison method of Analytic Hierarchy Process (AHP)

was employed in for finding out the relative importance of supplier
evaluation criteria. Three top-most Executives from Stores and Purchase
department were identified as Experts in the present study with a view
to securing responses from them. The purpose of the study and the pair-
wise comparison method of AHP were first thoroughly explained to all the
three Experts. The Experts, while comparing the criteria, show their
preferences in terms of linguistic variables as suggested by Saaty, such
as Very high, High etc.

Table 2.1: Composite weights of supplier evaluation criteria

It is clearly evident from the above table that the Experts have assigned
the highest importance to the quality/reliability criterion followed by price
and then technological capability of the suppliers.

The relative importance of the above seventeen sub-criteria were taken

into consideration for evaluating the performance of five established sup­
pliers. The performance of these suppliers was examined on the seven­
teen sub-criteria by the same three Experts in a five-point rating scale. The
score 1 indicates a very poor performance, 5 very good performance while
the intermediate values imply the level of performance ranging from poor
to good. Subsequently the individual score obtained by a supplier on a
sub-criterion is multiplied by its corresponding weight with a view to
finding out the factor score of a supplier on a single sub-criterion.
Likewise, the factor scores of all the suppliers are determined on all the
remaining sub-criteria. Thereafter, the factor scores obtained by a single
supplier on

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all the seventeen sub-criteria are summed up in order to determine the total
factor score of a supplier and the same is repeated for the remaining
suppliers also. Finally the factor scores secured by all the five suppliers are
compared. The supplier securing the highest total factor score is ranked 1,
the second highest ranked 2 and so on. The entire exercise and results are
exhibited in table 3.

Table 2.2: Evaluation of suppliers

Evaluation lmpor- Performance rating of the sup- Factor Scores of the suppliers
criteria tance pliers

weight S1 S2 S3 S4 S5 S1 S2 S3 S4 S5

(11 0.239 5 4 3 4 5 1.195 0.956 0.717 0.956 1.195

(12 0.0245 5 4 4 4 5 0.1225 0.098 0.098 0.098 0.1225
(13 0.135 5 4 4 5 4 0.675 0.540 0.540 0.675 0.540
(14 0.045 4 4 4 3 4 0.180 0.180 0.180 0.135 0.180
(15 0.082 5 4 4 3 4 0.410 0.328 0.328 0.246 0.328
(21 0.153 4 3 5 4 4 0.612 0.459 0.765 0.612 0.612
(22 0.072 4 5 5 4 5 0.288 0.360 0.360 0.288 0.360
(23 0.032 5 4 5 4 4 0.160 0.128 0.160 0.128 0.128
(24 0.017 3 4 5 4 4 0.051 0.068 0.085 0.068 0.068
(31 0.051 5 5 3 5 5 0.255 0.255 0.153 0.255 0.255
(32 0.043 5 3 2 4 5 0.215 0.129 0.086 0.172 0.215
(33 0.021 4 4 3 5 4 0.084 0.084 0.063 0.105 0.084
(34 0.010 5 3 2 3 5 0.050 0.030 0.020 0.030 0.050
(35 0.0062 5 4 3 4 5 0.031 0.0248 0.0186 0.0248 0.031
(41 0.015 5 5 3 4 5 0.Q75 0.Q75 0.045 0.060 0.075
(42 0.043 5 3 2 3 4 0.215 0.129 0.086 0.129 0.172
(43 0.005 5 4 3 4 5 0.025 0.020 0.0,5 0.020 0.025

Total Factor Scores secured by the Suppliers 4.6435 3.8638 3.7196 4.0018 4.4405

Overall Rank of the Suppliers 1 4 5 3 2

Case study adapted from a paper titled 'An AHP framework of supplier
evaluation with reference to high-value and critical items: A case study' by
Das, D. & Barman, D., Int. Journal of Services & Operations Management,
Vol.7, No.4.

VENDOR RATING : Many companies have realized, it is very much essen­

tial to evaluate vendors with common parameters by giving weightages

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for various evaluation criteria. It is required for creating a solid& consistent

vendor base to take challenges in business. Vendor analysis and
performance improvement is always part of quality standards. These
companies do this exercise called 'Vendor rating' in a more transparent
manner.

Benefits of Vendor Rating are:

• Tracking the performance of vendors over a month/quarter/year

• Providing feedback to the vendors about their performance and advising
them to improve on low performance areas-which could be quality,
adherence to delivery schedules, price
• Comparison of vendors
• To build long term relationship with the suppliers through open
discussions on ratings
• To recognize the best performing suppliers with rewards
• To decide on 'share of business' when multiple suppliers are supplying
same products. Consistently performing suppliers get more business
from the company.
• To assign the 'green channel' supplier status. When the quality and
delivery performance of the supplier is consistent, for say six months, he
is given the status of green channel supplier. Quality check will not be
done for the products supplied by these suppliers. That is why, in some
companies, they are referred as 'Self Certified' suppliers. Many
Engineering products manufacturers follow this practice. Example given
in fig.2.2.3.
• Rationalization of Suppliers-to identify non performing suppliers and
remove them from the system
• Reverse Marketing: When the rating of a supplier is consistently
excellent, buying companies try to convince the supplier for accepting
more orders.

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SECTION 3:
MANAGING INVENTORY IN A SUPPLY CHAIN
This section is designed to cover the following:
• Meaning of inventory in the context of Operations & Supply Chain
• Inventory types
• Inventory-related costs
• Basic EOQ model
• Capturing uncertainty: Safety stock
i. Safety stock in case of Continuous review policy
ii. Safety stock in case of Periodic review policy
iii. Impact of service level on safety stock
iv. Impact of demand and supply uncertainty on safety stock
• Managing inventory for short life-cycle products
• Selective inventory control
• Vendor managed inventory (VMI)

3.1. Introduction:
Inventory is often called a necessary evil. It is a vital element of any
organization which enables it to run its operation in an uninterrupted
manner and also to provide a satisfactory level of service to its
customers. But the question is - how much inventory should an
organization keep - too much or too little? Because this will have an
important bearing on the operating performance of a firm and also the
level of service to be provided to its customers. Very often an organization
has to grapple with these two conflicting situations. If a firm decides to
provide an excellent service to its customers, it has to hold more than the
required amount of inventory. However, this leads to escalation in
inventory carrying costs. In addition, organization will have to keep
provision for extra space for the excess items. Further there lies
possibility of the excess items getting obsolete with the passage of time.
Management may decide to mark down the prices of slow moving items
in order to get rid of excess inventory at an appropriate period.

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Thus it is observed that providing good customer service interferes with

the operating efficiency of a firm. On the contrary, if the management of
the firm decides to improve its operating efficiency, it may have to run the
whole organization with a minimum level of inventory. However, this
approach may adversely affect the level of service to be provided to its
customers. In that case, customers will simply visit its competitor to avail
of the product in time.

This phenomenon reveals that neither too much nor too little inventory
helps an organization achieve its performance objectives. Rather it should
attempt to achieve a trade-off between these two conflicting scenarios.
The overall objective of inventory management is to achieve a satisfactory
level of customer service while keeping inventory-related costs within
reasonable limit.

To judge the effectiveness of inventory management, few performance

measures are in vogue. The most obvious is customer satisfaction which
is measured by the number and quantity of backorders and/or customer
complaints. A widely used measure is inventory turnover ratio, which is
the ratio of annual cost of goods sold to the average inventory investment.
The turnover ratio indicates how many times a year the inventory is sold.
Generally higher the ratio, the better is the performance, which in other
words, implies an efficient use of inventories. However, the desirable
number of turns depends on the type of industry and the amount of profit
margins. The higher the profit margins, the lower the acceptable number
of inventory turns and vice-versa. A product that takes a long time to
manufacture or long time to sell will have a low turnover rate. This is often
the case with high-end retailers. Conversely, supermarkets have a fairly
high turnover rate. Managers often use inventory turnover ratio to
evaluate inventory management performance. Further monitoring this
performance metric over a period of time can yield useful insights into the
changes in performance.

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3.2. Inventory types:

Inventory may be divided into various categories. This categorization
could be of various types which helps managers view inventory as
controllable rather than as an evil to be avoided. On the basis of physical
characteristics, inventory can be divided into three main types (which is
particularly applicable to a manufacturing firm) which are as follows:

• Raw materials and purchased parts

• Work-in-process (WIP) goods
• Finished goods
The above categorization is also known as accounting classification.

Further inventory could also be divided on the basis of functional

classification as mentioned below:

• Cycle inventory
• Safety inventory
• Pipeline inventory
• Anticipation inventory
• Decoupling inventory

3.2.1. Cycle inventory:

This is the amount of inventory carried in a supply chain resulting from
production or purchases in lot sizes that are bigger than those demanded
by customers. A lot or batch size is the quantity that a stage of a supply
chain either produces or purchases at a time in order to take advantage of
economies of scale. Bigger is the lot size, larger is the cycle stock. Higher
lot size reduces fixed costs associated with ordering and transportation,
quantity discounts in product pricing and short-term discounts or trade
promotions. However, higher lot size increases cycle stock which leads to
the increase in inventory carrying costs. If the lot size happens to be Q
then the cycle inventory at any point will be Q/2.

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3.2.2. Safety inventory:

Safety inventory takes care of the uncertainties associated with customer
demand or the supply of inputs. If customer demand is predictable in
advance and supply is also assured and free from any disruption risk,
then there is no need to keep safety inventory. However, in reality it is rarely
possible to know the exact customer demand in advance. Further in a
country like India, uninterrupted supply of inputs throughout the year is
not likely because significant delays occur due to bottlenecks in
transportation or labour unrest afflicting the supplying firm. The amount
of safety inventory to be kept in an organization also depends on the level
of customer service to be provided.

3.2.3. Pipeline inventory:

This is actually the inventory in-transit while moving an item from one place
to another or the materials actually being worked on (work-in-process
inventory). Since production and transportation involve certain amount of
time, it is essential to carry an item equivalent to the number of days it will
take to transport the same from source to destination. The pipeline inventory
is computed as the product of the process time or transit time and the usage
rate of the item. Thus it is affected by choosing alternative modes of
production or transportation. If the goods are transported by air rather than
by sea, the amount of pipeline inventory required will be reduced. Similarly
if manufacturing lead time is reduced, pipeline inventory will be reduced.

3.2.4. Anticipation inventory:

Anticipation inventory is an inventory that is held in anticipation of
customer demand. It allows instant availability of items when customers
want them. It may further fall into two categories: (i) seasonal and (ii)
hedge inventory.

(i) Seasonal inventory:

Firms that face seasonal patterns in demand, often build up inventories
during lean period to meet high demand of the peak periods. For
example, paints and consumer durables exhibit high demand during
festival

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seasons; refrigerators and air-conditioners show high demand during

summer season.

(ii) Hedge inventory:

If certain events like labour or transport strike results in temporary price

increase or supply disruption, the firm may carry certain stock to take care
of the eventuality. According to APICS, hedge inventory is a form of
inventory buildup to buffer against event that may not happen. Hedge
inventory planning involves speculation related to potential labour strikes,
price increases, unsettled governments and events that could severely
impair the company's strategic initiatives. As the name suggests, this
inventory is meant to be a preventive measure against an event that may
never hap­ pen.

3.2.5. Decoupling inventory:

Firms, particularly the manufacturing ones keep inventory at
departmental boundaries in order to maintain the continuity of operations
that might otherwise be disrupted by events like breakdown of equipment
or accidents. The decoupling inventory provides the needed flexibility
and permits other operations to continue temporarily while the problem
is resolved. Firms use decoupling inventory of raw materials to insulate
production from disruption in deliveries from suppliers and also
decoupling inventory of finished goods to buffer sales operations from
manufacturing disruptions. Improving co-ordination within and across
the supply chain can reduce decoupling inventory significantly.

3.3. Inventory related costs:

There are three types of inventory-related costs: ordering cost, carrying
cost and shortage cost. These three types of costs are often in conflict with
each other. Therefore while making inventory decisions, order quantity is
chosen in such a manner which minimizes all inventory related costs.

3.3.1. Ordering costs:

This includes the costs associated with the preparation of purchase order,
getting the necessary approval for placing the purchase order, actual

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placing of the order and follow-up of the same. It also includes the shipping
cost of items from source to destination. In addition, it incorporates the costs
incurred in connection with the preparation of goods receipt note upon
arrival of the goods, inspection of the same for quality and quantity, updation
of inventory records. Ordering costs are generally expressed as a fixed
amount per order regardless of the order size.

3.3.2. Carrying costs:

This relates to the costs incurred in connection with the physical storage
of items. The items need to be kept in a warehouse which might be taken
on lease or rent. The size of different items may be different thereby
occupying varying amount of space in the warehouse. Further the value
of different items might also be different. The items are insured against
theft, pilferage and spoilage for which adequate security is needed.
Further the items depreciate and get obsolete with the passage of time.
However, the rate of obsolescence differs from item to item. For example,
Fashion goods and high technology products face high rate of
obsolescence than auto­ mobiles or furniture. Inventory carrying costs
include the costs associated with warehousing (rent/leasing, light,
security), insurance, taxes, obsolescence and spoilage etc. It also
includes the opportunity costs associated with the funds tied in inventory
which could be used elsewhere. Inventory carrying cost of an item is
expressed as a percentage of its unit price per year.

3.3.3. Shortage costs:

This relates to the costs incurred by the firm when demand exceeds supply
of inventory on hand. There are two types of shortage costs: (i) lost sales
cost and (ii) backorder cost.

i. Lost sales cost: When a firm loses potential sales due to non­
availability of finished goods, it loses an opportunity to make
profits. It also affects the goodwill of the firm and hence future
sales.
ii. Backorder cost: When a customer is willing to wait for his or her
order to be fulfilled, backorder cost is incurred. It results in
additional administrative costs and may also involve an additional

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Transportation and handling costs. It may also affect the

goodwill of the firm and future sales.

3.4. Basic EOQ model:

This is the simplest inventory model and is used to identify an order size that
minimizes the sum of ordering costs and inventory carrying costs. In this
model, material cost remains constant irrespective of the size of the order.
Assumptions of the basic EOQ model are as follows:

• Only one product is involved

• Annual demand requirements are known
• Demand is even throughout the year
• Lead time does not vary
• Each order is received in a single delivery
• There are no quantity discounts

Fig 3.1: Behavior of inventory level over time

The above diagram reveals that the demand (usage rate) is constant and
supply is also delivered exactly at the same time. Thus reorder point or the
reorder level of inventory remains same in every cycle which is computed
by taking the product of usage rate and the lead time between the
placement of order and the receipt of the order.

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Notations:

D: Annual demand

A: Setup or Order Cost

C: Cost per unit

h: Holding cost per year as a percentage of unit product cost

H: Inventory carrying costs per unit per year= h*C

Q: Lot Size

T: Reorder interval

Number of orders per year= D/Q

Annual material cost= C*D

Annual order cost= (D/Q)*A

Annual holding cost= (Q/2)*H

Total annual variable cost (TC)= (D/Q)*A + (Q/2)*H

Fig 3.2: Impact of order size on inventory-related costs ((Source: Shah,

2009, Supply Chain Management, Pearson Education)

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The total cost curve reaches its minimum where the carrying and ordering costs
are equal, i.e.

Key insights of the basic EOQ model:

• One important observation of the cost versus order quantity

curve (fig 2.3.2) is that the total cost curve is relatively flat in the
vicinity of EOQ. This indicates that the total cost is not particularly
sensitive to the optimal order quantity. This is evident from the
following findings:
Order quantity 50% 80% 90% 100% 110% 120% 150% 200%
Increase in cost 25% 2.5% 0.5% 0% 0.4% 1.6% 8.0% 25.0%

This indicates that the basic EOQ model is fairly robust. In other words,
even if the resulting EOQ differs from the actual EOQ, total costs will not
increase much at all.

• In deciding the optimal lot size, the tradeoff is between order

{Setup) cost and holding cost.
• If demand increases by a factor of k, it is optimal to increase batch
size by a factor of Sqrt k. No of orders placed per year should
increase by a factor of Sqrt k.
• If lot size is to be reduced, one has to reduce fixed order cost. To
reduce lot size by a factor of 2, order cost has to be reduced by a
factor of 4.

3.5. Capturing uncertainty: Safety stock

So far we have assumed in the basic model that demand is constant and
supply is also delivered at the same time. However, in reality demand
varies from time to time and also from one region to another. In addition,
production and transportation systems have also some degree of
unreliability which may affect the delivery of goods in time. In order to take
care of this variability in demand and supply lead time, firms will have to
keep some stock which is popularly known as safety stock or safety
inventory

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Further the amount of safety stock kept in a firm depends on the level
of service provided to customers. Safety stock reduces the risk of stock
out during lead time. In, the determinants of safety stock and the re­
order point are as follows:

• The rate of demand

• The lead time
• The extent of demand variability
• The extent of lead time variability
• The degree of stock out risk acceptable to the management or
the level of service to be provided to customers.
The following figure pictorially describes the necessity of keeping safety
stock in a firm.

Figure 2.3.4: ROP based on normal distribution of lead time demand

3.5.1. Continuous review policy:

The inventory model considered under continuous review policy is known
as Q model or FOQ model or ROP model. The relevant policy is known as
(s, S) or (s, Q) policy. The small case's' is known as reorder point while the
capital case 'S' is termed as order up to level. Q indicates the order quantity.
'The sum of reorder point (s) and order quantity (Q) together represents order
up to level (S), i.e.

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S=Q+s

This policy is normally utilized when the items purchased or handled are
expensive in nature and the management needs to closely monitor the
level of its inventory on a continuous basis. The policy is visually
represented with the help of the following

Figure 2.3.5: Continuous review (s, S) policy

The relevant computation of safety stock, reorder point and order up to

level can be explained with the help of few formulas discussed below.
Consider the following notations:

d= average daily/weekly demand

crd = standard deviation of daily/weekly demand

crdLT = standard deviation of demand during lead time

LT= replenishment lead time in days/weeks

LT=average replenishment lead time in days/weeks

crLT = standard deviation of lead time

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h = holding cost of one unit per period

A = fixed cost

SL = Service level (for example, 95%). This implies that the probability of
stocking out is 5%

55 = Safety inventory

s = Reorder point (ROP)

S = Order up to level

z = standard normal variable corresponding to a particular service level

provided to customers

The reorder point (s) has two components:

(i) average demand during lead time

(ii) variation in demand from the average also known as safety stock

Further since there is a fixed cost involved in each order, we order more
than the reorder point:

In terms of finding out safety stock, reorder point and order up to level,
there are three possible scenarios.

Case 1: Only demand is variable

Case 2: Only lead time is variable

Case 3: Both demand and lead time is variable

Case 1: Only demand is variable

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Example 1:

The distributor has observed average weekly demand of a particular

variety of lamp:

d=5O ad=30

Replenishment lead time is 2 weeks, and desired service level (SL) is 97%

Average demand during lead time is:

50*2 = 100

Safety Stock {55) is:

1.88*30* √2 = 79.76 (Value of z is 1.88 corresponding to 97% service

level).

Reorder point is thus 180 approx., or about 3.6 weeks of supply at ware­
house and in the pipeline.

Further, Q = 650

Order-up-to level (5) thus equals: Reorder Point+ Q = 180 + 650 = 830
Cycle inventory= Q/2= 325

Average Inventory= cycle inventory+ 55 = 325 + 80 = 405

Case 2: Only lead time is variable

Example 2:

Daily Demand of product (d) =600,

__
Average Lead Time (LT)= 6

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3.5.2. Periodic review policy:

For most of the retail stores handling FMCG or groceries, it may not be
practically feasible or advisable on the part of the management to monitor
the level of inventory of innumerable number of items on a continuous
basis. In this case, orders for the items are placed at fixed intervals and
inventory level is also checked only in those intervals. Order up to level

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remains fixed and order quantity is computed on the basis of order up to

level and inventory level on hand at fixed intervals. The relevant model is
known as fixed order interval (FOI) model. Since inventory level is monitored
only at fixed intervals, the amount of safety inventory to be kept in this model
is much higher than that in case of FOQ model. Because the safety
inventory has to cover the period of lead time plus the fixed order interval.
At each interval, inventory position is raised to order up to level (or base-
stock level). Periodic review policy is pictorially represented through the
following diagram (fig. 2.3.6).

Figure 2.3.6: Periodic review (Base stock) policy

The base-stock level includes two components:

i. Average demand during (r+LT) period (the time until the

next order arrives): (r+LT)*d
ii. Safety stock during that time: [z*sd*√(r+LT)]
In this policy, items from the same supplier may be clubbed together,
which yield savings in ordering costs, packaging costs, shipping costs,
handling costs and other related administrative costs. However, as
mentioned earlier, this policy requires larger amount of safety stock, which
in­ creases the carrying costs of inventory.

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3.5.3. Impact of service level on safety stock:

If a firm decides to provide higher level of service to its customers, it has to
keep higher level of safety stock. Service level is the probability that all
orders will be filled from stock during the replenishment lead time or during
the reorder cycle. This is also known as cycle service level. For example, a
retailer has specified a service level of 95 percent. This implies that during
100 such reorder cycles, we can expect stock out situation in about five
cycles, which results in z being equal to 1.645. A firm keeping higher level
of safety factor is in a position to provide higher level of customer service.
The impact of safety factor on the service level provided to the customers
can be understood from the following table.

Table 2.3.1: Safety factors and service levels

Safety factor (z) Service

0 0.500

0.5 0.690

1.0 0.841

1.5 0.933

2.0 0.977

2.5 0.994

3.0 0.998

If we plot safety inventory vis-a-vis service level required by a retailer, we

come across an interesting observation which is depicted in figure 2.3.5.
It reveals that the service level increases as the level of safety inventory in­
creases. However, the marginal increase in service level in the initial period
is higher than that in the later period. For example, when the retailer in­
creases the safety inventory from 600 to 800, there is a significant increase
in service level. However, when the retailer increases the safety inventory
from 1200 to 1400, one observes very little improvement in service levels.
This phenomenon highlights the importance of selecting suitable service
levels.

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Figure 2.3.7: Impact of service level on safety stock ((Source: Shah, 2009,
Supply Chain Management, Pearson Education)

3.5.4. Impact of demand and supply uncertainty on safety

stock:
Both the variability in demand as well as the variability in lead time has an
important bearing on the amount of safety stock to be kept by a firm. In
addition, the absolute value of lead time also has an impact on the amount
of safety stock to be maintained. Thus for reducing safety stock, a firm can
decide to reduce variability in demand and also the variability in supplier
lead time. It can also reduce safety stock by decreasing the supplier lead
time. The variability in demand can be captured by forecast error which can
be improved through the utilization of better forecasting technique. It can
also be improved if the retailer enters into contract with some customers.
Variability in supplier lead time can be reduced, if the supplier decides to
use more reliable modes of transportation. Further if the supplier utilizes a
faster mode of transportation, the supplier lead time will be reduced.

Which of the above three levers provide highest payoff to a firm in terms
of minimizing the safety stock requirement? It has been found that the
reduction in variability of supplier lead time provides highest benefits to
the firm. Surprisingly, improvement in forecast accuracy and reduction in
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average lead time do not seem to have much impact on the required safe­
ty stock level. This kind of analysis has an important implication in terms
of prioritization of efforts on the part of the retailer. The following table
(2.3.2) helps understand the findings in a better manner. In the following
example, we have considered a service level of 95% to be provided by the
retailer to its customers which helps in determining the safety stock of
the retailer. The value of the standard normal variable (z) corresponding
to 95% is 1.645.

Table 2.3.2: Impact of demand and supply uncertainty on safety stock

Average S.D.of Average S.D.of Safety

Safety
daily daily lead time lead stock in Remarks
stock
demand demand (days) time days

500 100 20 6 4990 9.98 Base case

500 100 20 0 736 1.472 No supply uncertain- ty

No demand uncer-
500 0 20 6 4935 9.87 tainty
Reduce demand un-
500 50 20 6 4949 9.898 certainty
Reduce supply uncer-
500 100 20 3 2575 5.15 tainty
Reduction in lead
500 100 10 6 4962 9.924 time

Equation (2.3.10) has been utilized to find out the values shown in the
above table. The table reveals that the influence of lead time variability on
the amount of safety stock to be kept is maximum compared to other
parameters. There is hardly any impact of demand variability on the
amount of safety stock, if lead time variability is not reduced. In addition,
the impact of lead time reduction on the amount of safety stock to be
maintained is also very marginal.

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3.6. Managing inventory for short life-cycle products:

Short life cycle products are a special category of items for which demand
occurs for a very short period. This short period is technically called single
selling season which is much shorter than the production or
replenishment lead time. Manager does get an opportunity to place a
second order during the selling season. Goods are to be kept ready
before the selling season starts in order to take care of the demand.
Further due to obsolescence of the product or significant fall in the
perceived value of the product, it is not possible to carry inventory from one
selling season to the next. The problem faced by the manager is: how
many items should the man­ ager order before the selling season starts?
The kind of products which face this type of situation are: fashion products,
high technology products, perishable goods etc. In case of perishable
products like milk or bread etc., physical deterioration takes place in the
products and the products suffer reduction in prices by the end of the
selling season. In case of fashion products or newspapers, physical
deterioration in the product does not take place. But the perceived value
of the products falls drastically at the end of the selling season. Further
in case of high technology products, obsolescence of the technology
takes place very fast. In all these cases, the selling season is very short
and the likely sales should be anticipated before the selling season.

At the end of the selling season, if the realized demand turns out to be less
than the available inventory, then the manager needs to salvage leftover
inventory at a discounted price. However, if the realized demand exceeds
the available inventory, then the manager loses customers and hence the
opportunity to make more money. Subsequently the reputation of the
firm may be at stake for not having enough products on hand to satisfy
customer demand. And the customers may choose to visit other retailers
in the following season. Thus the manager faces a fundamental trade-off
between keeping 'too much' and 'too little' items.

The problem of managing inventory in a single period with uncertain

demand is known as newsvendor problem, because it has traditionally
been motivated by the problem of determining the right number of
newspapers for a newsvendor to stock. Consider the following notations:

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Co = overage cost
This indicates the cost of ordering one more unit than what you would
have ordered had you known demand. In other words, suppose you had
left-over inventory (i.e., you over ordered). Co is the increase in profit you
would have enjoyed had you ordered one fewer unit.

Co= Cost - Salvage value

• Cu = underage cost
This indicates the cost of ordering one fewer unit than what you would have
ordered had you known demand. In other words, suppose you had lost sales
(i.e., you under ordered). Cu is the increase in profit you would have enjoyed
had you ordered one more unit.

Cu = Selling Price - Cost

Critical ratio is computed as Cu/ (Co+ Cu)

This ratio indicates the probability that the demand will be less than or equal
to the order quantity Q. In other words, this also implies the optimum level
of service from which the value of standard normal variable (z) is found out.
Subsequently the optimum order size can be found out from the following
formula:

Optimum order size= Mean demand + z*standard deviation of demand

The formulas of critical ratio and optimum order size indicate that if under­
age cost turns out to be very high compared to the overage cost, service
level factor will also be high which will result in bigger order size. The
opposite phenomenon occurs if the overage cost becomes higher than
underage cost.

3.7. Selective inventory control:

A firm has to purchase innumerable number of items. The monetary value
of the items, their usage rate, availability and criticality of the same are also
different. It is, therefore, advisable on the part of the management not to
exercise equal control on all types of items because management control
involves time and resources which are scarce in nature. There are different

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Types of selective inventory control techniques which are discussed below

in brief:

ABC classification: In this method, items are classified based on the annual
consumption value of items. 'A' category items are those which constitute
roughly 10% of the whole items but account for approx. 70% of the total
annual consumption value. These items are known as high value items and
need significant management attention. 'C' category items are low value
items and need least management attention for control of its inventory.
These items constitute roughly 70% of the items and account for only10%
of the annual consumption value. 'B' category items are medium value items
and need not require much attention of the management for control of its
inventory. These items account for approx. 20% of the whole items and
contribute towards 20% of the annual consumption value.

Ag.3.8: Classification of Items based on annual value

VED Classification: In this method, Items are segregated based on the
criticality of the items specified by the end users. 'V' indicates vital Items
without which the entire functioning of the firm or the plant or the machine
will come to a standstill. 'E' Indicates essential Items required by the end
users while 'D' denotes desirable Items from the point of view of the end
users. This classification is quite popular in maintenance management.
Based on VED classification, one can fix different level of service for differ­
ent category of items.

FSN classification: In this method, items are classified based on the volume
of consumption. 'F: 'S' and 'N' indicate fast moving, slow moving and non-

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moving items. Fast moving items need to be kept in all decentralized stores
while slow moving items should be stocked in a centralized store. Non-
moving items need to be disposed off gradually. Firms need to make sure
that the non-moving items do not take up a significant share of inventory
investment.

SDE classification: In this method, items are classified based on their avail­
ability in the market. 'S' means 'scarce to obtain’: which in other words,
indicates that the items are neither available in regional market nor in
national market. It is probably available in the international market and
involves substantial effort for getting hold of the same. 'D' implies 'difficult to
obtain: which indicates that the items are neither available in local market,
nor in regional market. However, the same might be available in the national
market. Finally 'E' indicates 'easy to obtain’: which implies that the items are
probably available in both regional as well as local markets. This type of
analysis provides an insight to the managers to develop suitable sourcing
strategies for different category of items.

3.8. Vendor managed inventory (VMI):

This is a mechanism of inventory management jointly agreed upon by a
retailer and a supplier which ensures minimum mismatch between the
quantity demanded by customers in a retail store and the quantity made
available in the store by a supplier. In this case, the supplier takes the en­
tire responsibility of determining when to replenish and how much to
replenish at the retail store, of course, in consultation with the retailers.
The supplier also decides about the appropriate level of inventory of each
item to be kept at the retail store and the right inventory policy to maintain
inventory at proper level. The retailer will have to share actual demand
data with the supplier through EDI or through other means of
communication network which will enable the supplier/manufacturer to
update its

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production plan, decide about the shipment size and the timing of
replenishment. This helps improve the forecast and better match
manufacturer production with customer demand. Thus VMI tries to
improve the stock­ out situation faced by a retailer as also excessive
inventory to be carried by the retailer.

In VMI system, supplier owns the inventory as long as the goods are
lying in the shelves of retailer. VMI relationship was popularized by Wal-
Mart and Procter & Gamble, which has dramatically improved P & G's on-
time deliveries to Wal-Mart. One of the shortcomings of VMI is the sale of
substitute products of the competing manufacturers by the retailers. A
customer may substitute a detergent manufactured by P & G with
another detergent manufactured by Hindustan Unilever Ltd. If the retailer
has a VMI agreement with both manufacturers, each manufacturer will
tend to ignore the impact of substitution while making their replenishment
decisions. As a result, inventories at the retail store will be higher than
normal. In such a setting, the retailer may be in better position to decide
on the replenishment size and timing.

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SECTION 4:
MATERIALS REQUIREMENTS PLANNING (MRP)
This section is designed to cover the following:

• An overview on MRP

. MRP inputs

. MRP processing

. MRP outputs

• MRP II

4.1. Introduction:
MRP, also known as dependent demand estimation method, is essentially
a computer based information system that converts a master schedule of
end products into time-phased requirements of sub-assemblies,
components and raw materials considering the procurement lead time of
input

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items and assembly time of the sub-assemblies with a view to delivering

the finished products to the customers in time. While working on MRP,
first of all, due date of delivery of end items as shown in the mater schedule
are kept in mind and accordingly the purchase of different inputs is
initiated at different time periods working backward from the due date of
delivery taking into account the amount of inventory of those inputs
available with the firm in those time periods. Hence requirements for end
items generate requirements for lower-level items which are broken down
by planning periods so that the elemental activities can be scheduled for
timely completion of end items while inventory levels are kept reasonably
low. MRP is both an approach to scheduling and inventory control.

An MRP system is designed to meet simultaneously three objectives:

• Ensure inputs are available for production and end items are
manufactured for delivery to customers in time.
• Maintain the lowest possible level of inventory.
• Prepare delivery schedules and accordingly plan manufacturing
and purchasing activities.
Firms need to control the type and quantities of materials and
components they purchase, plan which products are to be produced and
in what quantities and ensure that they are able to meet current and
future customer demand at the lowest possible cost. If a firm falters on any
of these areas, it may either affect its internal performance or may not be
able to meet customer due date. For example, if insufficient quantity of
an item used in manufacturing is purchased, the firm will not be able to
deliver the goods within the due date. On the contrary, if excessive
quantity of an item is purchased, cash will remain tied up as inventory and
the operational performance of the firm gets adversely affected. MRP is a
powerful tool to deal with these conflicting problems. In short, it provides
answers to the following three questions:

• WHAT is needed?
• HOW MANY/HOW MUCH is needed?
• WHEN is it needed?

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MRP is applicable to both items that are purchased from outside suppliers
and to sub-assemblies, produced internally, that are components of more
complex items.

4.2. MRP inputs:

The main inputs of MRP are (i) a master production schedule, which pro­
vides the details of how much end items are desired and when, (ii) a bill­ of-
materials file, which tells the composition of a finished item and (iii) an
inventory record file, which shows how much inventory is on hand or on
order. A brief description of all these three inputs is provided below:

4.2.1. Master Production Schedule:

Master Production Schedule (MPS), also known as master schedule,
specifies which end items are to be produced, how many quantities are
needed and when the same is to be delivered. MPS is developed on the
basis of aggregate production plan. It also gets inputs from specific
customer orders which sometimes create the need for modifying MPS on
the basis of urgency or priority of customer orders. Figure 2.5.2 illustrates
a portion of MPS that shows planned output for end item P for different
weeks. The schedule indicates that 50 units of P will be needed in week
2, 90 units in week 4 and another 80 units in week 6.

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MPS divides the planning horizon into a series of time periods or time
buckets, which are often expressed in weeks. The time periods need not
be of same length. Time bucket of nearer periods is generally shown in
weeks while the same of distant periods is expressed in months or
quarters. MPS does not have any fixed time periods. However, some
managers put in efforts to plan far enough into the future in order to have
an idea of demand for the upcoming periods.

4.2.2. Bill of Materials (BOM):

BOM provides a clear idea about the composition of a product, i.e. it pro­
vides a list containing the details of the quantities of sub-assemblies,
components and materials required to manufacture a product. The list of
items in BOM is hierarchical. It shows the quantity of each item needed to
complete one unit of an item upstream. This becomes clearer when we
consider product structure tree, which provides a visual depiction of the
sub-assemblies and components required to assemble a product. Fig. 2.4.3
shows an assembly diagram for a sofa and its product structure tree. The
end item, i.e. sofa is shown at the top of the tree and beneath it is shown
the sub-assemblies and the components that are assembled to produce
the end item.

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A product structure tree is useful in explaining how BOM is used to deter­

mine the quantity of each component necessary to obtain a desired
number of finished items. It is very important that the BOM correctly
reflects the composition of a product, since errors at one level get
magnified by the multiplication process in the next higher level.
4.2.1. Inventory record file:
Inventory records refer to the information relating to the status of each
item by individual time period. This includes the quantity of the item
available in the store, gross requirements, scheduled receipts, projected
available balance etc. This also includes information on procurement lead
time of the item, setup time of each production run, run time for each sub­
assembly or assembly etc. Changes due to new orders, cancelled orders,
stock receipt and withdrawal etc. should also be recorded in the inventory
record file. Inventory records should be accurate.

4.3.MRP Processing:
The main purpose of MRP processing is to determine the net requirements
of items in right time periods. For this purpose, MRP considers the
requirements of end products specified by MPS and explodes them into
time­ phased requirements of sub-assemblies, components and raw
materials using the BOM and lead time information. Quantities estimated
through exploding the BOM are gross requirements which do not take into
account
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any inventory that is currently on hand or due to be received. When on­

hand inventory and inventory scheduled to be received are considered to­
gether with the gross requirements, net requirements of inventory can be
estimated. Net requirements are computed by subtracting the sum of on­
hand inventory and any scheduled receipts from the gross requirements
of inventory and then adding safety stock quantity, if applicable.

Net requirements in period t = Gross requirements in period t- Pro­

jected on-hand inventory in period t + Safety stock

MRP processing takes place through the following list of items.

Gross requirements: It indicates the total expected demand for an item

during each time period regardless of the quantity available on-hand.

Scheduled receipts: It indicates the open orders scheduled to arrive from

the vendors.

Projected available balance: It implies the expected amount of inven­

tory that will be on hand at the beginning of each time period.

Net requirements: This shows the actual amount needed in each time
period.

Planned-order receipts: It tells the quantity expected to be received at

the beginning of each period in which it is shown.

Planned-order releases: It indicates a planned amount to order in each

time period which equals the planned-order receipts offset by lead time.
The following diagram (Fig. 2.4.5) shows the results of MRP processing.

Week number 0 , 2 3 4 5 6 7 8
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned order receipts
Planned order releases

Figure 4.5: MRP processing

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4.4.MRP Outputs:
It normally generates two types of outputs: (i) primary reports considered to
be the main report and (ii) secondary reports considered to be the optional
outputs.

Primary reports: These reports include the following:

Planned orders: a schedule indicating the amount and timing of future

orders

Orders releases: authorization for the execution of planned orders

Changes: Change in due dates or order quantities or cancellation of orders.

Secondary reports: These include the following optional reports:

Performance-control reports: Evaluation of system by measuring the

deviations from plans.

Planning reports: Useful for assessing future material requirements.

Exception reports: Reports on major discrepancies such as late orders, late

delivery, and excessive scrap rates etc.

Material requirements can be computed using both lot-for-lot ordering and

lot-size ordering. In case of lot-for-lot ordering, order size equals to the net
requirements while in case of lot-size ordering, order could be placed with
the suppliers only with specific lot size. Thus in this case the planned receipt
may sometimes exceed the net requirements. The excess quantity is
recorded as the projected available balance in the following period.

Example:

75 units of end item Pare required at the beginning of week 7.Three cases
(25 units per case) of B have been ordered and one case is scheduled to
arrive in week 3, one in week 4 and the last one in week in 5. B must be
produced by the case and A must be produced in multiples of 100 units.
There are 60 units of A and 20 units of B now on hand. Lead times are two

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weeks each for P and A and one week for B.

Prepare a material requirements plan for component A and B

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Explanation:
First we observe that 2 units each of A is required to produce one unit of
P and 60 units of A are available on hand. The procurement lot size of A is
100 units. While computing the number of components A for producing
75 units of end item Pin week 7, order for 100 units of A has to be released
on week 3, because the procurement lead time of A is 2 weeks and the
assembly lead time of end item P is another 2 weeks.

Further 4 units each of B is required to produce one unit of end item P and
3 units each of B is required to produce one unit of A. The minimum
procurement lot size of B is 1 case (25 units). 25 units each is scheduled to
arrive in week 3, 4 and 5. Further 20 units are available on hand. Accordingly
the net requirement of Bin week 3 becomes [100*3 - (25+20)] i.e. 255. The
sum of the scheduled receipt of 25 in week 4 and projected on-hand of 20
in week 4 becomes the projected on-hand in week 5, which essentially
becomes 45. In addition, scheduled receipt in week 5 is 25. Therefore, the
net requirement of B in week 5 becomes [75*4 - (45+25)] i.e. 230. Thus
working backward by 1 week, the planned released order becomes 275 and
250 in week 2 and 4 respectively (considering 1 case= 25 units in each case).

4.5.Manufacturing Resources Planning (MRP II):

The basic MRP system simply determines the time-phased requirements
of the components and other inputs required to manufacture or
assemble a product based on master schedule, inventory record file and
bill of materials. However, it does not include the feasibility of the plan. In
other words, it does not take into account the capacity of the plant to
under­ take the specified activities, nor does it consider the company's
financial health. MRP II is an integrated information system that
incorporates the valuable inputs from other functional areas like
marketing, finance apart from production based on the consensus of the
people. The purpose of involving the people from other functional areas
is to devise a production plan which is practical, feasible and
implementable. The production department then is expected to produce
at the committed level, the sales department to sell at this level and the
finance department to ensure adequate financial resources for this level.
Master production schedule is

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checked to find out whether capacity is available to sustain the proposed

master schedule. If not, either the capacity or the master schedule must be
changed. Once settled, the master schedule is used to create material
requirements and priority schedules for production. Then an analysis of
detailed capacity requirements determines whether capacity is sufficient
for producing the specific components at each work centre during the
scheduled time periods. MRP II enables managers to test 'what-if'
scenarios by using simulation. For example, managers can see the effect
of changing the MPS on the purchasing requirements for certain critical
suppliers. In­ formation from MRP II is used by managers in manufacturing,
purchasing, marketing, finance, accounting and engineering.

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SECTION 5:
LOGISTICS & TRANSPORTATION MANAGEMENT
This section is designed to cover the following:

• Logistics: A brief overview

• A brief concept of transportation
• Drivers of transportation decisions
• Impact of speed on transportation decisions
• Impact of demand uncertainty on transportation decisions
• Distribution network design
• Comparison of distribution network design options
• Other distribution networks in practice
• Warehousing & its different types

5.1. Introduction:
The term 'logistics' is associated with military warfare which, in essence,
implies the movement of the supplies of arms, ammunitions, food, medi­
cines and other essentials from one place to another as army changes its
battlefield while fighting the enemies. History has got ample evidence to the
fact that most of the battles fought between the nations has been won or
lost by a nation due to proper or improper management of its logistics. The
elemental activities of logistics in the context of war operations are
considered analogous to some of the activities of business operations.
Organizations need to move raw materials, components, semi-finished and
finished goods from one region to another within a country or from one
country to another depending on the type of businesses the organizations
are involved with. Accordingly 'logistics' terminology became very popular
and relevant to business firms with a view to addressing the needs of the
customers located at different geographical regions with speed and
accuracy. Now the activities coming under logistics have assumed such a
huge proportion that it has become a separate full-fledged domain in
corporate sectors all over the world. Council of Supply Chain Management
Professionals (CSCMP), the erstwhile Council of Logistics Management
(CLM) has defined logistics as "The process of planning, implementing and

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control­ ling the efficient, cost effective flow and storage of raw material, in-
process inventory, finished goods and related information from the point of origin
to the point of consumption for the purpose of conforming to customer
requirements':

The above definition of logistics reveals that while satisfying the needs of
customers located at different places, the goods need to be sent to
different retail stores or to the customers directly. But getting the goods
from the point of manufacture to the point of consumption requires
performing several other functions related to shipment. Goods need to
be properly packaged, loaded into a suitable transportation mode,
shipped to a desired destination, unloaded and kept in storage in a
warehouse and finally distributed to the retail stores. Thus logistics
function has got several components namely transportation,
warehousing, packaging and material handling. Further logistics activities
can also be divided into two broad functions namely inbound logistics and
outbound logistics. Inbound logistics, also known as physical supply is
concerned with bringing materials, components etc. from the sources of
supply to the processing or the manufacturing plant while outbound
logistics also known as physical distribution deals with the movement of
finished goods from the processing plant to the distribution centres and
subsequently to the retail stores.

Logistics is a high-cost activity in India (13% of GDP) compared to 8-9%

of GDP in the US owing to general inefficiencies. The inefficiencies in the
logistics industry arise from (i) a fragmented market, (ii) multiple taxes, (iii)
physical infrastructure bottlenecks, (iv) archaic labour laws, and (v)
state­centred policies. Despite these limitations, the industry is growing
at a rate of 8-10% per annum and is expected to reach a size of $385
Bn by 2015.(Source: http://www.ciilogistics.com/interactiveseminar.htm
accessed on Nov 7,2011).

5.2. Transportation
Amongst all elemental activities of logistics, transportation constitutes the
largest element and accounts for maximum cost of logistics.
Transportation related decisions have a direct impact on supply chain
efficiency and

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supply chain responsiveness of a firm. It cannot be decided in isolation. This

decision is intertwined with the decision relating to the number of facilities to
be set up and inventory management across the whole supply chain. In
other words, it directly depends on the supply chain network design of a firm.

While designing the supply chain network, distribution network in

particular, the firm will have to choose between setting up too many and
too few distribution centres and warehouses. If a firm decides to respond
to the needs of the customers very fast, it has to set up facilities in terms
of warehouses and retail stores at many places which will enable the firm
to become responsive. Because the distance and time required to satisfy
customer needs become smaller. This phenomenon decreases
transportation costs, but increases the operation and maintenance cost
of facilities and also inventory carrying cost at the facilities.

On the contrary, setting up too few distribution centres and warehouses

will minimize the operation and maintenance cost of the facilities. This will
also reduce inventory carrying cost at the facilities. However, the
transportation cost is likely to increase since the distance between the
facilities and customers becomes higher. This increases the response time
to receive the goods by the customers. Thus there is a trade-off between
facilities cost and inventory carrying cost on one hand and transportation
cost on the other which needs to be carefully accounted for by the
network design planners.

5.3 Drivers of Transportation decisions:

The transportation-related decision depends on several factors. First, the
overall cost of moving goods from one place to another has to be
properly estimated. Second, the physical characteristics of the goods
including its weight, volume, chemical properties etc. need to be examined
and compared with the respective economic value of the goods. This
exercise attempts to capture the value-density of an individual item.
Third, the volume of demand of an item and its variability of demand
should also be assessed beforehand. Fourth, the mode of transportation
needs to be evaluated in terms of cost, speed, capacity, reliability etc.
depending on the type of the goods to be moved, volume of goods to be
shipped etc. Thus transportation decision depends on

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• Transportation cost
• Value density
• Patterns of demand
• Mode of transportation

5.3.1. Transportation cost:

Unit cost of transportation of an item depends on the distance to be moved
by the item from origin to destination, total quantity of the same item
carried in the vehicle etc. As regards the distance to be moved, the unit
cost of transport of an item decreases, as the vehicle covers greater
distance. Because the marginal cost of transport decreases, as longer
distance is covered. Fixed cost is distributed over larger distance. This is
technically known as 'economies of distance In addition, the unit cost of
transportation also decreases, if the vehicle is moved in full truck load
(FTL) mode rather than in less-than truck load (LTL) mode. Because fuel
consumption and driver and crew-related costs remain the same
irrespective of the vehicle being moved in FTL or LTL mode. These costs
rather depend on the distance to be moved by the vehicle. The
transportation cost structure can be understood from the following
diagram (Figure 2.5.1) in which the impact of distance and load on air-
freight has been depicted.

Fig 2.5.1: Impact of distance and load on air freight {Source: Shah, 2009,
Supply Chain Management, Pearson Education)

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The above diagram reveals that with increasing distance and shipment
size, transport cost per kg or transport cost per km decreases, but at a
diminishing rate. This shows that there are economies of scale in both
distance and load in transportation.

5.3.2. Value density:

Through this particular attribute, the value of an item and its weight or
volume are considered together which helps a manager understand the
trade-off between transportation costs and inventory carrying costs.
Inventory carrying cost depends on the value of the items while
transportation cost depends on its load (weight or volume) and the
distance to be moved. With a view to considering both the attributes
together, items are categorized into high, medium and low value-density
products. The examples of high value-density items are gold, diamond,
high technology products like cell phones, laptops etc. while those of low
value-density items are coal, iron ore, cement etc. In between these two
extremes, there exist a large number of items in the category of FMCG,
consumer durables etc. which could be considered as medium value-
density products. For high value-density products, transportation cost
constitutes a small percentage of the overall cost of the product. Thus a
firm can afford to utilize a relatively expensive mode of transportation like
air for shipment purposes. However, in case of low value-density items,
transportation cost accounts for a significant percentage of the total
product cost. Thus a firm has to make use of economic mode of
transportation like rail, water etc. in this case. For shipping medium value-
density products, a firm mostly depends on truck. However, shipping via
other modes is not completely ruled out. In all the above cases, volume of
demand of an item and its variability also need to be considered
simultaneously which is explained below.

5.3.3. Patterns of demand:

There are two components to be considered in this attribute: (i) volume
of demand and (ii) uncertainty in demand. High volume of demand of an
item results in high order quantity of the same and thus allows a firm to
work with higher cycle stock while moving the goods from one place to
another. The firm can utilize the vehicle in FTL mode to gain economies
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of scale in transportation. However, lower volume of demand will result

in lower cycle stock which will compel a firm to utilize the vehicle in LTL
mode. Uncertainty in demand or the variability in demand leads to higher
amount of safety stock to be kept by a firm. Safety stock depends on the
variability of demand, lead time and the service level to be provided by
the firm. Thus if a firm with high variability in demand makes use of slower
mode of transport, the firm will have to maintain higher amount of safety
stock. Therefore, for items with high demand uncertainty, faster mode of
transport should be employed while slower mode of transport should be
used for products with low demand uncertainty.

5.3.4. Mode of transportation:

As mentioned earlier, the choice of transportation mode depends on unit
cost of transportation, the total amount to be shipped in a single run or the
capacity of the transportation mode, delivery time, delivery time reliability
and the losses and damages incurred in transit. The following modes of
transportation are frequently used by firms:

• Rail
• Road
• Air
• Water
• Pipeline
Rail:
Railways, being a slower mode of transportation, are not sensitive to time.
However, it, being an economic mode of transportation, is suitable for
shipping low value-density products like coal, cement, iron ore etc. The
delivery lead time through rail is both long and unreliable. Indian railways
is the second largest rail network in the world. It accounts for roughly 30
percent of freight movement in India. Most of the freights {approx. 95 %)
carried by rail are in bulk goods and coal accounts for 50 percent of the
traffic. Rail mode of transport alone cannot provide delivery from the point
of origin to the point of final use or consumption. Because from railway
yard, the goods are unloaded and then again loaded into a truck for
delivery to a distribution centre or to the final destination. In addition,
there are possibilities of the goods getting pilfered or stolen in some
places while in transit.
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Road:

India has the second highest network of roads in the world. However, in terms
of quality, Indian road hardly matches international standard. The national
highways constitute only 2% of the total roads, but carry almost 40% of the
traffic. 80% of the roads may be considered as 'village roads'
(http://www.ciilogistics.com/interactiveseminar.htm accessed on Nov 7,
2011). Truck, being the primary carrier on road and slightly more expensive
than rail, offers the advantages of door-to-door delivery. Although de­ livery
lead time is lower than that of rail, there is considerable variability in delivery
lead time. Because road conditions in India are not uniform across all the states
due to which there are chances of the goods not delivered in time. There are
also chances of the items getting damaged while in transit due to bad road
conditions. In India, trucks account for 65 percent of freight movement.
Transport sector in India is highly unorganized. More than 90 percent of the
vehicles are owned by people who own less than 5 trucks. They lack
professional approach and as a result, the quality of service provided by them
does not meet the expectation of customers.

Air:
This is considered to be the fastest mode of transportation which is suitable for
time-sensitive and high value-density items. However, since this is most
expensive amongst all modes, proper analysis should be carried out before
selecting air as a transportation mode for shipping an item. Delivery reliability
through air is also very high while the chances of losses and damages are very
low. In India, air transport contributes a very small percentage towards freight
movement. But this is expected to play a significant role in near future, once
infrastructural facilities in the airports are upgraded.

Water:

This is known as the slowest mode of transport and is also one of the cheapest
modes of transport. When very large quantity of items needs to be shipped in
a single run, water transport can serve the purpose. This is suitable for shipment of
low value-density products and is extensively used for international cargo. In
India, although we have quite extensive coast­ line and number of ports in different
places, the amount of cargo handled by the Indian ports is very low compared to
the International standard.

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Pipeline:
This is used for bulk transportation of petroleum products like crude oil,
gases etc. When the point of origin and the point of destination remain
same and uniform quantity of goods need to be shipped, pipeline offers
advantages over other modes. Because the transportation lead time is not
affected by strike or any other event. Losses and damages also remain at a
very minimum level. Unit cost of transportation is also very low. However,
firms will have to incur huge capital expenditures in terms of laying pipes
and creating necessary infrastructure. In India, pipelines are being laid to
transport gases and petroleum products to different places. For example,
the pipeline network from Hazira to Jagdishpur carries natural gas from
Gujarat to central India. This pipeline is maintained by Gas Authority of
India Ltd. (GAIL).

The above modes of transportation are compared on different attributes

in the following table (table 2.5.1) in order to gain additional insights.

Table 5.1: Performance of the transportation modes on different

measures

Mode of Delivery Delivery time

Cost (1 = Lot size (1= Losses &
transporta- time(1= variability (1=
least) smallest) Damages
tion fastest) least)
Rail 2 3 3 3 4
Truck 3 2 2 2 3
Water 1 4 4 4 1
Air 4 1 1 1 2
Pipeline 1 2 2 1 1

1 indicates most favorable and 4 indicates least favorable from the

shipper's point of view

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(Source: Ballou and Srivastava, Business Logistics/Supply Chain

Management, Pearson Education, 2008)
Once the above comparison is made, the firm should compute total
costs for the relevant modes of transportation with the help of the
following relationship:
Total costs= Transportation cost +Inventory carrying cost (Cycle stock+
Safety stock+ Pipeline inventory)+ Cost of losses and damages.
In addition, wherever applicable, the firm should also include handling
costs.
5.4. Impact of speed on transportation decision:
Delivery time has a significant impact on the choice of transportation
mode. As a rule of thumb, high-value products should be shipped by a
faster mode of transport while low-value items should be shipped by a
relatively cheaper mode of transport. This is explained with the help of
the following example.
Example 1: An export-oriented garment manufacturing unit located in
Ludhiana manufactures two types of garments, viz. premium garment
and low-end garment and exports the same to European and American
markets. It considers two modes of transportation, air and sea. It takes
four weeks to ship the goods to either Europe or America from
Ludhiana, if the same is sent by sea. However, shipping via air takes
only one week. If the firm decides to use air as the mode of transport, it
can fly the goods in smaller lots of 400 units, while shipping via sea
requires a minimum shipment size of 2000 units. The premium
garment and low-end garment cost Rs. 2000 and Rs. 500 per unit
respectively. The demand of premium garment and low-end garment is
100 units and 200 units per week respectively in the export market.
Freight by air will be Rs 100 per unit while the same by sea will be Rs
25 per unit. The annual inventory carrying cost is 20% of the cost of the
item. Consider 52 weeks in a year.
The comparison of the above two modes of transport for carrying two
different items (one high value and another low value) is shown in the
following table (table 5.2)

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Table 5.2: Comparison of the two modes of transport under stable de­
mand

Product Mode of Cycle Pipeline Average lnven- Trans- Total cost

trans- stock stock inven- tory porta- per an-
port tory car- tion cost num In Rs.
rying in Rs.
cost in (annual)
Rs (an-
nual)
Premium Sea 1000 400 1400 560,000 130,000 690,000
garment
Air 200 100 300 120,000 520,000 640,000

Low end Sea 1000 800 1800 180,000 260,000 440,000

garment
Air 200 200 400 40,000 1040,000 1080,000

The above table reveals that it is economical to ship high-value items via
a faster mode of transport and low-value items via a cheaper and slower
mode of transport.

The following simple formulas are used for doing the necessary
computations:

Cycle stock= O.5*Lot size of shipment

Pipeline stock= Lead time* demand rate

Average inventory= Cycle stock+ Pipeline stock

Annual inventory carrying cost= Average inventory*% inventory carrying

cost*unit cost of the item

Annual transportation cost= Annual demand*transport rate per unit

= Demand per week * No.of weeks* transport rate per unit

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5.5. Impact of demand uncertainty on transportation decisions:

A firm will have to maintain safety stock in case demand happens to be
uncertain in nature. Further the amount of safety stock to be kept by a firm
depends on the level of service provided by the firm, standard deviation
of demand and the lead time of shipment which is captured through the
following formula:

Safety stock= Service level factor* S.D. of demand * -√(lead time)

We have taken a very simple example to explain the effect of demand

uncertainty on transportation decisions.

Example 2: We shall continue with the same example shown in example

1. Assume that instead of the weekly demand of the premium and low-end
garments in Europe and America being uniform, the same exhibits
randomness. Further assume that the weekly demand data given in example
1 represent average demand of premium and low-end garments. The
standard deviation of weekly demand of premium and low-end garments is
80 and 50 respectively. The firm is targeting a service level of 95%. (For
95% service level, consider the value of z = 1.645).

Necessary computations on safety stock and safety inventory carrying cost

have been shown in the following table (Table 5.3).

Table 5.3: Cost comparison of two modes of transport under uncertain

demand

Total cost per

Safety stock
Mode of annum under
Product Safety stock carrying cost Total cost
transport stable
Demand
Sea 263.2 105,280 690,000 795,280
Premium
garment
Air 131.6 52,640 640,000 692,640
Sea 164.5 16,450 440,000 456,450
Low end
garment
Air 82.25 8,225 1080,000 1088,225

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The above table clearly reveals that it is economical to ship high value
items with considerable demand uncertainty via faster mode of transport
while it is advisable to ship low value items with more or less stable
demand via an economic mode of transport.

5.6. Distribution network design:

It is not alone sufficient to select a suitable mode of transport to ship the
items from the sources of supply to demand centres. The logistics man­
ager will have to decide how the items should be delivered to the final
customers. Towards that end, he will have to find out how many
distribution centres/warehouses are to be set up and where the same
should be located. This is technically known as distribution network.
There are different options which a logistics manager can employ to
distribute goods from the plant to the market areas. The main purpose
behind exploring and evaluating different options is how to ship the
goods to the geographically dispersed market areas in a cost-effective
manner. There are broadly three main options which a firm can explore to
finally design its distribution network. These are described below in brief.

5.6.1. Direct shipment network:

Through this network, the supplier would be able to ship the goods
directly to the customers with minimum delivery time due to the absence
of intermediaries. When the volume of demand is quite high and also the
uncertainty in demand is low, direct shipment works very well. Since the
volume of demand is high, the goods are supplied in FTL mode in this
network in order to derive economies of scale in transportation. Thus per
unit cost of transport decreases in this network. However, since each trip
involves FTL shipment, the resulting cycle stock in each distribution centre
or demand centre becomes high, which leads to the increase in inventory
carrying cost. The following diagram (Fig. 5.2} illustrates the functioning of
direct shipment network.

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5.6.2. Direct shipping with milk-runs:

A milk-run is essentially a route on which a truck either delivers an item

from a single supplier to multiple retailers/distribution centres or from
multiple suppliers to a single retailer/distribution centre. In case of sup­
ply being made to multiple centres, demand across all the stores is
aggregated product-wise while in case of supply being made to a single
centre, supply across all the suppliers are consolidated product-wise.
In both the cases, shipment size of an individual item reduces due to
the consolidation of several items in a single truck. This reduces the
cycle stock and thereby inventory carrying cost carried at the
distribution centre. Since in each trip, distribution centres get smaller
volume of products, the frequency of shipment increases in this
network. Further the truck has to travel between distribution centres or
between suppliers depending on whether delivery to the centres or
supply across the suppliers is consolidated. This phenomenon
increases transportation cost. The network is explained with the help of
two diagrams shown below. Diagram 2.5.3 shows a single supply being
made from a supplier to multiple demand centres while diagram 2.5.4
shows supply across multiple suppliers being consolidated before
being delivered to a single demand centre. As per diagram 2.5.3, each
truck starts its trip from a supplier and visits demand centres P, Q R
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and S in that sequence and comes back to the supplier after serving
the last demand centre in the trip. The ideal example of milk-run
shipping with consolidation across demand centres in Indian context is
the delivery of milk by milk-delivery van to several outlets of Mother-
Dairy. The van loaded with milk starts its journey from the mother dairy
plant, delivers milk to the designated outlets on its route and finally
returns to the plant.

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As per diagram 5.4, a truck starts its journey from a supplier, picks up items
from its premises and subsequently visits the next supplier for picking up
another item/s or same item/sand further visits another supplier for
picking up items. This consolidation across suppliers continues till the
capacity of the truck is fully utilized and then the item/s is/are delivered to
a single demand centre. Finally the empty truck has to come back to the
originating supplier. Japanese Auto-giant Toyota utilizes the concept of
milk-run shipping in which the supply of auto-components from multiple
suppliers is made to the Toyota plant in milk-run mode. In Indian context,
the col­ lection of milk from farmers or individual household by Mother-
Dairy is an ideal example of milk-run shipping with consolidation across
suppliers.
5.6.3. Shipment via Central Distribution Centre:

This type of network is suitable when the distance from the suppliers to
the demand centres is very high and at the same time replenishment to
the demand centres has to be made on a frequent basis. Supply from sev-

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-eral supply centres is directly made to the central distribution centre on

FTL mode which provides the benefit of economies of scale in inbound
transportation. In the central distribution centre, the supply from all the
suppliers is consolidated. During outbound transportation, a single truck
is loaded with all the items received from all suppliers in FTL mode. Thus
shipment size of an individual item becomes smaller compared to the
shipment size in case of direct shipment mode. This reduces the cycle
stock of an individual item thereby decreasing inventory carrying cost.
Transportation cost is lower than that of shipment via milk-run but higher
than that of direct shipment network. However, in this network since a
separate distribution centre has to be maintained, additional cost has to
be incurred in terms of facility maintenance cost, inventory carrying cost
at the distribution centre and handling cost for loading and unloading at
the distribution centre. This network is visually represented with the help
of the following diagram (Fig. 5.5).

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5.7. Comparison of distribution network design options:

To evaluate the performance of the above distribution networks, we have taken a
simple example, which will give an insight into their performance measures.

Example 3:

XYZ Company is having its manufacturing facilities of three different cars namely
hatchback, entry level sedan and high level sedan cars at three different places
Faridabad, Manesar and Gurgaon respectively. It serves primarily three markets, Delhi,
Noida and Greater Noida and accordingly sends finished cars to the three depots
located at Delhi, Noida and Greater Noida. Weekly demand at each of these depots is
20 units of hatchback cars, 10 units of entry level sedan cars and 5 units of high level
sedan cars. The distance of Delhi, Noida and Greater Noida depot from Faridabad plant
is 45 kms, 50 kms and 55 kms respectively. And the distance of Delhi, Noida and Greater
Noida depot from Gurgaon plant is 50 kms, 55 kms and 60 kms respectively. Further
the distance of Delhi, Noida and Greater Noida depot from Manesar plant is 80 kms, 85
kms and 90 kms respectively. The distance between Delhi and Noida depot is 25 kms
and that between Noida and Greater Noida is 15 kms. The company is contemplating
to set up a distribution centre (DC) somewhere in the mid-point between the plants and
the depots. The distance of this DC from Faridabad, Gurgaon and Manesar plant is
expected to be 25 kms, 28 kms and 40 kms respectively. Further the distance of Delhi,
Noida and Greater Noida depots from the DC is expected to be 25 kms, 30 kms and 35
kms respectively.

The company is considering three strategies for shipping the finished cars from its
plants to the depots, viz. (i) Direct shipping, (ii) Shipping through milk run and (iii)
Shipping through a distribution centre. Imagine that a very big truck can carry 60 units
of hatchback cars or 30 units entry level sedan cars or 15 units of high level sedan cars
in FTL shipment or it can bundle 20 units of hatchback cars, 10 units of entry level
sedan cars and 5 units of high level sedan cars in FTL shipment. The transportation
cost is Rs.10 per km for FTL shipments. To obtain economies of scale, the com-

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pany has decided to work with FTL shipments. The inventory carrying
cost of hatchback, entry level sedan and high level sedan cars is Rs
5000, Rs. 10,000 and Rs. 15,000 per unit per year. If the company
decides to ship through distribution centre, then it will have to set up a
cross-docking centre for which facility cost of Rs 50,000 will be incurred
every year. Consider 52 weeks in a year.

For this type of problem, distance between any pair of locations is

calculated in the following manner if distance data is directly not available
which helps in finding out transportation cost.

Distance

The distance calculated above is known as radial distance, which is

considered to be the shortest distance between points i and j.

The above problem is handled in the following manner.

For direct shipping option:

Transportation cost is computed in the following manner:

Distance travelled per trip from Faridabad plant to alI three depots= (2*45
+ 2*50 + 2*55) = 300 kms.

Distance travelled per trip from Gurgaon plant to all three depots = (2*50
+ 2*55 + 2*60) = 330 kms.
Distance travelled per trip from Manesar plant to all three depots = (2*80
+ 2*85 + 2*90) = 510 kms.

Total distance travelled in one trip (300 + 330 + 510) = 1140 kms.
In direct shipping, FTL shipment of 60 units of hatchback cars, 30 units of
entry level sedan cars and 15 units of high level sedan cars are transported
individually from each plant to each depot. Weekly demand of hatchback,
entry level sedan and high level sedan cars is 20 units, 10 units and 5 units
respectively. Thus number of trips per year: (52/3) = 17.33

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Total distance travelled in one year= (1140 X 17.33) kms = 19760 kms.

Annual transportation cost= Rs. (10*19760) = Rs. 197,600

Inventory carrying cost is computed in the following manner:

Cycle stock at each depot= (60/2) units of hatchback cars+ (30/2) units
of entry level sedan cars+ (15/2) units of high level sedan cars.

Annual Inventory carrying cost at one depot= Rs. (30*5000) +

(15*10,000)
+ (7.5*15,000) = Rs. 412,500

Total annual inventory carrying cost at all the depots = Rs. (3*412,500)
= Rs. 1237,500

Total annual cost = Rs. 1435,100

For shipping via milk run:

Transportation cost is computed in the following manner:

Distance from Faridabad plant to the depots of Delhi, Noida & Greater
Noida & back to Faridabad plant: (45 + 25 + 15 + 55) = 140 kms

Distance from Gurgaon plant to the depots of Delhi, Noida & Greater
Noida & back to Gurgaon plant: (SO+ 25 + 15 + 60) = 150 kms

Distance from Manesar plant to all the depots of Delhi, Noida & Greater
Noida & back to Manesar plant: (80 + 25 + 15 + 90) = 210 kms

Total distance travelled in one trip= 500 kms

In shipping via milk-run, FTL shipment of 60 hatchback cars delivers 20

units each at each of the depots, FTL shipment of 30 entry level sedan
cars delivers 10 units each at each depot and further FTL shipment of
15 high level sedan cars delivers 5 units each at each depot. Thus
number of trips per year becomes 52.

Total distance travelled in one year= (500 x 52) kms = 26000 kms.

Annual transportation cost = Rs. (10*26000) = Rs.

260,000
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Inventory carrying cost is computed in the following manner:

Cycle stock at each depot = (20/2) units of hatchback cars (10/2) units of
entry level sedan cars and (5/2) units of high level sedan cars.

Annual Inventory carrying cost at one depot= Rs. {10*5000) + {5*10,000)

+ {2.5*15,000) = Rs. 137,500

Total annual inventory carrying cost at all the depots = Rs. {3*137,500) =
Rs.412,500

Total annual cost = Rs. 672,500

For shipping via distribution centre:

Transportation cost is computed in the following manner:

Distance travelled from all three plants to the DC = {2*25 + 2*28 + 2*40) =
186 kms

Distance travelled from DC to alI three depots= {2*25 + 2*30 + 2*35) = 180
kms

Total distance travelled in one trip= 366 kms

In shipping through distribution centre, FTL shipment of 20 units of hatch­

back cars, 10 units of entry level sedan cars and 5 units of high level sedan
cars are bundled together and delivered to each depot individually. Thus
number of trips per year: 52

Total distance travelled in one year= (366 x 52) kms = 19032 kms.
Annual transportation cost = Rs. (10*19032) = Rs. 190,320

Inventory carrying cost would be the same as in case of shipping via milk­
run.
Total annual inventory carrying cost considering all the depots together=
Rs.412,500
In addition, extra cost is incurred in terms of maintaining the distribution
centre, which is Rs. 50,000
Total cost = Rs. 652,820

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5.8. Other distribution networks in practice:

In addition to the distribution networks discussed above, there are
few other popular distribution networks, for example, Cross-
docking, Hub and spoke model etc. which are used by the
organizations worldwide.

Cross-docking:
This distribution network has been popularized by Wal-Mart and
now currently it is being utilized by a number of organizations
worldwide. The structure of cross-docking resembles the
distribution network of shipment via central distribution centre.
However, in this case the central distribution centre is not used
for the purpose of holding inventory. Rather it is used for
facilitating the movement of goods from a set of suppliers to the
set of buyers. Inbound truck contains product from a supplier and
carries the same to the cross-docking centre in FTL mode.
Similarly supply from other suppliers is also delivered to the cross-
docking centre in FTL mode. Outbound truck is loaded with
different products of different suppliers in FTL mode at cross-
docking point and destined for delivery to a buyer location. This
provides the benefit of economies of scale in both inbound and
outbound transportation. Major benefit of this network is that
product flows faster from supply sources to the demand centres
and inventory is held at the cross-docking centre for 12-14 hours
only. This reduces inventory carrying cost at the cross-docking
centre. However, this requires a significant degree of coordination
and synchronization between incoming and outgoing trucks.
Cross-docking is appropriate for products with high, predictable
and stable demand.

Hub and spoke model:

This distribution network is suitable for airlines and postal services.
In this model, the hub is considered to be the centralized point
wherein all operations like sorting of parcels destined for delivery to
different locations, segregation of passengers wanting to go to
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different places etc. are carried out. Spokes indicate different routes
to be followed for shipping products to different locations. One of
the disadvantages of this network is that all parcels or passengers
will have to come to the hub first irrespective of the locations of the
originating station. Subsequently the parcel or the passenger will
be moved to the final destination. Thus the items or the
passengers might have to travel a very long distance despite the
origin and destination being located not very far-off from each
other. In order to overcome this limitation, sometimes firms may
attempt to create regional hubs at different regions.

5.9. Warehousing:
It is an operation that receives, sorts, stores, repackages or
centralizes goods or materials for the purpose of storage or for
facilitating the movement of goods from sources to final
destinations. Firms use warehouses to reduce transportation
costs, improve operational flexibility, shorter customer lead time
and lower inventory carrying costs.

Activities in a Warehouse
Receiving: Relates to all activities of accepting freight from a
carrier, evaluating the condition of the freight, and assuming
ownership of the freight

Put-away: All activities related to the movement of product away

from the receiving area to storage locations within the
warehouse or to the shipping area for immediate delivery.

Order Picking: The process of selecting goods from the

warehouse and assembling them for customer orders. Customer
orders are converted in to pick lists, which will contain the details
of the item like: part number, description, quantity, storage
location. The common format of indicating storage location is
Aisle number / Row number / Bin number. (ARW xxxx).

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Pickers will go to the location and pick the items as mentioned in

the pick list.

Replenishment: Activities related to maintaining an adequate

inventory in picking locations for the timely selection of customer
orders.

Shipping: Activities pertaining to the planning, consolidation,

loading, and dispatch of customer orders from the warehouse
facility.

Of all the above activities, Picking activity consumes the major percentage
of time and effort of the resources used in a warehouse.

A recent trend in warehousing is to assume more value-added processing,

called 'Value Added Services' (VAS). This is additional work beyond that of
building and shipping customer orders. Typical value-added processing
includes the following:

• Labelling & Repackaging

• Monogramming or Customization
• Kitting (repackaging items to form a new item)
• Postponement of final assembly, OEM labeling (For example, many
manufacturers of computer equipment complete assembly and
packaging in the warehouse, as the product is being packaged and
shipped.)
• Invoicing
• Quality control/ product testing
• Assembly, repair, returns handling and reverse logistics
• Grading and coating of fruits, meant for Exports.

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Warehouse types:
Depending on the type of functions to be carried out, warehouse could be
divided into following categories:

• Finished goods warehouse

• Consolidation warehouse
• Break-bulk warehouse
• Cross-docking warehouse

Finished goods warehouse:

This particular type of warehouse is the most important one as it is
responsible for the storage of finished goods. Since manufacturing and
consumption cycle never match, the finished product has to be kept
ready and stored somewhere in the supply chain. At the warehouse,
there is continuous inflow and outflow of goods and the goods getting in
and out of the warehouse are to be properly recorded. Products are to be
kept in designated places depending on its types, physical characteristics,
chemical properties, arrival date, demand pattern, expiry dates etc. This
is very essential to retrieve the goods with minimum time and effort as and
when demand arises and goods need to be delivered to the customers.

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Consolidation warehouse:
This type of warehouse is suitable, when supplies come from various
sources in small quantities while the need of the customers happens to
be very high during the same time. Small shipments from all suppliers are
combined into a large shipment in the warehouse and finally delivered to
the final customers. This provides the benefit of economies of scale in
transportation. There are several types of consolidation warehouse. A
single manufacturer may use a consolidation warehouse to bring
together the outputs from several plants and combine them into a large
shipment for delivery to a major customer. Further, a contract carrier may
use its own consolidation warehouse to combine shipments from several
local businesses.

Figure 5.7: Consolidation warehouse

Break-bulk warehouse:

This is conceptually the reverse of the consolidation warehouse. In this

case, the incoming shipment comes from a single supplier and the material
arrives in bulk which is subsequently divided into small shipments for the
purpose of delivery to the final customers. The bulk cargo of oil, gas,
chemicals, fertilizers etc. coming from a single source is broken down into
small consignments as per the requirements of customers.

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Cross-docking warehouse:
This is similar to break-bulk warehouse except that it involves multiple sup­
pliers. In this case, goods stay in the warehouse for a very short duration.
Different items arriving in bulk from different suppliers in FTL mode are
unloaded and broken down into smaller shipments in the cross-docking
warehouse. Subsequently, smaller shipment of each item is loaded into the
outbound truck in FTL mode, which is finally delivered to the retail stores.
Cross-docking is most commonly used in retail chains. In Cross Docking,
two steps are skipped, i.e.: Put away and Picking. Since picking is the
important activity that consumes lot of resources, Warehouses are aiming
to achieve more and more Cross-docking. If Supply planning is efficient,
more and more Cross-docking is achievable.
5.10. Storage and handling equipment :
Common storage modes include pallet rack for bulk storage, flow rack for
high-volume picking, bin-shelving for slower picking, and carousels for
specialized applications.

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Within the warehouse, the material is generally stored in pallets, which is

a wood or plastic base.

The nominal overall plan dimension of pallet is 1200mm x 1000mm as per

IS 7276:1989.(for Non-expendable general purpose flat pallets)

But, there are several pallets with different dimensions for a variety of
applications.

A 2-way pallet allows forks from a standard forklift or pallet jack to be

inserted on two sides. A 4-way pallet has narrow slots on all the sides by
which it can be lifted by fork lift from any side. The 4-way pallets are
slightly more expensive.

The simplest way of storing pallets is floor storage, which is typically

arranged in lanes. Normally, the pallets are stacked one over the other
for three levels, which is determined by pallet weight, type, fragility,
number of cartons per pallet, bearing strength of floor, manual or type of
Material handling equipment used and so on.

If the pallets are stored in racks, The most common types of rack storage
are:

Selective rack or single-deep rack which stores pallets one deep,

Double-deep rack essentially consists of two single-deep racks placed one

behind the other, and so pallets are stored two deep. All the pallets will have
same SKUs (Stock Keeping Units) to avoid multiple handling.

Push-back rack is an extension of double deep rack to 3-5 pallet

positions, but to make the interior positions accessible, the rack in each
lane can be pulled out like a drawer. That is, each lane (at any level) is
independently accessible.

Drive-In or drive-through rack allows a Fork lift truck (FLT) to drive within
the rack frame to access the interior loads. Since the pallets are loaded
from one end, this type of rack is suitable for enforcing rule FIFO - First In
First Out.

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Pallet flow rack is deep lane rack in which the shelving is slanted and lined
with rollers, so that when a pallet is removed, gravity pulls the remainder to
the front.

But for automated storage-and-retrieval systems (AS/RS), some type of

Forklift truck is required to load or unload the pallets. Forklift is a powered
piece of equipment designed to lift and transport material in an industrial
/ warehouse setting from 1 ton to 5/6 tons. A forklift is a very versatile and
useful piece of equipment and the wide variety of attachments that can
be added to a forklift make them even more useful. Forklifts ride on solid
rubber tires called cushion tires and are powered by a number of fuel
options including diesel, electrical battery, compressed natural gas (CNG)
and liquid propane gas (LPG).

The most common type of Forklift trucks are:

Pallet jacks are low lift ground level jacks that have either forks or a plat­
form.

Counterbalance Fork lift truck is the most versatile type of lift truck.

Reach and double-reach Forklift truck is equipped with a reach

mechanism that allows its forks to extend to store and retrieve a pallet.

Turret Truck uses a turret that turns 90 degrees, left or right, to load or
retrieve loads. Since the truck itself does not turn within the aisle, an aisle
width of only 1.5-2.1 meters is required.

Stacker crane within an AS/RS is the handling component of a AS/RS, and is

designed to handle loads up to 30 meters. Roof or floor-mounted tracks are
used to guide the crane. Very narrow aisle width is sufficient. Each crane
is restricted to a single lane, even though complicated mechanisms exist to
move the crane from one aisle to another.

Articulated Forklifts are the improvements over turret trucks and re­
quires very narrow aisle width.
Conveyors are also used in high velocity warehouses to transport the picked
carton boxes to the shipping area or for transporting boxes from receiving
area to Storage zones.

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SHELVING: Simple shelves are the most basic storage mode, which are
commonly made of slotted angles and the least expensive ones.

Gravity flow rack are shelves that are tilted, with rollers, to bring cases
forward for picking. Flow rack is refilled from the back, independently of
picking. This means refilling never interferes with picking. Hence the pick
rate goes up.

Carousels are fully motorized, computer-controlled, independently-rotat­

ing aisles of Shelves. Since they carry items to the picker there is no need
for the picker to walk along an aisle and so aisles are unnecessary. This
facilitates, carousels can be installed side-by-side, which increases space
Utilization.

Automated Storage & Retrieval Systems (AS/RS) A basic AS/RS system

is comprised of one or more aisles, each having a robotic crane to retrieve
from and store product in the racks on either side of the aisle. The cranes
also bring the materials to the picker which eliminates wait, walk and cycle
times. AS/RS systems can also handle a variety of materials, from small bins
of parts up to entire pallets of materials, finished products like automobile
engines with fast cycle times and high precision.

VNA Truck: The turret truck is often abbreviated to VNA standing for
very narrow aisle truck. .Comparing this to conventional reach trucks or
counter-balance forklifts where the operator can be up to 8 metres away
from the actual pallet handling, resulting in the operators having an
extremely obscured view. It has two kinds of VNA trucks thus 1. Ma-up
VNA Truck 2. Man-down VNA Truck

Order Picker: The machine known as an order picker is an electric lift

truck specifically designed for filling individual customer orders which
require piece-part or case picking, rather than full pallets or unit loads.
Order pickers are used at elevations higher than the second level of
racking in a warehouse or distribution center. They can reach heights up
to 390″ Order pickers are typically powered by 24- or 36-volt industrial
batteries. Order pickers will be used in applications where pallet trucks,
rolling ladders, and other piece-picking methods are traditionally used.
Their versatile design allows for handling of a variety of items, ranging
from small items, such as individual auto parts or drugs, to larger bulky
items.

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Power Pallet Truck: Equipment used for low-level lifting and moving
pallets is known as powered pallet jacks. They are also called electric
pallet trucks, walkies, single- or double-pallet jacks, or power jacks.
Some powered pallet jacks contain a platform for the operator to stand
on while moving pallets.

They are used to move palletized products from one area to another with
relative ease.
Used in warehouses, manufacturing plants and storage facilities, pallet
jacks are some of the most common and important pieces of equipment
in the material handling industry.
A pallet jack’s front wheels are mounted inside the end of the forks. As
the hydraulic jack is raised, the forks are separated vertically from the
front wheels. That forces the load upward until it clears the floor. The
pallet is only lifted enough to clear the floor for subsequent travel
Operators generally use a throttle on the handle to move forward or in
reverse. The steering is done by swinging the handle in the intended
direction.
To stop the machine, operators use “plugging.” It allows them to turn the
throttle from forward to reverse (or vice-versa) to slow and stop the
machine.
To apply the brake, the operator must allow the handle to spring back to
the upright position or hold it down to the lowest position.

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 About us
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the
development of India, partnering industry, Government, and civil society, through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive
role in India's development process. Founded in 1895 and celebrating 125 years in 2020, India's premier
business association has more than 9100 members, from the private as well as public sectors, including
SMEs and MNCs, and an indirect membership of over 300,000 enterprises from 291 national and regional
sectoral industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and
enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized
services and strategic global linkages. It also provides a platform for consensus-building and networking on
key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship
programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated
and inclusive development across diverse domains including affirmative action, healthcare, education,
livelihood, diversity management, skill development, empowerment of women, and water, to name a few.
India is now set to become a US$ 5 trillion economy in the next five years and Indian industry will remain the
principal growth engine for achieving this target. With the theme for 2019-20 as 'Competitiveness of India Inc -
India@75: Forging Ahead', CII will focus on five priority areas which would enable the country to stay on a
solid growth track. These are - employment generation, rural-urban connect, energy security, environmental
sustainability and governance.
With 68 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia, China,
Egypt, France, Germany, Indonesia, Singapore, South Africa, UAE, UK, and USA, as well as institutional
partnerships with 394 counterpart organizations in 133 countries, CII serves as a reference point for Indian
industry and the international business community.
To address the need of sharpening India Inc’s competitive edge through better Logistics and Supply Chain
practices, CII Institute of Logistics (CIL) was established in 2004 by the confederation of Indian Industry as a
center of Excellence in Logistics and Supply Chain. With a relentless aspiration to enhance logistics
competitiveness in the industry, CIL provides a complete range of services such as:
 Supply Chain Consultancy
 Corporate Training
 Research
 Warehouse Certification
 Supply Chain Transformation

Confederation of Indian Industry

Phase II, “B” Block, 9th Floor, IITM Madras Research Park , Kanagam Road , Taramani.
Chennai -600 113, Tamil Nadu , India
Phone : +91-44-66360300 Website : www.ciiscmconnect.com / www.cii.in
email : scm@cii.in
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SCM Pro

Module 3
Customer Relationship Management &
Supplier Relationship Management
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Disclaimer

The Contents presented here are for the sole purpose of reference for SCM
Pro Certification program by the CII Institute of Logistics subject to the
condition that it shall not by way of trade or otherwise circulated in any
form or used without the Cll's prior consent

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Table of Contents

CUSTOMER RELATIONSHIP MANAGEMENT &

SUPPLIER RELATIONSHIP MANAGEMENT
Chapter 1: Introduction 5
► What is Customer - Supplier Relationship? 5
► The need for relationship: The Importance of Customers 14
► Product Centric to Customer Centric 18
► Strategies for building Customer relationship 20
► Customer Order Fulfilment Process 28
Chapter 2 : CRM Process 31

► Customer Acquisition 31
► Customer Retention 32
► Lifelong Customer 33
► Customer Focussed Business 35
► 4 Ps of Marketing in CRM 37
Chapter 3: Technology in CRM 40

► Customer Account Management 40

► Sales Force Automation (SFA) 40
► Business Intelligence 40
► Marketing Automation 41
► Other Technologies 42
Chapter 4: Customer Satisfaction Measurement 43

► What does a customer want? 44

► Who should measure? 48
► What to measure? 50
► Measurement methods 54
► Cost of Measurement 59

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Chapter 5: Supplier Relationship Management - An overview

► SRM Defined 60
► Difference between transactional procurement and SRM 66
► Drivers for SRM 66
Chapter 6 -Strategic Sourcing 70
► Definition 70
► Supplier Selection Process 71
► Supplier Relationship 73
► Performance Measurement 74
Chapter 7- Off shoring and Outsourcing 77
► Difference between offshoring and outsourcing 77
► When to outsource 78
► Outsourcing Caveats 82
Chapter 8- Managing Logistics Service Providers 83
► Selection of 3PL service providers 85
► Commitment to Communication, 88
Relationship and Change
► Service Level agreements 89
► Monitoring Performance 89

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CHAPTER 1: INTRODUCTION
1.1 . What is Customer - Supplier Relationship?
Every business exists for its customer. It is the customer who
represents the raison d'etre for any business. The most important
asset of any organization in the world is its customers. Without the
customer no business can exist, for he is the one who buys a
company's products or services, brings in the revenue that leads to
profits and growth, and help to maintain a healthy cash flow. An
organization's success depends on its customer base, their buying
preferences and frequency and the quantities they buy.

It was Mahatma Gandhi who presented a simple, yet powerful,

focus on the customer. In a speech in South Africa in 1890, he said:
"A customer r is the most important visitor on our premises. He is
not dependent on us. We are dependent on him. He is not an
interruption of our work. He is the purpose of it. He is not an
outsider of our business.He is part of it. We are not doing him a
favour by serving him. He is doing us a favour by giving us the
opportunity to do so:'

Just as the customer represents one end of a business to whom the

products and services are sold, there is another set of organizations
known as suppliers from whom an organization buys all its input
materials and services. No organization can own all the resources it
requires, and will invariably depend on external suppliers to source
these resources in the form of raw materials, intermediates,
consumables, etc. and various services.

Thus, every organization depends on its suppliers at one end for

inputs, processes them in its facilities, and offers the finished
products and services to its customers at the other end. Without
these two entities, it is clear that no organization can exist.
Recognising this interdependence lies at the heart of ‘Managing
Customer and Supplier Relationships'.

Let us briefly look at three related concepts in this context

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1. VALUE CHAIN:
Every organization basically exists for the purpose of creating and
delivering value to the customer. The customer does not buy a
productvice by paying a price - he is buying 'value: a bundle of expected
benefits. Therefore, all the organizations involved in the chain in creating
and delivering this value to the customer are part of a 'Value Chain

The Value creation process works like this:

Business Units transform inputs into outputs and create value in this pro­
cess. Costs are incurred or resources are consumed for the value creation.

Value Chain concept traces value creating activities from the sources of
basic raw material to final product delivered to consumers and end of its life.
Value Activity within a Firm:

An Analysis of value activity within a firm shows the following:

► most important value creating activities of the firm
► costs incurred/ resources consumed in creating value
► amount invested/assets used in different value creating activities
► net value creation as a percentage of asset used
Value chain in some industries such as paper and sugar are quite simple
and straight forward. Industries such as petrochemical, steel, etc. have
complex value chain.
Oil Exploration-> Oil Refining-> Product

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Benefits of Value Chain Analysis:

Value chain concept provides four profit improvement areas by showing
linkages or relationships with:

► Suppliers
► Customers
► within the value chain of a business unit
► across business unit value chain within the firm
Let us briefly look at two of the above:

Linkages with Suppliers:

► A firm wishing to introduce Just-in-Time (JIT) to improve its value
chain by reducing inventory cost has to first understand the
business of its suppliers.
► JIT or profit improvement programme within the value chain fails
If there are difficulties in improving the business operations of
the suppliers
► Industrial chocolate firms eliminated cost of moulding bars and
packing and confectionery producers saved the cost of unpacking
and melting when technology for delivering liquid chocolate in
tank cars was developed.

Linkage with Customers:

► Cost of containers forms a significant portion of cost of product
in breweries and food processing industry.
► Occupies more storage space and costs more to transport and
carry the inventory.
► Container producers have constructed manufacturing facilities
next to breweries and deliver the containers through overhead
conveyers directly onto the assembly line to reduce transport and
inventory cost.
From the above brief discussion on value chain, it is thus evident that all
organizations are part of a Value Chain or Supply Chain in creating and de­
livering value to the customers, and they are dependent on each other in

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meeting this objective. It should also be remembered that a chain is on

as strong as the weakest link, and therefore, every member in the chain has
to be strong and efficient, and work in unison for the entire chain to be
successful.

2. BALANCED SCORECARD:
The balanced scorecard is a management concept that helps managers at
all levels monitor results in their key areas. Developed by Robert Kaplan
and David Norton and first published in the Harvard Business Review in
1992 "The Balanced Scorecard - Measures that Drive Performance' the Bal­
anced Score Card (BSC) is today a widely used tool in the arsenal of a man­
ager. It is both a strategy planning and performance measurement tool.

Kaplan and Norton have recommended broadening the scope of the

measures to include four areas:
► Financial performance,
► Customer knowledge,
► Internal business processes,
► Learning and growth.

The Balanced Scorecard introduced customer metrics into performance

management systems, and helps an organization to focus on the customer
and related metrics, as against the earlier focus on purely financial
measures. Thus customer focus has got elevated to a strategic level.
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3. TOTAL QUALITY MANAGEMENT & BUSINESS

EXCELLENCE:

Time was when both the customer and supplier were looked at with
askance, and treated like a nuisance to be suffered by an organization -
the customer was a pest who always demanded new products, calling in
complaints, delaying payments, asking for a price cut, etc.; and the sup­
plier was one who was the root of all problems, always calling up to de­
mand payments for supplies made, etc. The relationships were essentially
adversarial.

With the dawn of the Quality movement in 1970's and 1980's across the
globe, increasing globalization, organizations started realizing the inter­
dependence on each other and thus began the process of developing
'relationships'. From this recognition, it has blossomed into treating each
other as ‘partners:

The evolution of 'Total Quality Management' (TQM) concepts, originally

developed and implemented successfully in Japan, and later embraced
by the rest of the world, gave a fillip to this development of relationships
with customers and suppliers. TQM became an over-arching philosophy in
managing businesses.

TQM provides a systematic method for:

1. Ensuring customer satisfaction
2. Managing processes
3. Continuously improving
4. Working together
s. Encouraging personal initiative

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TQM is founded on the following eight principles:

1. Customer-Focused Organization:

Organizations depend on their customers for their business and profits.

Organizations should:

► Understand current and future customer requirements

► Meet customer requirements
► Strive to exceed customer requirements
2. Leadership

3. Involvement of People

4. Process Approach

5. System Approach to Management

6. Continual Improvement

7. Factual approach to decision making

8. Mutually beneficial supplier relationships

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Organizations and their suppliers are interdependent. Mutually

beneficial relationships or strategic alliances will enhance the ability
of both the organizations and suppliers to create value:'

The same concepts of TQM got embedded in the various models of' Busi­
ness Excellence'. For instance, the CII-Exim Bank model of Business Excel­
lence, based on the EFQM (European Foundation for Quality Manage­
ment) model, widely recognized and practiced in India, too focuses on the
Customers and Suppliers:

Today, every company is part of a long chain of customers and suppliers.

Every organization is a supplier to some other organization, and similarly
a customer to another. It is also being realized that an organization's
customer's customer is one's own customer in the final process. The
immediate person / organization who buys a company's product is
referred to as a customer, while the end-user is called the consumer. Thus,
for a steel company, an automobile manufacturer may be the customer,
the consumer is one who buys a car from the auto manufacturer.
Thus 'partnerships based on mutual benefit' has become the key theme -
both with the customers and suppliers, along the entire supply chain.
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Basic Principles of Customer-Supplier Relationships:

The importance of customers and suppliers and the need to nurture them
are now well established. Thus, the basic principles of developing sustain­
able customer-supplier relationships are the following:

1. The fundamental recognition and appreciation of the importance

of customers and suppliers as essential to the core of a business,
and the inter-dependence.
2. Development of longer term relationship that is mutually
beneficial.
3. Establishing relationships based on goodwill and trust.
4. Continuously endeavoring to enhance the relationship through
active engagement.

Ancient India had understood this truism very well. Consider what the Ar­
thasastra had to say:"ln every economic transaction, both the parties have
to win'

Johnson & Johnson has a 'Credo' which has continued to inspire its em­
ployees, and many others outside the company too, for decades:

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We are responsible to the communities in which we

live and work and to the world community as well.
We must be good citizens - support good works and charities
and bear our fair share of taxes.
We must encourage civic improvements and better health and
education.
We must maintain in
good order the property
we are privileged to use,
Protecting the environment and natural resources.

Our final responsibility is to our stockholders.

Business must make
a sound profit. We
must experiment with
new ideas.
Research must be carried on, innovative

1.2 The need for relationship: The Importance of Customers

While there had always been companies such as IBM, 3M, Kodak, ICI, Rolls
Royce, etc. who were known for their quality products, it was not until a
war-battered Japan adopted 'Quality' as a die-hard philosophy, a way of
life, that companies embraced the concept whole-heartedly. Till then the
focus of most organizations across the globe was on top-line and bottom­
line, i.e., purely on the financial performance. The invasion of US markets
by Japanese auto and consumer electronics majors in early 1970's altered
the scenario for ever. In the initial years, the focus was on producing qual­
ity products. Then, with the wider understanding and adoption of TQM
practices, organizations began adopting a more holistic approach -'Qual­
ity in everything we do'. This brought in the much needed attention and
focus on customers and suppliers.

Notwithstanding these developments, even today, many organizations

remain inward-looking, getting lost in their own grandiose plans, market
forecasts, financial projections, R&D and product launches, without really
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understanding whether their products and services are really required by

the customers, whether they are wanted or fulfill the needs of the cus­
tomers. Quite often we find companies rushing in with their products or
services with much fanfare, only to withdraw them quietly soon t hereafter.
The grand schemes and services offered many airlines in India in recent
years and their fate are too well known.

However, excellent organizations remain steadfast in their focus on meet­

ing, and even exceeding, their customers' expectations

Clause 5.3 of ISO 9001:2008 deals with "Customer Focus" as: Top manage­
ment shall ensure that customer requirements are determined and are
1
met with the aim of enhancing customer satisfaction :

Consider how great companies translate these into their operating phi­
losophy through Vision & Mission statements to create a culture focused on
customers:

1. FedEx:
"FedEx Corporation will produce superior financial returns for its share­
owners by providing high value-added logistics, transportation and relat­
ed business services through focused operating companies. Customer re­
quirements will be met in the highest quality manner appropriate to each
market segment served. FedEx will strive to develop mutually rewarding
relationships with its employees, partners and suppliers. Safety will be the
first consideration in all operations. Corporate activities will be conducted
to the highest ethical and professional standards':

2. Proctor & Gamble:

"Our Purpose unifies us in a common cause and growth strategy of im­
proving more consume rs' lives in small but meaningful ways each day. It
inspires P&G people to make a positive contribution every day':

3. Tata Steel:
"By becoming the supplier of choice, delivering premium products and
services and creating value for our customers:'

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4. Dabur:
"Dedicated to the health and well being of every household':

5. ITC:
"We are always customer focused and will deliver what the customer needs
in terms of value, quality and satisfaction':

CII-Exim Bank model of Business Excellence:

Adding Value for Customers:
Excellent organizations know that customers are their primary reason for
being and strive to innovate and create value for them by
understanding and anticipating their needs and expectations.

In practice, excellent organizations:-

► Know who their different customer groups are, respond to and

anticipate their different needs and expectations.
► Build and maintain a dialogue with all their customers, based
on openness and transparency.
► Strive to innovate and create value for their customers.
► Ensure their people have the necessary tools, competencies,
information and empowerment to be able to maximize the
customer experience.
► Continually monitor and review the experiences and
perceptions of customers and respond quickly and effectively
to any feedback.
► Involve customers in the development of new and innovative
products, services and experiences.
► Compare their performance with relevant benchmarks and
understand their strengths in order to maximize the value
generated for customers.

The American Society for Quality (ASQ) defines quality as "The totality of
features and characteristics of a product or service that bears on its abil-
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ity to satisfy given needs" [of the customer]. Just as it is said that beauty is
in the eye of the beholder, quality is what is in the eyes of the customers.
Remember what James Bond says how wants his drink: "stirred, but not
shaken".

Therefore, organizations aspire to move up the value curve - from provid­

ing customer satisfaction (fulfilling expected needs) to customer delight
(offering new and innovative features in products and services). For in­
stance, life time maintenance and warranty in consumer durables delight
the customer in terms of service.Taking back a product at the end of its life
under some exchange scheme helps the customer in not only its disposal
but also getting a residual value for it.

The importance of customer has thus evolved from being viewed merely as
a buyer of goods and services to being the focal point of an organization,
around whom the entire business is oriented. Increased customer
satisfaction leads to reduced costs of servicing the customer r, more profits,
repeat orders, referrals, lesser customer complaints, and lesser hassles in
doing business. Studies have shown that it typically costs 5-10 times as
much to acquire a new customer as it does to retain an existing one.
Satisfied customers are willing to pay more and buy more.

On the other hand, poor quality leads to customer dissatisfaction, with

the customer taking away the business to a competitor. There are more
product complaints, returns and adverse word-of-mouth publicity. Stud­
ies have again shown that more than product quality issues, perceptions
in regard to service quality have lead to customers switching suppliers.
Moreover, there is a greater deal of negative publicity from dissatisfied
customers about adverse experiences than good ones. Read the Whar­
ton article titled,"Beware of Dissatisfied Consumers: They Like to Blab" ap­
pended at the end of the Module.

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Firestone Tire Recall:

On August 9, 2000, Bridgestone/Firestone, Inc. announced the recall of 6.5
million tires that had been reportedly linked with fatal accidents mostly
involving Ford Explorer sport-utility vehicles (SUVs). The infamous faulty tire
debacle pitted Ford against Firestone, two giant corporations that had been
doing business together since 1906, but were then trying to separate
themselves on the crucial issue of legal liability. Despite these differences,
Ford agreed to share part of the cost for the massive Firestone tire recall,
which, between the recall itself and subsequent litigation, was estimated to
cost the embattled tire maker $2 billion.
Toyota:
In 2009 and 2010, Toyota recalled nearly eight million vehicles as part of the
sticky pedal and pedal entrapment recalls. Toyota also paid $48.8 million in
civil penalties as the result of NHTSA investigations into the timeliness of
several safety recalls last year. Toyota posted its first annual loss at $4.4 billion
in 2009. It was expected that it would plunge deeper into red in 2010 because
of the global economic downturn, at $8.6 billion. It was the first reported
loss, since it started publishing results in 1941.

Cases in Product Recall:

1.3 Product Centric to Customer Centric:
Again, time was when organizations produced whatever they wanted, and
expected the customers to queue up and buy them. Many organizations
used to behave as though they were doing a great service by merely of­
fering their products or services. It was more of an attitude of "take it, or
leave it’: The choices for the customers were limited, the terms stiff and it
was purely a “sellers' market': Most operated on a "Cost-plus" model, with
annual increases in prices.

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Things changed dramatically with globalization and liberalization in the

1980's and 1990's. In a highly globalised competitive environment, acquir­
ing, retaining, and supporting customers is more challenging than ever

before for businesses of all sizes. There was a tremendous shift in terms
of attitude and approach towards the customer - from a 'product centric'
approach, it metamorphosised into one of' customer-centric: From focus­
sing entirely on product and its features, as the company saw it, organiza­
tions began see product development and its offerings from the custom­
ers' point of view - in terms of customer expectations and fulfilling them.
Today, there more variants in any product - be it a car, a computer or an
ice cream. Sometimes it appears as though the customer is being spoilt by
the sheer variety or choice that is being offered.

Organizations understand as never before that they are in the business of

selling experiences, not products alone.

Just read the following narrative

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We had decided after dinner, to spend a second night in Washington. Our

business day had taken us beyond the last convenient flight out. We had no
hotel reservations, but were near the new Four Seasons, had stayed there once
before, and liked it. As we walked through the lobby wondering how best to
plead our case for a room, we braced for the usual chilly shoulder accorded to
latecomers. To our astonishment the concierge looked up, smiles, called us by
name, and asked how we were. She remembered our names! We new in a flash
why in the space of a brief year the Four Seasons had become the "place to stay"
in the District and was a rare first-year holder of the venerated four-star rating'

- Quoted from "In Search of Excellence" by Tom J. Peters and Robert

H.Waterman Jr., Harper & Row Publishers, New York, 1982.

"Who We Are:

We have chosen to specialise within the hospitality industry by offering only

experiences of exceptional quality [Emphasis added]. Our objective is to be
recognised as the company that manages the finest hotels, re­ sorts and
residence clubs wherever we locate.
We create properties of enduring value using superior design and finishes, and
support them with a deeply instilled ethic of personal service. Doing so allows
Four Seasons to satisfy the needs and tastes of our dis­ criminating customers,
and to maintain our position as the world's premier luxury hospitality company:'

"
1.4 Strategies for building Customer relationship:
Principles of Customer relationship:
All organizations must sincerely believe in the importance and value of
their relationships with their customers and suppliers. From nearly paying
lip service, they should move towards active interaction and engagement
with them.

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Every organization should endeavor to develop these relationships based

on mutual benefits. Only then the relationships will be sustainable.Work­
ing towards shared objectives and common goals of satisfying the end
consumer is the only way to strengthen the relationships. They must work
together in unison as members of the same team. The relationships
should be based on understanding and appreciation of each ones roles,
contribution, trust and good will. In fact, Dr. C.K. Prahalad goes to the ex­
tent of expanding the concept to co-creation of value.

,…we challenge the traditional notion of value and its creation, namely
that firms create and exchange value with customers. We believe that,
increasingly, the joint efforts of the consumer and the firm - the firm's
extended network and consumer communities together - are co-cre­
ating value through personalized experiences that are unique to each
individual consumer. This proposition challenges the fundamental as­
sumptions about our industrial system - assumptions about value itself,
the value creation process, and the nature of the relationship between
the firm and the consumer. In this new paradigm, the firm and the con­
sumer co-create value at points of interaction. Firms cannot think and
act unilaterally.

The future of competition, however, lies in an altogether new approach

to value creation, based on an individual-centered co-creation of value
between consumers and companies.

In the emergent economy, competition will center on personalized co­

creation experiences, resulting in value that is truly unique to each indi­
vidual':

Today organizations take substantial time and effort to bring in a new sup­
plier into the fold. Supplier evaluation through a detailed questionnaire,
interview, personal visits to the suppliers premises form art of regress pro­
cess of supplier evaluation. Once the initial evaluation is completed then
the relationship moves to the next level of total trust. Supplier certified

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materials, single supplier and vendor managed inventories are the

norm in most large organizations.
Customer-related Practices:
1. Collect customer information on their expectations:

How do effective organizations know what their

customers want?"

They ask them.

- quoted from Quality Management by Donna
CS.Summers.
"
Acquiring customer-related information is crucial to understanding cus­
tomer needs and identifying opportunities for improvement. There are
hosts of methods and techniques available for the purpose. These range
from obtaining customer feedback, customer satisfaction surveys, service
evaluation forms, focus groups, actively listening to customers during
business interactions, installing toll-free numbers and 24-hour helplines,
telephone interviews, monitoring customer complaints, sending employ­
ees to customers premises for observation and interaction with their em­
ployees, periodic visits to customers' premises by not only the marketing
and sales team, but by the top management, and quality and operations
personnel, recording and monitoring customer interactions, etc.

Effective use of the internet is another technique being widely followed

today. Customers are encouraged to log in, post their queries, complaints
and share experiences.

2. Communicate customer information across all departments: As

the people in the organization are going to work to meet the
customers' needs and expectations, the information collected
on customers should be communicated across the entire
organization. Otherwise, the information collected will not be
used and the efforts in the direction will be a waste. The 'Voice of
the customer' must be heard by one and all in an organization.
Customer information should be used in designing, developing
and creating the products and services, and translated into
product features. This can be done effectively using Quality
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Function Deployment (QFD). Once a team has identified the

customers ‘wants, QFD is used for two fundamental reasons:
a. To improve the communication of customer wants throughout
the organization.
b. To improve the completeness of specifications and to make them
traceable directly to customer wants and needs.
QFD links the needs of the customer (end user) with design,development,
engineering, manufacturing, and service function s.

QFD empowers organizations to exceed normal expectations and provide

a level of unanticipated excitement that generates value.

3. Use customer information in creating and delivering the product

to the customer: Customer feedback should be integrated into
continuous improvement activities across the organization.
4. Manage customer relationship efficiently and effectively:

CUSTOMER RELATIONSHIP MANAGEMENT

Customer Relationship Management (CRM) is a key business tool

in managing this vital function. The idea behind CRM is by engaging in
smarter and keener relationships, a company can learn its customers'
preferences and develop trust over a period of time. Every interaction or
contact with the customer can be seen as an opportunity to understand
and record such information and learn the customers preferences. Co m­
plaints and errors are not considered as mere fixes that are forgotten once
resolved, but a valuable repository of learning and experience.

A thorough understanding of customers and markets is the key prerequi­

site to develop successful CRM platform that adds value to Customers. This
initiative involves a significant change in corporate culture and its success
largely depends on top management commitment. By learning customer
preferences and focusing on long-term relationships, organisations can
provide products and services that meet customers' needs and add value
to them.
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What is CRM?

The simplest, broadest definition can be found in the name: CRM is a com­
prehensive way to manage, through a set of processes and technologies,
the relationship with customers - including potential customers - that is
sustainable and mutually beneficial, focusing on adding value to Custom­
er than just providing a product or service. More specifically, modern CRM
systems enable us to capture information on all aspects of customer in­
teractions and integrate it with every customer-related function and data
point.

CRM is a widely implemented strategy for managing a company's inter­

actions with customers, and involves using technology to organize, auto­
mate, and synchronize all business processes relating to customers that
include not only the sales activities, but also marketing, customer service
and technical support. The principal objectives are: to nurture and retain
existing customers, to find, attract, and win new customers, entice for­
mer customers back into the fold, and reduce the costs of marketing and
customers service. CRM describes a company-wide business strategy that
includes not only the customer-interface departments, but all other de­
partments as well. Measuring and valuing customer relationships is critical
to implementing this strategy.

Benefits of Customer Relationship Management:

An effective and well-designed Customer Relationship Management sys­

tem provides the following advantages:

► Improved Customer acquisition

► Improved Communications -to and from Customer
► Improved Customer Retention and Experience
► Improved Customer Satisfaction
► Improved Quality and efficiency
► Increase in Sales, Market Share, profitability & Customer Loyalty
► Decrease in overall costs
► Improved decision support
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► Enhanced enterprise ability

► Increased profitability.
Building strong and sustainable relationships with customers is no over­
night effort, but has to be achieved over a prolonged period of interaction.
Customer loyalty can be built only through painstaking efforts to build
trust, and through open customer interactions. Frequent contacts with
customers at various levels are required by an organization by permit­
ting interactions of its own people at various levels. The quality of these
interactions and responses has to be of a very high order to infuse trust
and confidence in the customers. This calls for a great deal of training and
monitoring of employees, empowering them and fostering teamwork
within the organization.
1
Entering into Memorandum of Understanding (MoU s) and Service Level
1
Agreements (SLA s) with the customers can help to some extent in the
process. Faster complaint resolution and implementing steps to prevent
recurrences can also help. Constant vigilance is required in regard to cus­
tomer service and there can never be any slackening of efforts in this vital
area.

The 2011-2012 Criteria for Performance Excellence of The Malcolm

Baldrige National Quality Award defines Customer-related Processes
as follows:
Process:
3.1 Voice of the Customer: How do you obtain information from your
customers? Describe HOW your organization listens to your CUSTOM­
ERS and gains satisfaction and dissatisfaction information.

a. CUSTOMER Listening
(1) Listening to Current CUSTOMERS How do you listen to customers to
obtain actionable information? How do your listening methods vary for
different customers, customer groups, or market segments? How do you
use social media and Web-based technologies to listen to customers, as
appropriate? How do your listening methods vary across the customer life
cycle? How do you follow up with customers on the quality of products,

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customer support, and transactions to receive immediate and actionable

feedback?

(2) Listening to Potential CUSTOMERS How do you listen to former cus­

tomers, potential customers, and customers of competitors to obtain ac­
tionable information and to obtain feedback on your products, customer
support, and transactions, as appropriate?

b. Determination of CUSTOMER Satisfaction and

ENGAGEMENT\
(1) Satisfaction and engagement How do you determine customer sat­
isfaction and engagement? How do these determination methods differ
among customer groups and market segments, as appropriate? How do
your measurements capture actionable information for use in exceeding
your customers' expectations and securing your customers' engagement?

(2) Satisfaction Relative to Competitors How do you obtain information

on your customers' satisfaction relative to their satisfaction with your com­
petitors? How do you obtain information on your customers' satisfaction
relative to the satisfaction levels of customers of other organizations pro­
viding similar products or to industry benchmarks, as appropriate?

(3) Dissatisfaction How do you determine customer dissatisfaction? How

do your measurements capture actionable information for use in meet­
ing your customers' requirements and exceeding their expectations in the
future?

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Process:
3.2 Customer Engagement: How do you engage customers to serve
their needs and build relationships?

Describe HOW your organization determines product offerings and

communication mechanisms to support customers. Describe HOW
your organization builds CUSTOMER relationships.

a. Product Offerings and CUSTOMER Support

(1) Product Offerings How do you identify customer and market require­
ments for product offerings and services? How do you identify and in­
novate product offerings to meet the requirements and exceed the ex­
pectations of your customer groups and market segments (identified in
your Organizational Profile)? How do you identify and innovate product
offerings to enter new markets, to attract new customers, and to provide
opportunities for expanding relationships with existing customers, asap­
propriate?

(2) CUSTOMER Support How do you enable customers to seek informa­

tion and customer support? How do you enable them to conduct their
business with you and provide feedback on your products and your cus­
tomer support? What are your key means of customer support, including
your key communication mechanisms? How do they vary for different cus­
tomers, customer groups, or market segments? How do you determine
your customers' key support requirements? How do you ensure that cus­
tomer support requirements are deployed to all people and processes in­
volved in customer support?

(3) CUSTOMER Segmentation How do you use customer, market, and

product offering information to identify current and anticipate future cus­
tomer groups and market segments? How do you consider customers of
competitors and other potential customers and markets in this segmen­
tation? How do you determine which customers, customer groups, and
market segments to pursue for current and future products?

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(4) CUSTOMER Data Use How do you use customer, market, and prod­
uct offering information to improve marketing, build a more customer­
focused culture, and identify opportunities for innovation?

b. Building CUSTOMER Relationships

(1) Relationship Management How do you market, build, and manage
relationships with customers to achieve the following?

► acquire customers and build market share

► retain customers, meet their requirements, and exceed their
expectations in each stage of the customer life cycle
► increase their engagement with you
(2) Complaint Management How do you manage customer complaints?
How does your customer complaint management process ensure that
complaints are resolved promptly and effectively? How does your custom­
er complaint management process enable you to recover your customers'
confidence and enhance their satisfaction and engagement?

1.5 Customer Order Fulfilment Process:

Order fulfilment refers to the entire process starting from the point of sales
inquiry to the delivery of a product to the customer. Sometimes the term
can also be used to describe the more narrow act of distribution or the lo­
gistics function. However, in the broader sense it always refers to the way
organizations respond to customer orders.

Conventionally, there are only two types of production systems: (a) Pro­
duce for stock, and (b) Produce for orders. One typifies mass production
of a standard product and another production against specific customer
orders.

The first conceptual framework towards defining order fulfillment strate­

gies was published by Mather (1988). He defined a P:D ratio, where P is the
production lead-time, i.e. how long it takes to manufacture a product, and
Dis the demand lead-time, i.e. how long customers are willing to wait for
the order to be completed.

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Based on comparing the parameters P and D, an organization has several

basic strategic order fulfillment options:

► Make-to-Stock (MTS) - (D=0) Here, the product is built against a

sales forecast, and sold to the customer from finished goods stock.
This approach is common in most mass production industries
such as sugar, cement, tyres, shoes, grocery and retail sectors.
► Make-to-Order (MTO) - (D>P): Here, the product is based on a
standard design, but component production and manufacture of
the final product is linked to the order placed by the final
customer's specifications. This strategy is typical for high-end
motor vehicles and aircraft.
► Engineer-to-Order (ETO) - (D>>P): In this case, the product is
designed and built to customer specifications. This approach is
most common for large construction projects and one-off
products, such as ship building .
► Assemble-to-Order (ATO) - (D<P): Here, the product is built to
customer specifications from a stock of existing components. This
assumes a modular product architecture that allows for the final
product to be configured in this way. Typical examples for this
approach are customization of computers, modular furniture,
and cars with several add-on features which are just fitted before
delivery.

Order fulfilment process:

The normal steps in order fulfilment process are:
a. Product Inquiry: Initial inquiry from the customer about the
company's product/ service offerings, through mail or in person,
on telephone, or visit to the web-site, catalog request.
b. Quotation: Providing the customer a budgetary and/or
availability quote.
c. Order Configuration: Where the ordered items need selection of
options or order lines need to be compatible with each other.
d. Order Booking: The formal order placement (issuing of a Letter of
Intent (LOI) and Purchase Order by the customer).
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e. Order Acknowledgment / Confirmation : Confirmation that the or­

der is booked and/or received.
f. Order amendment: Changes to orders, if needed by the custom­
er. This can be in terms of product specifications, quantity and
delivery schedules.
g. Order processing: Process step where the production or distribu­
tion centre or warehouse is responsible to fill order (produce, as­
semble, receive and stock inventory, pick, pack and ship orders).\
h. Order Execution/ Sourcing/ Planning: Executing the production
run, determining the source/ location of item(s) to be shipped .
i. Billing: The presentment of the commercial invoice/ bill to the
customer.
j. Shipment: The shipment and transportation of the goods.
k. Delivery: The delivery of the goods to the consignee/ customer
I. Settlement: The payment of the charges for goods/ services / de­
livery
m. Returns by customers: In case the goods are unacceptable/ not
required.
The order fulfillment process is an important step in meeting the customer
needs, and represents the actual execution phase. This is the stage when a
customer's requirements are transformed into actual delivery. Therefore, it
is an important metric in measuring customer satisfaction.

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CHAPTER 2 : CRM PROCESS

2.1 Customer Acquisition:
Amidst all the clutter and competition, acquiring a customer is not the
easiest of tasks. The process of acquiring a customer is a quite costly affair,
and can also be a severe drain on the emotional energies of an organiza­
tion and its sales force. It can be frighteningly of huge proportions if the
customer's business is big, the stakes being that much higher, or the cus­
tomer is a high profile client.

Organizations spend a fortune and years in developing a product or ser­

vice - right from design, development, prototypes, pilot production, test
marketing, seed marketing, advertisements, product promotions, cam­
paigns, etc. A lot of expectations ride on the product, and sometimes the
future of a company itself can be determined by the success or failure of a
product.

Every customer approaches a company or business with an expectation

of being served, so that his / her needs are fulfilled. The developments
after the initial contact will shape the business relations between the two.
A pleasant or satisfactory experience may increase the customer’s loyalty
and prompt a tendency to purchase again. A poor or unsatisfactory expe­
rience may force the customer to take away the business to a competitor.

In a highly competitive market that is highly price-sensitive or cost con­

scious, and where quality is treated as an entry requirement, organizations
can compete only on service and value delivery. This calls for a great deal
of working very closely with the customer, and developing long term re­
lationships. The only way it can be done is to produce a top class product,
back it with excellent service, and invest in building long term relation­
ships.

In a crowded market, with many me-too kind of products or look-alikes, this is easier
said than done.The cost of switching is extremely low for the customer. However,
excellent organizations invest time and other resources in building reputation, brands,
excellent delivery network, and a high calibre organization dedicated to delivering
consistently great service to the customer.
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The ability to understand and actively manage, and sometimes anticipate,

the process forms the basis of customer relationship management.

The process, per se, requires that all the links in the supply chain - sup­
pliers, employees, etc. function in total synchronization to serve the cus­
tomer, and in total alignment of objectives. CRM, thanks to modern tech­
nology, can help in efficient management of the processes involved in a
totally integrated fashion, by providing information, empowerment and
insights all those involved in the value creation and delivery. Further, it can
help in continuously monitoring, measuring and improving the processes.

2.2 Customer Retention:

Retaining customer loyalty has always been a fundamental principle in
business. CRM helps in creating a system that can provide a means for re­
taining individual customer loyalty.

Customer retention is an important indicator of customer satisfaction and

loyalty. All organizations should strive to retain their existing customers,
before trying to add new customers. There is no point in trying to bring in
new customers; if the existing customers are not taken care of and leave
the companies fold regularly. The recent and persistent global economic
crisis has made customer retention the top priority of organizations, as
compared to the earlier fixation with acquiring new customers.

While customer feedbacks may provide some information on customer

satisfaction, the real proof is in retaining the customer. Customer satis­
faction should lead to increase the sales, increase market share, higher
retention of customers and increase in number of referrals from existing
customers. Customer retention enables an organization to truly under­
stand what is important to the customer and direct resources to ensure
customer satisfaction. In the long run customer retention is a direct link to
the profitability and growth

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Case study:

Tata Steel's Corus:

Tata Steel's Corus Unit in UK was on verge of closure in May, 2009. It was
reported that Teesside Cast products (TCP) in Northern England may be
forced to shutdown. A Consortium of buyers that had signed an Off take
Framework Agreement (OFA) in 2004 to buy 78% of the Plant's production
for ten years fails to honour commitment, and 1,920 employees may be in
distress.

2.3 Lifelong Customer:

Studies have shown that it is far cheaper to retain existing customers than
to acquire new customers. During economic downturns, this becomes a
matter of survival, and not just a value proposition. Retaining a customer
is more a matter of managing the relationship, than the product or service.

We have seen the process of customer acquisition and customer reten­

tion, and have also discussed how difficult it is to retain customers. Not­
withstanding the difficulties, every organization aspires to create lifelong
or lifetime customers - customers who will remain within the fold of the
company for their life time. This calls for total customer satisfaction and
unswerving loyalty.

This can come about only through sustained value offerings, building
trust, and relationship. This is easier said than done. However, if an orga­
nization can gain this kind of customer trust and intimacy, the relationship
can last over the lifetime of the customer.

Organizations such as Rolls Royce, Mercedes, Volkswagen, Colgate , Uni­

lever, Procter and Gamble, Tata companies, Nestle, Glaxo and Britannia, to
name a few, have such customers, developed and nurtured over long years
of painstaking efforts and customer orientation .

The advantages of having lifelong customers are the following:

Lower total marketing cost: We have earlier seen that the cost of acquiring
a new customer is about 5 times higher than the cost.
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of retaining an existing customer. With lifelong customers, the

marketing costs decline over time.
1. Easier to satisfy lifelong customers: By tracking the customers' buying
habits and developing a deeper knowledge of the customer needs and
expectations gained over a long term, it becomes easier to improve
products, develop new products or variants, and build better customer
profiles. Just look at the number of product variants both Horlicks and
Complan have introduced in the Indian market. They have products to
suit both the genders and also for finely segmented children segment.

2. Increased revenue and profit potential: With a stable relationship cus­

tomers become familiar and comfortable in the company's offerings
and generally buy new products introduced by the company and also
the larger pack sizes. Just look at the product range of Kellogg’sbreak­
fast cereals and Britannia biscuits. The product range and pack sizes
are simply amazing.

With higher values of purchase, increased frequency of purchase, greater

consumption and reduced marketing cost, the revenues and profits from
lifelong customers definitely go up. The "cost to serve" existing or lifelong
customers tapers down significantly over the years. They are also willing
to try out new product offerings from the company as the relationship is
based on satisfaction and trust. They also recommend the company's
products to their friends and relatives. Another advantage is once a cus­
tomer gets hooked to a company's products at an early stage and is satis­
fied with its performance in fulfilling his needs; he generally stays w it h the
product. This is true for both industrial and consumer products.

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2.4 Customer Focussed Business:

Excellence Model defines Customer Focus as follows:

The Concept

Excellence is creating sustainable

customer value. How the Concept is put

into practice
Excellent organisations know and intimately understand their
customers.They understand that customers are the final arbiters of
product and service quality. They also understand that customer
loyalty, retention and market share gain is maximised through a
clear focus on the needs and expectations of both existing and
potential customers. They are responsive to those customers'
present needs and expectations. Where appropriate they segment
their customers to improve the effectiveness of their response.
They monitor competitor activity and understand their competitive
advantage. They effectively anticipate what customers' future
needs and expectations will be and act now in order to meet and
where possible exceed them. They monitor and review the
experiences and perceptions of their customers and where things
go wrong they respond quickly and effectively. They build and
maintain excellent relationships with all their customers

Benefits
► Delighted customers
► Strong customer loyalty and retention
► Enhanced market share
► Sustained success for the organization
► Motivated employees
► Understanding of competitive advantage

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The 2011-2012 Criteria for Performance Excellence of The Malcolm Baldrige National
Quality Award defines Customer Focus as follows

The Customer Focus category examines how your organization engages its
customers for long-term marketplace success. This engagement strategy includes
how your organization listens to the voice of its customers, builds customer
relationships,and uses customer information to improve and identify opportunities for
innovat ion
1
"Note1: The 1'voice of the customer refers to your process for capturing customer-
related information. Voice-of-the-customer processes are in­ tended to be proactive
and continuously innovative to capture stated, unstated, and anticipated customer
requirements, expectations, and desires.The goal is to achieve customer
engagement. Listening to the voice of the customer might include gathering and
integrating various types of customer data, such as survey data, focus group
findings, blog comments and other social media data, warranty data, marketing and
sales information, and complaint data that affect customers' purchasing and
engagement decisions'

Customer focused businesses have customer satisfaction as the core or

principal objective of the business. All the activities of the organization
are tailored towards making the customer interactions smooth and pleas­
ant. They are easier to contact and do business with anytime and any­
where. They welcome the customers to engage and challenge them and
look at customers as not just as buyers of their products and services but
also as sources of ideas and feedback for product improvement and
product innovation. Their entire value creation and value delivery
processes revolve around the customer - right from design, product
development, sourcing, production, marketing and distribution and
service and end-of­ life disposal.

These organizations also educate the customers in the right and safe use
of the product. They aim at product stewardship. They continuously aim
to add value to their customers to improved and more efficient products
and services.

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The process of creating and sustaining a customer-focused organization are:

1. Align the organization's v1s1on, m1ss1on, objectives, goals,

organizational structure, and jobs to support a customer focus
2. Identify and anticipate customers' perspective and needs.
3. Map customer segment s.
4. Implement the most appropriate CRM program.
s. Monitor, measure, analyse and report.
6. Continuously improve and sustain quality and value creation.

2.5 4 P's of Marketing in CRM:

The 4 P's of conventional or traditional marketing are: Product, Price, Place­
ment and Promotion.

1. Product: In traditional Marketing, products and services were

designed and created as deemed fit by the organization, targeted
towards a large group of customers. Be it a shoe, car or biscuits,
the company would simply produce the product based on the
technology it had and it was left to marketing to create the need,
find customers and sell to them. We have come a long way since
those days. Organizations try to come up with different product
offerings to suit the varying tastes and expectations of the
customers. All we have to do is walk in to an Ice cream parlor, a
Pizza outlet, or a car showroom to see the mind-boggling choice
the customer has today. The customer can have his pick from a
menu of choices and customize the product to suit his taste and
budget.
2. Price: Time was when organizations fixed prices on a cost-plus
model. They simply announced the price which was common to
all. Today we find that it has shifted to a target price model,
where the price is fixed by the customer and the competitors.
Organizations also segment the customers as regular and loyal
customers, frequent buyers, one-off buyer, etc. CRM helps in
these processes greatly. Preferred customers are given discounts,
informed of product promotion, etc.

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3. Placement: In the earlier days there was generally a single channel

- manufacturer, wholesaler and retailer. Today we have multiple
channels of product distribution. We have mail order companies,
company-owned showrooms, shopping malls and giant retailers.
E-commerce has taken off in a big way. One can order Pizza, or
medicine on line and have it delivered in a few minutes at the
door step. We have elite showrooms such as the Tata's Croma for
electronic goods, Levi Jeans, Adidas, Shoppers Stop and what
have you. Besides the conventional outlets of buying books from
book stores, we have on line retailers such as Amazon.com, Barnes
& Nobles.com and Flip kart.
4. Promotion: Promotion refers to all marketing activities such as
market research, consumer behavior analysis, customer
segmentation, advertising and brand promotion. CRM has made
the whole task much easier through adoption of technology,
capturing of customer data at various points and through various
customer interactions, data mining and business analytics for
recording and analyzing the vast amount of data for developing
better product-marketing strategy and decision making.

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CASES IN CUSTOMER
RELATIONSHIP:
A. Construction Equipment Manufacturer:
The company engages with its customers the
following ways:

a. Product Improvements and new applications

b. New Product Development
c. Customer workshops.

d. Mobile workshops which move around

at regular periodicity to serve
customers in remote locations.
24x7 service helplines, mobile links, satellite
service stations, central warehouse of parts
B. Utility Power Major:
e.
Daily coordination with customer on
generation, ramping up or down
Monthly, Quarterly and Annual engagement
with customers at various levels of management,
including the top management

a. .

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CHAPTER 3: TECHNOLOGY IN CRM

3.1 Customer Account Management:

Also known as Customer service and support, this CRM software provides
a business with the ability to manage customer-facing applications to cre­
ate, assign and manage requests made by customers. An example would
be Call Center software which helps to direct a customer to the agent who
can best help them with their current problem. Other functions could be
online help facilities, internal helpdesk, and expert knowledge-based sys­
tems for problem resolution.

Recognizing that this type of service is an important factor in attracting and

retaining customers, organizations are increasingly turning to technology to
help them improve their clients' experience while aiming to in­ crease
efficiency and minimize costs. CRM software can also be used to identify
and reward loyal customers, which in turn will help customer retention.

3.2 Sales Force Automation (SFA):

SFA involves using software to streamline all phases of the sales process,
minimizing the time that sales representatives need to spend on each
phase. This allows a business to use fewer sales representatives to manage
their clients. At the core of SFA is a contract management system for track­
ing and recording every stage in the sales process for each prospective
client, from initial contact to final disposition. Many SFA applications also
include insights into opportunities, territories, sales forecasts and work­ flow
automation, quote generation, and recently, aspects of partner relationship
management.

3.3 Business Intelligence:

Business intelligence (Bl) mainly refers to computer-based techniques
used in identifying, extracting and analyzing business data, such as sales
revenue by products and/or departments, or by associated costs and in­
comes.

Bl technologies provide historical, current and predictive views of bus

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ness operations. Common functions of business intelligence technologies

are reporting, online analytical processing, analytics, data mining, busi­
ness performance management, benchmarking and predictive analytics.

True Bl is considered by several top organizations across the globe as the

key to running a performance oriented organization. They use their Bl sys­
tems to identify and focus on select key performance indicators to help
them define corporate strategy and drive profitability. From a robust Bl
system, they obtain data that gives them insights into markets and cus­
tomer-behaviour, identify their strengths and weaknesses, measure their
progress against goals, and to employ skills, processes, technologies, ap­
plications, and practices to support good decision-making.

Most of the ready-to-use Bl products available in the market are easy to

implement and very powerful. They have extremely useful features, and
can work effortlessly on a vast amount of data - integrating, synthesizing,
and analysing data from various parts of the organization. Problems are
encountered in actually deploying this performance-driven approach to
running the business.

Business intelligence aims to support better business decision-making .

Thus a Bl system can be called a decision support system (DSS). The term
business intelligence is sometimes used as a synonym for competitive in­
telligence, as they both support decision making. However, the distinction
lies in that while Bl uses technologies, processes, and applications to ana­
lyze mostly internal, structured data and business processes, competitive
intelligence gathers, analyzes and disseminates information with a topical
focus on a company's competitors. Business intelligence thus can include
the subset of competitive intelligence.
3.4 Marketing Automation:
The automation of marketing functions covers a wide variety of capabili­
ties. CRM systems for marketing help the enterprise identify and target
potential clients and generate leads for the sales team. A key marketing
capability is tracking and measuring multichannel campaigns, campaign
management and execution tools, surveys and contest management, and
distribution of marketing materials to sales executives and partners.

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Metrics monitored include clicks, responses, leads, deals, and revenue. Al­
ternatively, Prospect Relationship Management (PRM) solutions offer to
track customer behavior and nurture them from first contact to sale, of­ ten
cutting out the active sales process altogether. In a web-focused marketing
CRM solution, organizations create and track specific web activities that
help develop the client relationship. These activities may include such
activities as free downloads, online video content, and online web presen­
tations.

3.5 Other Technologies:

There are many other CRM technologies and tools available such as:

(a) Appointment to Create and schedule appointments with customers;

(b) Analytics where relevant analytics capabilities are often interwoven

into applications for sales, marketing, and service; and

(c) Integrated/collaborative tools for greater cooperation among sales,

service, and marketing.

Social media: Social media have taken the world by storm and represent
the most important means of communication today for any business or
organization. There is a plethora of these media such as Twitter, Facebook,
LinkedIn, Google+ that have captured the imagination of all, especially
the young and mobile. They help in amplifying the voice of people in the
marketplace and are having profound and far-reaching effects on the
ways in which people buy. Customers can now research companies on line
and then ask for recommendations through social media channels, as well
as share opinions and experiences on companies, products and services.

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CHAPTER 4: CUSTOMER SATISFACTION

MEASUREMENT

CII-Exim Bank model of Business Excellence:

ACHIEVING BALANCED RESULTS

Excellent organizations meet their Mission and progress towards their vi­
sion through planning and achieving a balanced set of results that meet
both the short and long term needs of their stakeholders and, where
relevant, exceed them.

In practice, excellent organizations:-

► Identify and understand the Key Results required to achieve

their Mission and evaluate progress towards their Vision and
strategic goals.
► Gather stakeholders' needs and expectations for input to the
development and review of their strategy and supporting
policies, remaining constantly alert to any changes.
► Use a balanced set of results to review their progress, providing
a view of long and short term priorities for the key stakeholders,
with clearly defined "cause and effect" relationships.
► Adopt effective mechanisms to understand future scenarios
and manage strategic risks.
► Define the required outcomes and related performance
indicators and establish targets based on comparisons of their
performance with other organizations and the Mission and
Vision.
► Deploy strategy and supporting policies in a systematic manner
to achieve the desired set of results, balancing short and long
term objectives.

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► Evaluate the set of results achieved to improve future

performance and provide sustainable benefits to their
stakeholders.
► Ensure transparency of reporting to key stakeholders, including
appropriate governance bodies, in line with their expectations.
► Ensure that their leaders are provided with accurate and suffi­
cient information to support them in effective and timely de­
cision making, enabling them to effectively predict the future
performance of the organization.

4.1 What does a Customer want?

As has been said earlier, a customer does not merely buy a product or ser­
vice by paying a price. He is buying a ‘bundle of benefits: called ‘value'. And
he expects 'value' for the money he pays.

For instance, when a customer buys a car, he is looking for a pleasant trav­
elling experience. An insurance product is not merely a paper document in
terms of a policy, but he is buying 'security'. A guest checking into a hotel is
not just hiring a room, but expects a restful stay. And so on.

The concept of quality is subjective and difficult to define. Certain aspects

of quality can be identified. However, ultimately, the judgment of quality
rests with the customer.

The' value' that the customer is seeking to buy is not a single attribute, but
represents a whole set of characteristics:

Dimensions of Product Quality:

► Performance
basic operating characteristics
► Features
11
"ext ra items added to basic features
► Reliability
Probability product will operate over time

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► Conformance
meeting pre-established standards
► Durability
life span before replacement
► Serviceability
ease of getting repairs, speed & competence of repairs
► Aesthetics
look, feel, sound, smell or taste
► Safety
freedom from injury or harm
► Product warranty:
an organization's public promise of a quality product guar- --
-anteeing customer satisfaction.
► Other perceptions
subjective perceptions based on brand name, advertising,
etc

Service Quality Attributes:

► Tangibles: physical facilities and appearance of personnel
► Reliability: ability to provide what was promised
► Assurance: knowledge and courtesy of employees and ability to
convey trust
► Responsiveness: willingness to help customers and provide
prompt service
► Competence: ability of staff to handle customer requests
► Access
► Courtesy
► Communication
► Credibility: Behaviour fostering trust
► Security
► Understanding and Empathy: degree of caring and individual
attention

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The Kano Model identifies three types of Customer Needs:

► Dissatisfiers: expected requirements

► Satisfiers: expressed requirements
► Exciters/delighters: unexpected features
Total Quality Management (TQM) principles, therefore, stress that 'Qual­
ity' encompasses the entire organization, from supplier to customer, and
stress upon a commitment by top management to have a continuing
company-wide drive toward excellence in all aspects of products and ser­
vices that are important to the customer.

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QUALITY IN ACTION: A MESSAGE TO THE STUDENT

Kenneth L. St. Cyr, Corporate Director, Apple Quality Management,
Apple Computer, Inc.

To survive in the fast-paced computer industry, where fortunes

seem to be made and lost overnight, a company must continuously
improve to meet changing expectations for customer value.
Corporate Director of Apple Quality Management Kenneth L. St. Cyr
reveals how Apple Computer, Inc., is focusing on customer value as
a strategy for competing in this dynamic industry.

Apple Computer has always had a reputation of having great, highly

innovative products. When the personal computer industry was in
its in­ fancy, that alone was sufficient to propel Apple to the forefront
of industry leadership.

But in recent years, both our customers and our competitors have told
us that great products alone are not enough to be successful. All
aspects of the customer experience - product, service, sales, and
support - must be top notch in order for Apple (or anyone else) to
succeed. Continuously and systematically improving these areas is
essential. Even if you're number one today, the competition will see
to it that you won't last long unless you're always improving.

Our total quality management journey, name Apple Quality

Management (AQM), is built upon a fundamental belief that
everything we do, every decision we make, is focused on
exceeding customer expectations. As the personal computer
industry has matured, so too has Apple Computer. We have
rigorously employed quality management principles to reduce
cycle time in product development, manufacturing, and
administrative areas, improve product quality, reliability, and
services, and achieve higher levels of customer satisfaction.
Winning on the J.D. Powers Customer Satisfaction Survey in 1991

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4.2 Who should measure?

The basic principles of Performance Management are:

1. If you don't measure results, you can't tell success from failure.

2. If you can't see success, you can't reward it - and if you can't reward
success, you are probably rewarding failure.

3. If you can't recognize failure, you can't correct it.

Measurement supports executive performance review and daily opera­

tions and decision making.

The major benefits of Performance Management are:

► Understand customers and customer satisfaction

► Provide feedback to workers
► Establish a basis for reward/recognition
► Assess progress and the need for corrective action
► Reduce costs through better planning
Empirical survey results have shown that companies that monitor and
measure performance are more likely to:

► be in top third of industry financially

► complete organizational changes successfully
► reach clear agreement on strategy
► enjoy favorable cooperation and teamwork
► have more employee empowerment
► have a greater willingness to take risks

Example: Federal Express:

► 11
We measure everything. Then... we prioritize what processes
are key to the company:'
► Most data collection systems are automated, making it fast and
easy.

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► Seeks internal measures that are predictors for external measures

Example: Ritz-Carlton
► "We only measure what we must. But, we make sure that what we
measure is important to our customers:'
► 50% marketing and financial data; 50% quality-related
productivity data.
► Cost of quality is top priority. Are improvements important to
customers, providing a good return, and done quickly?
Therefore, customer-focused organizations adhere to the following prac­
tices:

► Develop a set of performance indicators that reflect customer

requirements and key business drivers.
► Use comparative information and data to improve overall
performance and competitive position.
► Involve everyone in measurement activities and ensure that
information is widely visible.
► Ensure that data are reliable and accessible to all who need them.
► Use sound analytical methods to conduct analyses and use the
results to support strategic planning and daily decision making.
► Continually refine information sources and their uses within the
organization .
It is thus clear that performance measures should be monitored and mea­
sured across the organization, at all levels, and for all functions. Besides
measurement, the data collected should be collated and circulated to all
the concerned employees, not for record, but for understanding the devia­
tions and take appropriate corrective and preventive actions. Information
dissemination is important. This is the basis of responsibility accounting.

Most organizations today vigorously follow' visual displays' and 'visual

control' in shop floor and other areas to ensure that performance
measures and results reach appropriate levels of the organization . For
instance, daily production, total number of defects, consumption of key
materials or re-

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sources, energy consumption, safety data, etc. are widely displayed and
communicated.

4.3 What to Measure?

There are a host of performance measures and some of the important
measures are given below:

Balanced Score Card (BSC):

We have already seen what a BSC is all about, and how it measures the fol­
lowing:

1. Financial perspective
2. Internal perspective
3. Customer perspective
4. Innovation and learning perspective
The key types of Business Performance Measures are:

1. Customer satisfaction measures

2. Financial and market performance measures
3. Human resource measures
4. Supplier and partner performance measures
s. Company-specific measures

Creating Effective Performance Measures:

► Identify all customers and their requirements and expectations
► Define work processes
► Define value-adding activities and process outputs
► Develop measures for each key process
► Evaluate measures for their usefulness

Performance metrics:
The most important performance metrics used in measuring customer
satisfaction are given below:

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Common Quality Measures:

► Nonconformities (defects) per unit
► Errors per opportunity
► Defects per million opportunities (dpmo)
► Percent reduction in cost of poor quality
► Percent reduction in nonconformities
► Percent of certified suppliers
► Percent reduction in supplier base
► Percent reduction in corrective action cycle time
► Number of customer returns

Cost Measures:
► Percent reduction in data transactions
► Percent increase in materials shipped direct to work in process by
the supplier
► Percent increase in output dollars per employee
► Percent reduction in floor space utilization

Productivity Measures:
► Units shipped per employee
► Units to labour cost
► Equipment downtime
► Capacity utilization
► Order per sales person
► Order entry efficiency

Customer Service Measures:

► Order lead time
► The customer order path
► Delivery metrics
► Customer service and satisfaction metrics

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► The customer query time

► Measuring customer perception of service

Flexibility:
► Percent reduction in cycle time
► Percent reduction in setup time
► Percent reduction in lot/batch size
► Percent increase in number of jobs mastered per employee
► Percent increase in common materials used per product

Reliability:
► Percent of processes capable of Cp = 2.0
► Percent reduction in down time
► Percent reduction in warranty costs
► Percent reduction in design changes
► Percent increase in on-time delivery

Innovation:
► Percent reduction in new product introduction time
► Percent increase in new product sales revenue as a percent of
total sales revenue
► Percent increase in new patents granted
► Customer perception as a leader in innovation
► Percent of management time spent on or leading innovation

Process-Level Measurements:
► Does the measurement support our mission?
► Will the measurement be used to manage change; that is,
actionable?
► Is it important to our customers?
► Is it effective in measuring performance?
► Is it effective in forecasting results?

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► Is it easy to understand and simple?

Cost of Quality (COQ):

► COQ - the cost of avoiding poor quality, or incurred as a result of
poor quality
► Translates defects, errors, etc. Into the “language of management"
- $$$
► Provides a basis for identifying improvement opportunities and
success of improvement programs

Quality Cost Classification:

► Prevention
► Appraisal
► Internal failure
► External failure

Quality Cost Management Tools:

► Cost indexes
► Pareto analysis
► Sampling and work measurement
► Activity-based costing

Return on Quality (ROQ):

► ROQ - measure of revenue gains against costs associated with
quality efforts
► Principles:
Quality is an investment
Quality efforts must be made financially accountable
It is possible to spend too much on quality
Not all quality expenditures are equally valid

Managing Data and Information:

► The following questions need to be asked in managing data and
information:

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► Validity- Does the indicator measure what it says it does?

► Reliability- How well does an indicator consistently measure the
"true value" of the characteristic?
► Accessibility- Do the right people have access to the data?

Importance of Comparative Data:

Wherever possible, comparative data needs to be obtained to evaluate
where the organization stands in comparison to others:

► Comparative data: industry averages, best competitor

performance, world-class benchmarks
► Helps recognize the need for improvement
► Provides motivation to seek improvement

Analysis:
The data once collected needs to be analysed using appropriate tools to
derive or arrive at meaningful conclusions or inferences to facilitate deci­
sion making:

► Statistical summaries and charts

► Trends over time
► Comparisons with key benchmarks
► Aggregate summaries and indexes
► Cause-and-effect linkages and correlations (interlinking)
► Data mining
Over time, every organization should strive to move the level and rigour of
analysis from the basic to advanced.

4.4 Measurement methods:

How do we capture customers ' feedback and expectations, their satisfac­
tion? The following are some ways this can be done:

► Comment cards:
► Formal surveys

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► Focus groups
► Direct customer contact
► Field intelligence
► Complaint analysis
► Internet monitoring
Customer feedback must be obtained on a regular basis and monitored.
This is important for the following reasons:

1. Spot customer dissatisfaction at an early stage

2. Identify relative priorities of quality
3. Bench mark own performance against competition
4. Identify customer needs
s. Identify opportunities for improvement

Customer feedback has become very important in all sectors of business,

more so in the services industry. For instance, customer feedback provides
an essential input in new product development in financial services, in­
dustries, such as Banking, Insurance and Wealth Advisory.

Comment card:
This is a low cost method of obtaining feedback from the customers and is
generally tagged with the warranty card at the time of purchase. The card
can help in obtaining basic information such as Name, Age, Sex, Address,
Income Group and the influences that made the customer by the product.
These types of cards are used widely in the hospitality and Airlines indus­
tries.

Questionnaire:
The Questionnaire is widely used tool for obtaining customer perceptions
about a product or service. They are costly and time consuming to admin­
ister. These services can be administered by mail or by telephone. Various
quality or service parameters are listed in the customer is asked to rank
them as a O - 5 or O - 10 scale. The highest number represents excellent or
highly satisfied
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Focus Groups:
Customer focus group represents another popular tool for obtaining cus­
tomer feedback. Group of customers are gathered in a meeting room to
answer a series of structured questions. The group is guided by a mod­
erator to skillfully probe in to the ideas, thoughts, opinions, perceptions
and prejudices of the participants. The meetings are designed to focus on
both present and future products. The participants are selected to have
the same profile as the target customer. The participants are given some
incentives to take part in the discussions. This method must be quite costly

Customer satisfaction service conducted by independent agencies and

market research firms represent another source of monitoring customer
satisfaction.

Excellence awards, Quality Awards instituted by various bodies such as CII,

Ministries, Business Councils, etc. can provide some information on Cus­
tomer Satisfaction.

Complaint Handling and Complaint resolution is another important tool

in the hands of the organization to understand customer requirements. IN
some organizations a cross functional team is set up to resolve customer
complaints. These enables better coordination and team work among the
departments and also facilitate learning across the departments.

Measuring Customer Satisfaction:

► Discover customer perceptions of business effectiveness
► Compare company's performance relative to competitors
► Identify areas for improvement
► Track trends to determine if changes result in improvements

Example: The Paradise Hotel

The Lobby

► Was the lobby staff friendly and did they welcome you to the
restaurant?
► Were you seated in a timely, efficient manner?
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The Table Area

► Was your table area clean when you were seated?

The Server

► Was your server attentive and there when you needed him/ her?
► Was your server knowledgeable and able to answer your
questions about our food and beverages?
► How was the pace of your meal?

The Food

► How would you rate the taste of your food?

► Please rate the temperature of your food, hot food being piping
hot.
► Please rate your visit on the value for the money.
► Overall, how would you rate your visit
► Would you recommend this Olive Garden to a close friend or rela­
tive?

Scale 1 = poor and Scale 5 = excellent

► Open-ended questions:
What one thing did you like most about your visit?
What one thing could we do to improve your experience at
the Olive Garden?
► Survey form provides address, 800 number, FAX, and TDD
number for hearing impaired

Performance-Importance Analysis:
Performance-Importance analysis is another valuable tool used widely in
measuring customer satisfaction.

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Difficulties with Customer Satisfaction Measurement:

► Poor measurement schemes
► Failure to identify appropriate quality dimensions
► Failure to weight dimensions appropriately
► Lack of comparison with leading competitors
► Failure to measure potential and former customers
► Confusing loyalty with satisfaction

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4.5 Cost of Measurement:

Various performance measures such as, cost of poor quality and other fi­
nancial and non-financial data must help an organization to improve op­
erations and thereby contribute to an improved bottom line.

However, use of performance measure comes with some caveats:

1. The cost of measurement should not be very high

2. Performance analysis should not lead to paralysis
3. Many a time we find organizations cracking a host of measures
some of them relevant and some of them not so relevant. This
leads to information clutter and information over load. This also
leads to a sense of wariness and inertia. People go tired and lose
sight of the key objectives.

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CHAPTER 5 : SUPPLIER RELATIONSHIP MANAGEMENT

5.1 SRM Defined:

The Importance of Suppliers:

'Suppliers' are all those entities that provide an organization with goods
and services to enable the organization to serve its own customers. Every
organization depends on a host of suppliers to meet its complete require­
ments. These may take several forms: Raw materials, intermediates, con­
sumables, equipment, spares, semi-finished goods, finished goods, office
supplies, etc. A number of service providers will also be involved: trans­
port, housekeeping, canteen, hospital, maintenance, etc.

An automobile company may have suppliers who supply steel plates, cast­
ings, tyres, batteries, paints, lubricating oils, auto electricals, lamps, frac­
tional horse power motors, etc.

It is well understood that quality within one's own unit is not enough to
ensure total quality of the finished product. It is important that all the in­
put materials also are of a high standard and quality to achieve zero de­
fects in the finished product. The role of suppliers is thus increasingly be­
coming critical. Their importance is only growing in an era of outsourcing
and global sourcing.

When an organization has a set of quality suppliers, it benefits the organi­

zation in more ways than one:

a. Final product quality is superior

b. Assured and reliable supplies cause fewer disruptions in
production schedule
c. There is no need for incoming inspection, which is increasingly
being recognised as a non-value adding activity.
Thus there has been a gradual shift in attitude towards suppliers - from
one of antagonism and suspicion, to one of trust and goodwill. This has
lead to a number of developments and initiatives in supplier management
and relationship such as:

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a. Lesser number of suppliers with assured orders, a far cry from the
early days of pitting one supplier against the other, and trying to
benefit from their price wars.
b. Vendor-managed inventories (VMI)
The suppliers also benefit in terms of:

a. Larger orders and less variations in order book/ cycle

b. Better margins or price realizations
c. Better material and production planning and scheduling, and im-
proved shop-loading
Further, with advancement in production technology being the order of
the day, there is a greater dependence on suppliers/ vendors, who bring
out technologically superior niche products. For instance, in production
automation, or IT (Information Technology) services such as an ERP (Enter­
prise Resource Planning) package, etc., the supplier not only develops and
installs the product, but also provides training, maintenance and technical
support. In such cases, the reliance on the supplier/ vendor is total.

Thus, today the term suppliers includes all those organizations who pro­
vide some input or support - be it goods or services, small or big - to the
organization. It can be as prosaic as gardening or housekeeping, to con­
tract R&D or technical consulting, or supplying high quality specialised al­
loy castings, or latest technology in automation.

In a globalised business environment, where sourcing takes place across

the globe, the task of managing a highly dispersed network of suppliers
can be quite daunting. In many a case, suppliers with their specialised
knowledge in niche areas, can play a vital role in product development,
faster time-to-market capability, scaling up volumes rapidly and lower
costs.

As the benefit of a collaborative effort and teamwork is increasingly being

appreciated, the relationship with the suppliers has blossomed into one
of' partnership'.

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The term'partnership'is extremely wide, and besides customers, suppliers,

financial institutions, and all others directly related to an organization, can
include academic institutions, research bodies, NGO's, and has been even
been extended to competitors. A case in point is the way telecom
companies share assets such as transmission towers.

Thus, Supplier Relationship Management (SRM) can be defined as the

discipline of strategically planning for, and managing, all interactions with
third party organizations that supply good and/or services to an organisa­
tion, in order to maximise the value of those interactions. In practice, SRM
entails creating closer, more collaborative relationships with key suppliers
in order to uncover and realize new value, and reduce risk.

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The EFQM Excellence Model defines Partnership

Development as follows:

The Concept
Excellence is developing and maintaining value adding
partnerships.

How the Concept is put into practice

Excellent organisations recognise that in the constantly
changing and increasingly demanding world of today
success may depend on the partnerships they develop. They
seek out, and develop, partnerships with other organisations.
These partnerships enable them to deliver enhanced value
to their stakeholders through optimising core competencies.
These partnerships may be with customers, society, suppliers
or even competitors and are based on clearly identified mutual
benefit. Partners' work together to achieve shared goals,
supporting one another with expertise, resources and
knowledge and build a sustainable relationship based on
mutual trust, respect and openness.

Benefits
► Increased value for stakeholders.
► Improved competitiveness.
► Optimising core competencies.
► Improved effectiveness and efficiency.
► Improved chances of survival.
► Shared risk and cost

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CII-Exim Bank model of Business Excellence:

Building Partnerships
Excellent organizations seek, develop and maintain trusting
relation­ ships with various partners to ensure mutual success.
These partner­ ships may be formed with amongst others,
customers, society, key sup­ pliers, educational bodies or Non-
Governmental Organizations (NGOs).
In practice, excellent organizations:-

 Recognize that, in the increasingly demanding world of

today, success may depend on the effective partnerships they
develop.
 Know what their core purpose is and they seek partners to
enhance their capabilities and ability to generate
stakeholder value.
 Establish extensive networks to enable them to identify
potential partnership opportunities.
 Understand partnerships entail working together for long
term, sustainable value enhancement.
 Identify strategic and operational partnerships based on
organizational and strategic needs, complementary
strengths and capabilities.
 Develop partnerships that systematically enable the delivery
of enhanced value to their respective stakeholders through
competencies, synergies and seamless processes.
 Work together with partners to achieve mutual benefit,
supporting one another with expertise, resources and
knowledge to achieve shared goals.
 Build a sustainable relationships with partners based on mutual
trust, respect and openness.

Principles of Supplier Relationships:

Dr. Kaoru Ishikawa has suggested the following 1O principles to ensure
quality products and maintain satisfactory relationships between the cus­
tomer and the supplier:
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1. Both the customer and the supplier are fully responsible for the control
of quality.

2. Both the customer and the supplier should be independent of each

other and respect each other's independence.

3. The customer is responsible for providing the supplier with clear and
sufficient requirements so that the supplier can know precisely what
to produce.

4. Both the customer and the supplier should enter into a non-adversarial
contract with respect to quality, quantity, price, delivery method, and
terms of payments.

5. The supplier is responsible for providing the quality that wiII satisfy the
customer and submitting necessary data upon the customer's request.

6. Both the customer and the supplier should decide the method to eval­
uate the quality of the product or service to the satisfaction of both
parties.

7. Both the customer and the supplier should establish in the contract
the method by which they can reach an amicable settlement of any
disputes that may arise.

8. Both the customer and the supplier should continually exchange infor­
mation, sometimes using multifunctional teams, in order to improve
the product or service quality.

9. Both the customer and the supplier should perform business activi­
ties such as procurement, production and inventory planning, clerical
work, and systems so that an amicable and satisfactory relationship is
maintained.

10. When dealing with business transactions, both the customer and the
supplier should always have the best interest of the end user in mind

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5.2 Difference between transactional procurement

and SRM:
The conventional approach to dealing with suppliers was one of a transac­
tional approach: "You supply, and I pay. End of story' The supplier was on
trial every time, and organizations went through the rigmarole of asking
for quotes every time they wanted an item from a multitude of suppliers,
generally picking the "lowest bidder' There was no effort to forge a rela­
tionship, and the focus was essentially short term.

However, SRM represents a systematic, enterprise-wide (1) assessment of

suppliers' assets and capabilities with respect to overall business strategy,
(2) determination of what activities to engage in with different suppliers,
and (3) planning and execution of all interactions with suppliers, in a co­
ordinated fashion across the relationship lifecycle, in order to maximize
the value realized through those interactions. The outlook is over the lon­
ger term, being viewed as a continuum, and not as individual transactions
which will yield only short term gains.

The focus of SRM is to develop two-way, mutually beneficial relationships

with strategic supply partners to deliver greater levels of innovation and
competitive advantage than could be achieved by operating indepen­
dently or through a traditional, transactional purchasing arrangement.

In many fundamental ways, SRM is analogous to CRM. Just as companies

have multiple interactions over time with their customers, so too do they
with their suppliers - negotiating contracts, purchasing, managing logis­
tics and delivery, collaborating on product design, etc. The starting point
for defining SRM is a recognition that these various interactions with sup­
pliers are not discrete and independent - instead they are accurately and
usefully thought of as comprising a relationship, one which can and
should be managed in a coordinated fashion across functional and
business unit touch-points, and throughout the relationship lifecycle.
5.3 Drivers for SRM:
► ''... Supplier relationship management provides the holistic
approach needed to maximize the suppliers' value to the

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enterprise." - Source: Gartner.com

► "... monitoring supplier health and performance, working col­
laboratively to provide innovative solutions for customers' needs,
and creating a team oriented environment:' - Source: Procure­
ment Strategy Council/Corporate Executive Board.

The 2011-2012 Criteria for Performance Excellence of The

Malcolm Baldrige National Quality Award:

Supply-Chain Management How do you manage your supply

chain? How do you ensure that suppliers you select are qualified
and positioned to enhance your performance and customer
satisfaction? How do you evaluate supplier performance? How
do you deal with poorly performing suppliers?

In order to ensure that customers provide products or services of high

quality at reduced costs, many organizations adopt various techniques
and methods. These include assisting and helping in quality assurance
programmes, solving quality problems, sourcing, financial assistance,
technical assistance, trouble-shooting, facility sharing, transferring assets,
training, incentives, joint product development, joint conferences, reward
and recognition, preferred supplier status, long-term supply contracts, etc.
The most common practices are listed below:
1. Purchasing decisions are based on both quality and cost, and not
just on cost: Instead of adopting cost as the only criterion, and
awarding supply contracts to the lowest bidder, organizations
today look at other important parameters such as quality and
delivery capability.
2. Have fewer suppliers: Against the old practice of having many
suppliers and pitting them against each other, organizations have
fewer suppliers so that they get a better share of the business.
Many organizations have single suppliers. This has greatly
brought down the total number of suppliers, sometimes as much
as 90%.
3. Establish long-term contracts: Such long-term contracts reduce or
eliminate uncertainties in off-take and thus encourage suppliers

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to invest in technology, quality improvement and product

developments and improvements.
4. Measure supplier performance and reward them: Suppliers'
performance is constantly monitored and feedback is given in
terms of defects, etc. Supplier ratings are also done. Top
performers are recognized and rewarded, and given special status
such as"Most Favoured Supplier". In India, for example, Sundaram
Fasteners have won such as a recognition from General Motors
for supply of radiator caps.
s. Develop partnerships and strategic alliances: The relationship
blossoms into a close partnership, based on trust and mutual
goodwill. Joint development of products, setting up Joint
Ventures, leveraging each other’s strength for mutual benefit, etc.
are some such developments.

In recognition of the suppliers' expertise in specific areas, some organiza­

tions enter to 'servicizing' contracts.

Servicizing the transformation from product-to service based enterprise is

a major force in changing how firms manage material input, through­ put,
and output. Redefinition of the firm as a service provider instead of a
product manufacturer means that function, not form, is the source of
added value delivered to the customer. To realize the dematerialization
benefits of such a transformation requires a fundamental realignment of
the supplier-customer relationship. Instead of the traditional incentives to
maximize the volume of physical product sold, servicizing requires a
partnership wherein the financial rewards of reduced material consump­
tion are shared between supplier and customer':

- Quoted from "Servicizing the Chemical Supply Chain" by

Edward D. Reiskin et al, in Journal of Industrial Ecology, Volume
3, No.2 & 3.

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CASES IN SUPPLIER RELATIONSHIP:

A.Construction Equipment Manufacturer:
The company engages with its suppliers the following ways:

a. Long Term Agreements, assuring business

opportunities and enabling planning of capital
expenditure.
b. Financial assistance: Providing Project Financial
assistance and working capital loans through bill
discounting
Technical assistance in process and quality improvements,
troubleshooting, implementation of standards, obtaining of
certifications, motivating them to adopt / comply with international
levels of performance, etc.

B.Utility Power Major:

Long term contracts and agreements for not only fuel, but
also with local authority for water; OEM suppliers for
Maintenance services, spare parts support; Research and
academic Institutions for Research, Technology and
Training;

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CHAPTER 6: STRATEGIC SOURCING

6.1 Definition:
Strategic sourcing refers to structuring of sourcing or purchasing activities
and development of reliable sources of supply to achieve long term strate­
gic competitive advantage in procurement. The competitive factors may
be quality, highly specialized products, cost advantage, delivery reach,
ability to scale up, ability to serve, different geographies, etc.

Strategic sourcing critically evaluates the following parameters:

1. Internal capability or out sourcing.

2. Identification of Vendors and Vendor development.
3. Co-ordination with other functions.

Sourcing:
There are three main types of sourcing: Sole, Multiple and Single.

A sole source of supply exists when there is only one supplier who can
supply the material a customer wants. This can be due to factors such
as, proprietary technology, patents unique access to raw materials due
to geographical advantage etc. This can also happen when a company
is forced to source from its sister units within the company or groups. In
such cases managing supplies is the only significant activity.

Multiple sources of supply exist when there is healthy competition in the

market and the company can source its requirements from two or more
suppliers. There is suppose to be a healthy competition among the sup­
pliers which brings in the advantages of better quality, reduced cost and
better service to the customer. The Multiple sourcing also reduces supply
Chain risks and uncertainties.

Single sourcing is a case when an organization resorts to buying from only

one supplier. A long term contract is entered into, which confers mutual
benefits. The supplier is encouraged to invest in technologies, quality sys­
tems, production facilities, product developments, etc. and the degree of
partnership is very strong between the supplier and the customer. This is

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the ideal situation when both stand to win from the relationship. How­
ever, the risk is that any disruption in the supplier's premises can affect the
production program of the customer.

6.2 Supplier Selection Process:

There comes a time in every organization when it must decide between
producing something internally or outsourcing the requirement.

The following points must be considered before taking any decision:

1. Criticality of the product to the overall performance of the

product or service.
2. Technical and Financial capability within the organization to
produce the material. If it does not exists presently, should the
organization invest in developing the capability
3. The presence of reputed suppliers in the market who can supply
the material at a reasonable quality and cost. If they do not exists
whether the organization is willing to expand time and effort in
vendor development.
4. Long term implications of internal capability verses outsourcing.
Many organizations have considered only the short term aspects
and have gone in for outsourcing, only to regret loss of a key
capability or technical competence in the long run. This had
been felt acutely that the USA had lost its manufacturing edge by
outsourcing to Asian Countries.
The key aspects according to Ishikawa, to be considered in selection and
evaluation of the suppliers are:

1. The supplier understands and identifies the philosophy of the

customer.
2. The supplier has a consistent and reliable management system.
3. The supplier maintains high technical standards as a capability
for future technological innovations.
4. The supplier has a capability to meet the quality and quantity
requirements of the customer

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s. The supplier will maintain confidentiality and can be interested

with customers' property and technical knowhow. This is
important in contract design and manufacture.
6. The price is reasonable and delivery schedules can be meet
without any difficulty.
7. The supplier adheres to the terms of the contract in letter and
spirit.
8. The supplier has quality management systems, which are certified
to International Standards.
9. The supplier has a proven track record of customer satisfaction.
The following information are to be gathered and evaluated in respect of
potential suppliers:

a. Internal facilities and capacity

b. Financial strength
c. Location
d. Industrial relations
e. Brand image/reputation
f. Direct manufacturer or only an agent
g. Plant visits:
Personal assessment of condition of facilities
Production staff capability
Training practices
Quality control systems
Customer base
Management
The following are the supplier evaluation stages:

a. Survey stage
b. Inquiry stage
c. Negotiation stage
d. Experience stage
Formal vendor rating of performance
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6.3 Supplier Relationship:

In the earlier chapter on 'Supplier Relationship Management the impor­
tance of supplier relationship and the various techniques organizations
adopt for the purpose have been discussed in detail.

Organizations expend substantial time and effort to develop and support

suppliers who can provide quality materials or services, and are reliable.

Supplier/ Vendor development is defined as: "The understanding of sys­

tematic planning and effort of continuous nature, directed at creating new
sources of supply with a view to increasing purchasing effectiveness':

It is an extension of source selection process.

Supplier Development is considered important for the following reasons:

► New items hitherto not manufactured

► Technical or time constraints for their manufacture inside
► Existing sources of supply not efficient or located at a distance
► For critical materials to avoid monopoly source situation
► To develop small scale or ancillary industries, especially in public
sector
Source Development activities include the following:

► Providing clear specifications, drawings, necessary tools and

fixtures
► Technical support and guidance during development
► Helping in installing quality assurance systems
► Sharing of information
► Continuous feedback on performance
► Helping in problem solving and process improvement
► Maintaining good relationships based on mutual respect and
trust
► Training of vendor staff

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► Financial support, if necessary

► Assuring substantial level orders for ancillaries
The following are some of the prerequisites for vendor development:

► Commitment to the idea by top management

► Systematic planning of activities
► Allocation of necessary resources
► Close collaborative working
The benefits of vendor development are:

► Conservation of working capital

► Reduced capital investment
► Cost considerations of buying Vs, making
► Adequate and timely availability of materials
► Greater accessibility as small vendors are less bureaucratic
The Key characteristics of supplier relationships are:

► Compatibility of interests
► Mutual need
► Willingness to be open, sharing information as well as the benefits
resulting from the relationships
► Perhaps of greatest importance: trust

6.4 Performance Measurement:

The importance of Performance measurement has already been discussed
in the earlier chapter on 'Customer satisfaction Measurement'. Measure­
ment of performance is extremely important to every organization, and
today all organizations are moving towards a performance-centric ap­
proach. The measures are applied to employees, suppliers and customer­
related operations and functions. The analysis of performance alone can
form a reliable basis for decision-making in terms of continuity, enhance­
ment, reward or levying a penalty of the performers.

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Suppliers are no exception to the rule. In fact material cost works out any­
where between 50% and 70% for most of the industries, and supply/ ma­
terials function is very critical both from the points of view of product per­
formance and capital involved. With increased outsourcing and reliability
on the vendor to assure quality, the evaluation function is central to man­
aging the relationship. HP has a nice way of putting it:"ln God we trust, but
all others must have data".

Supplier rating is defined as: “It is a control system which records, analyzes
and gives a feedback of the performance of vendors to focus on areas of
improvement':

Supplier evaluation provides the following benefits:

1. All suppliers need to be evaluated on relevant parameters of

quality, cost, delivery, responsiveness, etc.
2. Such evaluation will provide a basis for factual communication
and proving feedback to the suppliers.
3. Help in deciding on rewards and recognition, penalties
4. Decide on whether to continue with the supplier enhance his
share of supplies or drop a supplier.
s. Enhance a long term relationship and engagement between the
supplier and the customer.
6. Helps to improve vendors' performance
7. Motivates good vendors through certification
8. educes inspection effort for buyers
9. Assured quality/ delivery of materials
In a supplier evaluation system the key performance parameters are listed
with assigned weightages, with the total aggregating to 100. Each sup­
plier is assessed against each parameters and its weightage and assigned
his core. The aggregate score against each supplier represents his actual
score. A cut off is usually adopted and suppliers scoring below this cut off

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are removed from the vendors list.

Weighted Point Method:

Step-1: Each factor is given appropriate weightage

Example; Quality 35%

Delivery 30%
Price 10%
Service 25%

Step-2: Measurement of each factor

Quality: % defective from the supplied material Delivery:
% of on time delivery
Price: Least offer received/ suppliers offer
Service: Subjective rating

Overall Rating
Factor Weight Absolute Weight adjust-
score ed score
Quality 0.35 90% 31.5
Delivery 0.30 85% 25.5
Service 0.25 87% 22.0
Price 0.10 98% 9.8
Overall Score 88.6

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CHAPTER 7 : OFFSHORING AND OUTSOURCING

7.1 Difference between offshoring and outsourcing:

Offshoring refers to the relocation by a company of a business process
from one country to another - typically an operational process, such as
manufacturing, or supporting processes, such as accounting - i.e., the job
moves offshore. It can refer to production or services offshoring . Today it
can include Research & Development, Design, Product development or
any such key activity. More recently, offshoring has been associated pri­
marily with the sourcing of technical and administrative services support­
ing domestic and global operations from outside the home country, by
means of internal (captive) or external (outsourcing) delivery models.

The term is used in several context s. It is sometimes used broadly to in­

clude substitution of a service from any foreign source for a service former­
ly produced internally to the firm. In other cases, only imported services
from subsidiaries or other closely related suppliers are included. A further
complication is that intermediate goods, such as partially completed com­
puters, are not consistently included in the scope of the term .

The economic logic is to reduce costs. The classic example is that of global
IT majors such IBM, Accenture, and Microsoft having their operations in
India.

Offshore outsourcing is the practice of hiring an external organization to

perform some business functions in a country other than the one where
the products or services are actually developed or manufactured. It can
be contrasted with offshoring, in which the functions are performed in a
foreign country by a foreign subsidiary.

There are four basic types of offshore outsourcing:

► Information Technology Outsourcing (ITO)

► Business Process Outsourcing (BPO)
► Software development
► Knowledge Process Outsourcing (KPO)
The driving factor behind the development of offshore outsourcing has
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been the need to cut costs while the enabling factor has been the global
electronic internet network that allows digital data to be accessed and de­
livered instantly, from and to almost anywhere in the world.

7.2 When to outsource:

Outsourcing:
This has been a classic dilemma many organizations have faced over a
long time. "To make or buy" is the question faced by the Production and
the Cost Managers.

Some of the definitions of outsourcing are given below:

► "Outsourcing is the act of transferring some of an organization 's

recurring internal activities and decision rights to outside
providers as set forth in a contract:' - Strategic Outsourcing, A
Structured Approach to Outsourcing Decision and Initiative,
(1999) Maurice F. Greaver II.
► "Strategic use of outside parties to perform activities, tradition­ ally
handled by internal staff and resources': - Theory & Practice of
Outsourcing by Dave Griffiths

► "Contracting out non-core and non-revenue producing activities

to specialized service providers':
► Unlike traditional practice of contracting, outsourcing is a
strategic management tool that involves organization restructur
ing unlike in contracting. It allows the organization to concen­
trate on its core competencies.

Outsourcing is resorted to mainly in terms of non-core business processes

to outside service providers such as the following:

► Logistics
► Warehousing
► IT Software/Hardware

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► Human Resources
► Payroll processing
► Manufacturing
► Enterprise Resource Planning
Trend in larger organizations is to outsource entire processes.

Nike focuses on what it does best: marketing, and leaves the manufactur­
ing offshore, in places such as Thailand. Nike designs what they are selling.
The Thai manufacturer makes and delivers the products. Nike receives the
products, check them against specifications and quality assurance
standards.

On the one hand producing something internally can confer the following
advantages to the organizations:

a. Quality can be ensured to meet the internal requirements

b. Internal capability and expertise are utilized and enhanced over a
period of time.
c. Cost advantage will accrue to the company.
d. Internal facilities will not remain idle and will be put to use.
e. Technical knowhow will be preserved and maintained within the
organization .
f. Flexibility in production runs can be tailored to meet internal
requirements.
On the other hand outsourcing can bring in the following advantages:

a. Expertise of vendors, who are specialized in the specific areas of

business, can be tapped in the advantage of the organizations.
b. The suppliers can be encouraged to invest in infrastructure,
technologies and capability building to supply improved and
innovative products.
c. The company's own resources can be put to better use to achieve
higher value addition.

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d. The company can concentrate and direct its resources towards its
core competence and outsource all non-core activities.
e. Reduced costs
It has been seen that outsourcing is resorted to not only for cost advan­
tage but also to exploit the specialized knowledge of the vendor. Out­
sourcing can also be resorted to for low value and non-core materials and
functions.

However, the main concerns towards outsourcing relate to loss of exper­

tise in a particular functional area over a period of time and loss of control
through increased dependence on the suppliers for materials and con­
tractual jobs. This may lead to increase in cost over a period of time and
greater supply chain risks and vulnerabilities.

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Case Studies in Supply Chain Risk Management:

Thailand Floods in 2011:

Three months of flooding in Thailand had killed more than 500 people. It
will take several more months for Thailand's many tech factories to re­
cover capacity.The monsoon run-off had swamped more than 1,000 fac­
tories across central Thailand, leaving the world's largest computer mak­
ers without a reliable forecast about when crucial parts will be available
once again. Consumers worldwide could see increase of at least 10 per
cent in the price of external hard drives because of the flooding.
Hurricane Katrina:

On August 29th, 2005, Hurricane Katrina struck the Gulf Coast becoming
the costliest and one of the deadliest natural disasters in United States
history. It destroyed beachfront towns in Misssissippi and Louisiana and
displaced more than a million people. When levees in New Orleans were
breached, 80% of the city was submerged by the flooding. About 20%
of its 500,000 citizens were trapped in the city without power, food, or
drinking water. Estimates of the losses ranged from $9 billion to $25 bil­
lion. The affected area's ports moved a large fraction of the nation's im­
ports-including critical oil and gas supplies-as well as roughly half its
exports of agricultural commodities like corn and soyabeans. Most of the
region's oil and gas rigs were shut down due to the hurricane. Substan­
tial damage was done to drilling rigs, refineries and port facilities.

Bridgestone Tyre Plant in Japan:

A major fire broke out on 8th Sept.2003 in the rubber-mixing plant - Ku­
roiso, Tochigi, the main tyre plant in Japan (out of 9), contributing 13% of
domestic output. The production per day was 5,700 nos. for trucks and
buses, and 16,300 for passenger cars. 80 fire engines and 400 fire fighters
fought the fire and brought it under control. The fire raged for 24 hours and
was extinguished after 48 hours. 5,000 people were evacuated, and the
reported loss to property was 10 billion Yen ($85 million). A 3-sto­ reyed
factory building and 100,000 nos. tyres got burnt in the incident. Further,
the plant was shutdown for over one month and production was shifted to
other units.

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It should however be realized that these concerns can be managed bet­

ter through developing robust partnerships with reliable suppliers and a
sound relationship management based on trust, transparency and mutual
benefit.

The three phases of outsourcing are:

1. Internal evaluation of the company's current and long term needs
and capabilities, and cost efficiency.
2. Decision to outsource and selection of vendors.
3. Managing partnership and relationship.

7.3 Outsourcing Caveats:

The important caveats relating to outsourcing are:

1. Take a long term view of the issue.

2. Ensure that the organization's long term interests and capabilities
are not compromised.
3. It really helps in focusing on core competency.
4. Cost is not the only decision criterion. Quality and customer
satisfaction are also taken into account.
s. Manage through facts and data.
6. Build a long term relationship with the outsourcing partner.

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CHAPTER 8: MANAGING LOGISTICS SERVICE PROVIDERS

1PL - First-Party Logistics

An enterprise that sends goods or products from one location to another
is a 1PL. For example, a local farm that transports eggs directly to a
grocery store for sale is a 1PL.

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2PL - Second-Party Logistics

An enterprise that owns assets such as vehicles or planes to transport
products from one location to another is a 2PL. That same local farm
might hire a 2PL to transport their eggs from the farm to the grocery
store.

3PL - Third-Party Logistics

In a 3PL model, an enterprise maintains management oversight, but
outsources operations of transportation and logistics to a provider who
may subcontract out some or all of the execution. Additional services
may be performed such as crating, boxing and packaging to add value
to the supply chain. In our farm-to-grocery store example, a 3PL may be
responsible for packing the eggs in cartons in addition to moving the
eggs from the farm to the grocery store.

4PL - Fourth-Party Logistics

In a 4PL model, an enterprise outsources management of logistics
activities as well as the execution across the supply chain. The 4PL
provider typically offers more strategic insight and management over the
enterprise's supply chain. A manufacturer will use a 4PL to essentially
outsource its entire logistics operations. In this case, the 4PL may
manage the communication with the farmer to produce more eggs as
the grocery store's inventory decreases.

5PL - Fifth-Party Logistics

A 5PL provider supplies innovative logistics solutions and
develops an optimum supply chain network. 5PL providers seek to gain
efficiencies and increased value from the beginning of the supply chain
to the end through the use of technology like blockchain, robotics,
automation, Bluetooth beacons and Radio Frequency Identification
(RFID) devices.

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8.1 Selection of 3PL service providers:

Third Party Logistics Providers (3PL): 11••• is the function by which the own­
er of goods outsources various elements of the supply chain to one 3PL
company that can perform the management function of the clients in­
bound freight, customs, warehousing, order fulfillment, distribution, and
outbound freight to the clients customers:'

Many organizations are increasingly focusing on their core competence

and are outsourcing non-core activities to organizations whose core com­
petence is handling those activities. With globalization organizations
reach out to customers spread across the globe. This perforce warrants
an understanding of international clearing regulations and practices. The
outsourcing activities can range from a simple packaging to billing pro­
cess, freight forwarding, warehousing, documentation including export
documentation, transportation, etc. Over the years, many companies
have resorted to engaging specialist third party logistics service provid­
ers. Some of these service providers provide integrated services spanning
the whole or part of the spectrum listed above. The services include sales,
distribution, storage, inland and overseas transportation, warehousing,
customs inspection, clearance and forwarding, etc.

This has given rise to a whole new industry, calling for skill development,
capability building, infrastructure development, investment in technology
and so on. Logistics is increasingly becoming a highly valued and special­
ized business, managed through sophisticated technologies.

The names of FedEx, OHL, and United Parcel Service who are truly global
giants come readily to our mind. Our own India Post has also identified
logistics as a niche and growth industry and is offering a range of services.
Some of the big private players in India are TVS Logistics, GATI and Safe
Express.

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Supply Chain Management includes many logistics activities such as Infra­

structure management, facilities management, inventory management,
warehousing and transportation. Most of these services are eminently
suitable for outsourcing.

A logistics service provider provides his knowledge, experience, technol­

ogy, infrastructure and management to offer improved processes and
dedicated specialized service to the principle.

Advantages:
Focus on Core Competencies

► Saves Company’s limited resources to concentrate on what it does

best.
► Ryder Dedicated logistics and GM's Saturn - Ryder fully takes care
of Saturn's logistics needs; Saturn concentrates on manufactur­
ing.
Best Practices

► Organizations may not always follow best practices. Outsourcing

logistics to third party logistics allows companies to implement best
practices. This allows organization to achieve best performance.
► Enhanced technological capabilities and flexibility
► Use of information technology has enhanced the efficiency of lo­
gistics operations. TPL often invest in these technologies to pro­
vide competitive services.
Investment

► Organizations can save considerable amount of investment that

may be required in building logistics assets, networks and facilities
like warehouses. Companies can outsource these requirements
by outsourcing logistics and invest in developing their core
processes.

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Economies of scale
► 3PL who own assets would have considerable size, large
ustomer base, and considerable resources, which in turn mean
economies of scale.
A third party or an integrated logistics service provider can provide the
following valuable services (excerpted from Supply Chain Management
- Process, System, and Practice by Dr.N.Chandrasekaran, Oxford
University Press):
1. A company like TVS logistics provides a range of services such as
vendor managed inventory, JIT, and Milk runs of the Automotive
and Auto components Industry. The efficient handling of these
functions pro­ vides a high value to the companies customers.

2. A company like Transport Corporation of India offers Supply chain

solutions through an appropriate supply chain design and
customerising various facets of logistics management. The company
has many organizations within its hold, each specializing in some
aspect of logistics such as Shipping, freight forwarding and customs
clearing.
3. A company like Safe Express provides service to its clients through
shear geographical and asset based. It covers 550 destinations
spread across 28 states and 7 union territories and managers
warehousing space exceeding 3 million sq.ft. It has over 3,000
vehicles covering more than 1000 routes, linked through 41 super
hubs and hubs.
4. Expeditors, a U.S based Logistics company, operating in India
provides Integrated Logistics services and helps customers to reduce
costs, in­ crease order visibility, reduce surplus inventory, reduce
delivery cycle times, etc.

Third party logistics service providers are therefore selected on the basis
of the USP that matches with the customer expectations. It can be
expertise in specific industry segments, wide distribution network and
infra­ structure, a range of supply chain solutions or cost reduction
capability.
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Disadvantages:
Cost

► Outsourced logistics may cost more than running in-house

operations.

Customer orientation of 3PL

► How customer oriented or flexible is the 3PL is important. These

intangible benefits need to be carefully evaluated.
Asset owning v/s non-asset owning 3PL

► Whether 3PL owns assets or does not own assets should be

considered in decision-making.
► 3PL who own assets would have considerable size, large custom­
er base, and considerable resources, which in term mean econo­
mies of scale. On the other hand they may tend to favor their own
divisions and may not be flexible enough.
► Non-asset owning 3PL's may not own assets but they would tend
be more flexible, allowing them to tailor services to suit the client
needs

8.2 Commitment to Communication, Relationship

and Change:
The major bottle necks in the growth of 3PL services are: Poor network,
poor or no competency levels, unsatisfactory IT capability and high costs.
3PL service providers on the other hand, complain against low remunera­
tion for the services provided and comparison against unorganized service
providers. Their view is that they are not compensated adequately for the
expertise and the investments they make in infrastructure and manpower.

However, the situation is expected to change with increased globalization,

greater tendency to outsource as organizations want to stick to the core
competence, increase in customer demands and requirements and new
technologies that can enable the logistics service provider to perform bet­
ter with greater speed and efficiency. There has to be better communica­
tion between the principal and the service provider, and they should work

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at building a relationship, as they would do with any important supplier /

vendor.

8.3 Service Level Agreements (SLA):

Organizations enter into Service Level Agreements (SLA) with Logistics
service providers for the segment of service they provide - it can be pack­
aging, distribution, transportation, warehousing or exports. The scope
may extend to billing, inventory monitoring, handling customer returns,
insurance and providing management information system (MIS) reports.
Organizations just concentrate on Production and Marketing. For in­
stance, an Automobile Company can outsource its spare parts, inventory
management and distribution function to a Logistics company who will
not only take care of these spare parts produced by the company, but will
also receive store, package and redistribute the bought out items from
the suppliers of the parent company. They will be responsible for kitting,
repackaging ensuring full or partial container loads and also take care of
documentation including export documentation. An international tyre
company could decide to source materials from its one of its supplier in a
low cost location in Asia and move the materials to Europe. All this func­
tions are completely handled and managed by Logistics Companies .

SLAs clearly spell out the mutual responsibilities between the principle
and the logistics company. The key performance measures of the LSP are
clearly spelt out in the SLAs. This may improve inventory turnover, billing
accuracy, transportation cost, percentage of goods damaged during han­
dling and storage and transportation, response times, etc.

8.4 Monitoring Performance:

The most important metrics used in monitoring the performance of logis­
tics service providers are given below:

Common Quality Measures:

► Errors per opportunity

► Percent reduction in nonconformities
► Percent reduction in corrective action cycle time
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► Number of customer returns

Cost Measures:

► Percent reduction in data transactions

► Percent increase in output dollars per employee
► Percent reduction in floor space utilization
Productivity Measures:

► Units shipped per employee

► Units to labour cost
► Equipment downtime
► Capacity utilization
► Order execution efficiency
► Turnaround time
Flexibility:

► Percent reduction in cycle time

Reliability:

► Percent of processes capable of Cp = 2.0

► Percent reduction in down time
► Percent increase in on-time delivery
Process-Level Measurements:

► Does the measurement support our mission?

► Will the measurement be used to manage change; that is,
actionable?
► Is it important to our customers?
► Is it effective in measuring performance?
► Is it effective in forecasting results?
► Is it easy to understand and simple

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Bibliography:
1. The Excellence Model Brochure 2010 of CII-Exim Bank Excellence
Award.
2. Total Quality: Management, Organization, and Strategy, James
W. Dean, Jr., and James R. Evans, West Publishing Company, 4th
Edition, 2003.
3. Total Quality Management, Dale H.Besterfield, et al, Pearson
Education, 3rd Edition.
4. Quality Management, Donna CS.Summers, Pearson Education,
1st Indian Edition, 2005.
s. The Future of Competition: Co-Creating Unique Value with
Customers, C.K.Prahalad and Venkat Ramaswamy, Harvard
Business School Press, 2004.
6. "CRM at the Speed of Light: Capturing and Keeping Customers in
1
Internet Real Time by Paul Greenberg, Tata McGraw-Hill, second
'

edition.
7. Supply Chain Management - Process, System, and Practice by
Dr.N.Chandrasekaran, Oxford University Press, 2010.

Beware of Dissatisfied Consumers: They Like to Blab

It's cold and rainy and the parking lot outside the store is packed, except for
a spot way out in the corner. The shopper pulls up, only to find a shop­ ping
cart blocking the space. Inside, the store is jammed. The digital cam­ eras
are hard to find, and it's impossible to know why one costs $150 and another
$300.Thetwo models that are on sale are out of stock, and it takes a clerk
five minutes to bring another one from the back of the store. At checkout,
the line is stalled while those on either side are flowing smooth­ ly. Finally,
when the customer reaches the cashier, he is told his $25-off coupon is not
valid until the next day.
Wharton marketing professor Stephen J.Hoch, who suffered through
this scenario first hand during a recent shopping trip, says customers are
bound to talk about these kinds of experiences. And, according to new
Wharton research, such word-of-mouth communication should be a big
cause of concern to retailers.

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Results of The Retail Customer Dissatisfaction Study 2006 conducted by

The Jay H.Baker Retailing Initiative at Wharton and The Verde Group, a To­
ronto consulting firm, in the weeks before and after Christmas 2005 show
that only 6% of shoppers who experienced a problem with a retailer con­
tacted the company, but 31% went on to tell friends, family or colleagues
what happened. Of those, 8% told one person, another 8% told two peo­
ple, but 6% told six or more people. "Even though these shoppers don 't
share their pain with the store, they do share their pain with other people,
apparently quite a few other people;' says Hoch.

Overall, if 100 people have a bad experience, a retailer stands to lose be­
tween 32 and 36 current or potential customers, according to the study.

The complaints have an even greater impact on shoppers who were not di­
rectly involved as the story spreads and is embellished, researchers found.
Almost half those surveyed, 48%, reported they have avoided a store in
the past because of someone else's negative experience. For those who
had encountered a problem themselves, 33% said they would "definitely
not" or "probably nof' return. "This storytelling has even more impact on
the people the story is told to than the people who told the sto ry:' says
Hoch. The data is based on a survey of l, 186 shoppers.

Those surveyed were asked to discuss their most recent shopping experi­
ence. Half said they had at least one problem. On average, survey respon­
dents reported experiencing three problems on the shopping trip, during
which they spent an average of $163. The top three categories of mer­
purchased were clothing, 23%; groceries, 16%; and electronics, 12%.

Paula Courtney, president of The Verde Group, says the exponential power
of negative word-of-mouth lies in the nature of storytelling. "As people tell
the story the negativity is embellished and grows," she says. For example,
the first time the story is told, it might be about a customer service
representative who was rude. By the time the third or fourth person hears
the story, the customer service representative becomes verbally abusive.
"To make a story worth telling, there has to be some entertainment value,
a shock value/' says Courtney. "Storytelling hurts retailers and entertains
consumers:'

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Why don't shoppers confront the retailer directly? "If they were boiling
mad, they would complain to the management during the store visit or
maybe after, but they don't do that very often," says Hoch. "Some people
figure it's going to happen again and they can't do anything about it. They
are resigned to it. But the main reason they don't complain is it's too dif­
ficult to go out of their way to deal with every service slight:'

Indeed, the survey showed that 46% of those who had a problem expect
they would definitely or probably experience the same problem in the fu­
ture.

Jammed Parking Lots, Crammed Merchandise Racks

Parking was a major source of aggravation for shoppers, according to the
survey. It topped the list of problems, with 40% of those surveyed report­
ing dissatisfaction in the parking lot.

According to William Cody, managing director of the Baker Initiative, park­

ing problems set the stage for customers to “arrive angry: ‘which can make
them more likely to have a troubled shopping experience. Most retailers,
he says, don't consider the parking lot to be part of their operations, but
he advises them to take a closer look at their landlord's management of
parking problems and try to come up with creative solutions.

He notes that during the Christmas selling season one mall in New Jersey
hired people to wave flags -- indicating available parking spots -- at shoppers
circling to find space. Even if this doesn't speed up the parking process,
Cody says the presence of the flag wavers might provide some
psychological comfort to shoppers by signaling the stores were at least
attempting to address their concerns.

In addition to parking problems, shoppers surveyed complained that it

took a long time for them to be waited on (24%) or to pay (33%). Shoppers
who had to wait for service complained about it to 2.1 other people, on
average, and those who had to wait a long time to pay told an average of
1.4 people.
Customers' time has become an important part of the retail value equa­
tion, along with price, merchandising and other traditional components

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of the industry, according to Courtney. "Retailers haven't caught up to the

phenomenon that consumers have no time. Time is a rare and precious
thing:'Yet because the Internet allows shoppers to buy around the clock,
there is more pressure on retailers to respect their customers' time. "The
Internet has erased all the boundaries that existed with shopping in terms
of when you can shop:'

Courtney told about her own experience buying a briefcase in an airport

shop in Philadelphia. She used her mobile phone to call her husband in
Toronto and ask him to go online to research the brand. He discovered that
the same model, which was on sale for $475 in the airport, was avail­ able
online for $230. Courtney used the information to negotiate a 50% reduction
in price at the airport store."We are much savvier shoppers;' she says. "We
have no time and we don't want to overpay all the more reason retailers
have to worry:'

Meanwhile, she adds, retailers continue to focus on merchandise, jamming

stores with inventory that overwhelms customers and cuts into the time
they have to shop. According to the survey, shoppers are likely to tell 2.5
people, on average, about their inability to find an item because the store
was cluttered with merchandise. "Retailers are putting as many jeans and
shirts out as they can get on the racks:' In the end, she points out, retailers
will wind up reducing the price on merchandise to make up for the
negative experience, eroding their profit margins.

Gatherers vs. Grazers

According to Hoch, the survey shows some slight differences in attitudes
among shoppers who were reporting their experiences at a mass merchant
versus a specialty store."People who are in a specialty store are more in the
pleasure-seeking experience, while people going to a mass merchant are
on a mission:'

He notes the study did not find huge differences in the attitudes of male
and female shoppers, although men were more likely to complain. "It's
clear that males are hunters and gatherers and females are grazers and
gleaners. When the male is frustrated in his attempt to get the task accom­
plished, he is more likely to be irritated. Females are more interested in the
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customer service interaction:'

Cody says retailers historically have paid a great deal of attention to how to
satisfy the customer, but have not been too interested in finding out what
makes them dissatisfied. "In retail, it's hard to focus on the dissatisfied
because your customers are anonymous, unlike a direct sales or business-
to-business model. Wal-Mart has 100 million shoppers a week, so it's hard
to do. Historically it has focused more on product and experience as a way
to create satisfaction:'

And despite the value in learning about consumer gripes, retailers have
resisted asking their customers what they do wrong for fear of stirring up
negative thoughts, Courtney adds. "They have been reluctant to present
consumers with a laundry list of things they may have experienced be­
cause it would turn people off:'

Retailers, Cody suggests, need to find ways to get customers to share com­
plaints with management, not friends and family. One way is for retailers to
ask customers to check a box on their credit card slip indicating they had
a problem at the store. Retailers could then attempt to follow up, or give
the customer a phone number or web address to make their complaints
directly. If nothing else, he says, it would give the customer a chance to
blow off steam. That could prevent them from spouting off to others who
might then embellish the experience and make matters that much worse
for the retailer.

Courtney recommends that retailers pay closer attention to recruitment

and hiring of front-line sales people and other workers with direct cus­
tomer contact. “The least-trained, lowest-paid people are the ones you put
in front of your customers, particularly during the Christmas season:'

As for Hoch, good cheer goes a long way for retailers at any time of year, he
says. "Retailers that are responsive and friendly are more likely to smooth
over issues than those that don't try to be as friendly as possible. Maybe
something as simple as a greeter at the beginning of the store or at the
end would help. Some people say the personal touch doesn't matter, but
I disagree:'

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Consumers, too, can take steps to head off dissatisfying shopping trips,
adds Courtney. First, they should take their complaints directly to the re­
tailer."Don't we all, as consumers, benefit from telling the company?" she
asks."We recommend that the first thing is to complain to the person clos­
est to the problem. If someone is rude, confront that person. Or if you don't
want to do that, take it to the store manager:'

Customers should never escalate the problem, she cautions. "We encour­
age complaining, not yelling. It never pays to be abusive as a customer r.
You might just be escorted to the door if there is an emotional experience.
If something has made you very upset, don't do anything about it until
you can let your emotions pass:'

She suggests consumers go back the next day or make contact by tele­
phone or in writing. "Be as factual as possible. It lends credibility to your
story and makes you not sound like a crazy lunatic:' In addition, consumers
should shop around and not return to stores where they had a bad experi­
ence."The erosion of business is the only way to wake up retailers, to get
them focused on the customer's experience:'

Finally, if a retailer refuses to respond to dissatisfied customers, shoppers

should feel free to spread the word."If all else fails, we do encourage you to
tell all your friends and family. Don't tell five people, tell 35 people;' says
Courtney. "Retailers need to know that if they don't listen, it will hurt their
bottom line."

From the Wharton Issue: March 8, 2006

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IKEA Case Study: Home, Swede Home Budget

furniture chain Ikea is storming America very slowly.
And that's just the way the company likes it.
Look around the average college grad's first apartment, and you'll prob­
ably find it: a distinctive bookcase, an end table, maybe a bed. It has clean
lines and blonde wood, and if you ask the owner where he bought it, he'll
recall a scene in a giant furniture store. There he stood, perhaps with a bel­
lyful of Swedish meatballs, thinking,"Man, this is cheap:' Then he grabbed
the flat box, lugged it to his car, took it home, and assembled the contents,
a process that took two hours and required the use of no fewer than three
expletives. This is the formula made famous by Ikea, the Swedish furni­
ture company that's been helping young people furnish apartments and
starter homes for more than 50 years.

Ikea has been winning fans in the U.S. since 1985, albeit slowly: In all that
time, it's opened just 15 American stores. Ikea's is a peculiar growth strat­
egy glaciers have moved more quickly. But this privately held business has
an old European way about it, more thoughtful and traditional than ag­
gressive and adventurous. Ikea will never be a fast-growing empire like Gap
but then, at a time when Gap is struggling with too many stores, Ikea seems
to be riding out the recession quite nicely. "They are a very judicious
company:' says Kurt Barnard, president of Barnard's Retail Consulting Group
and Trend Report in Upper Montclair, New Jersey. "They don't act
spontaneously or fly by the seat of their pants:'

Ikea's roots lie in 1930s Sweden. That's where lngvar Kamprad, the five­
year-old son of local farmers, began peddling matches and Christmas
cards. By age 17, Kamprad had moved on to belts, watches, and writing
instruments. As recounted in Leading by Design: The Ikea Story, Kamprad
became obsessed with finding the right merchandise from suppliers, ne­
gotiating a good wholesale price, and calculating the optimal selling price.
By 1951 he was operating a mail order furniture catalog under the name
Ikea. The catalog business grew, but it had limited potential: Customers
were leery of buying furniture sight unseen. So in 1953 Kamprad opened
a showroom in the village of Almhult, where customers could examine his
wares before placing an order (deliveries were still mainly by mail). The
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store looked nothing like a modern-day Ikea outlet, but there was one
similarity: food. From the outset, Kamprad believed in serving rolls and
coffee to shoppers so they wouldn't leave the store because of hunger.
"No good business is done on an empty stomach," he said. But food alone
couldn't overcome the downsides of the mail-order model. So in the late
1950s, Ikea shifted to selling unassembled "knock-down" furniture directly
from the store. The new cash-and-carry model freed Ikea and its
customers from having to arrange delivery-a big logistical challenge in
the furniture industry-and allowed the store to keep a large inventory of
legless tables and flat-boxed, unassembled bookshelves, which stacked
easily. By the 1960s, Ikea had opened its first suburban location. Despite
the changing concept, the core mission remained the same: selling stylish
furniture at low prices, which Ikea maintained by using its size to exert
bargaining power over suppliers.

With that formula in place, this risk-averse company took a big plunge,
opening shops outside of Sweden for the first time. Furniture retailing isn't
an obvious industry for international expansion, says Christopher Bartlett,
a Harvard Business School professor who's studied Ikea. Customers' tastes
in furniture vary across different regions, and local firms can usually bet­
ter match products with customer preferences. Plus, the size and weight
of the merchandise make shipping costly. But Kamprad decided to plow
ahead. "He was driven by a vision that he could bring well-designed fur­
niture to people of modest means, and he pursued that vision with a pas­
sion;' Bartlett says. After expanding further into Europe, the chain opened
its first U.S. store in 1985, near Philadelphia. Americans were delighted by
the low prices; within a few weeks, the shelves were bare. Soon custom­
ers were driving to the store from as far away as Boston. Locations quickly
went up in Baltimore and just outside New York City in Elizabeth, New Jer­
sey, and Hicksville, Long Island.

To please Americans, Ikea had to make some adjustments. The best ex­
ample came in the bed department. American notions of bed sizes-twin,
queen, king-aren't a global standard, and Ikea was selling smaller, Eu­
ropean-size beds that wouldn't accommodate the bedding Americans
already owned. The company also sold European-size linens and mat­
tresses at its stores, but customers would be locked into buying from Ikea
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for as long as they owned the bed not a popular concept. Ikea eventually
switched to the U.S. sizes, and sales increased.

But some of the company's hallmarks remained constant. Its furniture is

distinctly Scandinavian, with sleek lines, tailored upholstery, and lots of
light-colored wood. Many American homes, in contrast, featured Barcalo­
ungers, overstuffed couches, and dark-stained country furniture. Ikea didn't
totally cave in to Americans' design preferences; instead, the chain made
smaller compromises and banked on the notion that its younger, well-
educated consumers would migrate toward Ikea's more sophisticated
designs. Over time, they have. Ten years ago Ikea couldn't get Americans
to buy furniture in its lightest-colored woods, such as birch or beech. Today
birch and beech are its most popular lines.
Ikea's expansion strategy has remained just as conservative. Given their
crowded parking lots, Ikea stores would seem ripe for cloning in every big
U.S. market. But the company has moved slowly, keeping locations con­
fined to a handful of East and West Coast cities, with Chicago and Houston
the only exceptions."There are a lot of areas in the U.S. we know we can be
successful in;' says Kent Nordin, U.S. marketing and sales manager , citing
Atlanta and Florida as examples. "As tempting as it would seem, it doesn't
make sense to jump in there and open stores, and have long and expen­
sive distribution lines that's how you kill yourself'

So Ikea's plan is to add stores in markets where it has a presence already,

instead of breaking ground in new cities. The strategy makes sense on a
number of levels. Having several locations around a single city minimizes
warehousing costs, and it brings economies of scale to advertising: A sin­
gle ad in The New York Times, for instance, can drive sales to both the New
Jersey and Long Island locations. And while there would seem to be a limit
to the number of supersize Ikea stores a market can support, the company
says many of its outlets are still too crowded at peak times.

Caution isn't the only brake on Ikea's expansion. In several cities, it's been
hit with opposition. In 1999, for instance, the company announced plans to
build a store in New Rochelle, a suburb just north of New York City. This third
New York area outlet would have completed a ring of the city and given
affluent Westchester County residents easy access. Then the locals
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started complaining.

"We were not anti-Ikea:' says Laura Lovejoy, a former advertising executive
who helped lead community opposition in New Rochelle. Her group ob­
jected not to the company but to the location it chose for its outlet smack
in the middle of a residential neighborhood. The store would have dis­
placed homes, businesses, and churches, she says. There was no good ac­
cess from the local interstate. Faced with protests, Ikea withdrew its plans
for a New Rochelle store in early 2001.

Big-box retailers face other hurdles. While Ikea has been restrained in its
expansion, companies such as Wal-Mart and Home Depot have saturated
so many of their markets that some experts see a new innovation coming
one that Ikea might try, too."There are not a lot of places you can put an
Ikea store and make it profitable," says Carl Steidtmann, chief economist at
Deloitte Research."lt takes an enormous volume:' ln fact, according to Ber­
til Torekull, author of Leading by Design, two thirds of Ikea's U.S. locations
were losing money in 1993, and by 1996 only half were profitable. If huge
outlets aren't feasible in some markets, Ikea could try to tweak the concept
and create smaller stores a move Home Depot and Wal-Mart are currently
attempting. But changing the formula entails big risks. Says Steidtmann:
Once you downsize the store,"it's a very different business:'

But none of that seems destined to happen very quickly which is just the
way the founder wants it. In Leading by Design, Kamprad says:" We want
to grow at our own pace so that we keep up, not just with what is new but
also develop what we already have." For now, Ikea's managers are pleased
with their success. Sales in the U.S. accounted for 13 percent of Ikea's $9.6
billion in 2001 worldwide sales, and 8,000 of the company's 65,000 work­
ers are in North America. "This market used to be called the graveyard of
European retailers. We're one of the few that's managed to adapt and sur­
vive," Nordin says. And while there will never be an Ikea in every town, the
company does envision a larger future than its recent past suggest s. Says
Nordin: "Our dream would be to open 50 North American stores in the next
1O years:'

This article originally appeared in the May 2002 issue of MBA Jungle

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 About us
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the
development of India, partnering industry, Government, and civil society, through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive
role in India's development process. Founded in 1895 and celebrating 125 years in 2020, India's premier
business association has more than 9100 members, from the private as well as public sectors, including
SMEs and MNCs, and an indirect membership of over 300,000 enterprises from 291 national and regional
sectoral industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and
enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized
services and strategic global linkages. It also provides a platform for consensus-building and networking on
key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship
programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated
and inclusive development across diverse domains including affirmative action, healthcare, education,
livelihood, diversity management, skill development, empowerment of women, and water, to name a few.
India is now set to become a US$ 5 trillion economy in the next five years and Indian industry will remain the
principal growth engine for achieving this target. With the theme for 2019-20 as 'Competitiveness of India Inc -
India@75: Forging Ahead', CII will focus on five priority areas which would enable the country to stay on a
solid growth track. These are - employment generation, rural-urban connect, energy security, environmental
sustainability and governance.
With 68 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia, China,
Egypt, France, Germany, Indonesia, Singapore, South Africa, UAE, UK, and USA, as well as institutional
partnerships with 394 counterpart organizations in 133 countries, CII serves as a reference point for Indian
industry and the international business community.
To address the need of sharpening India Inc’s competitive edge through better Logistics and Supply Chain
practices, CII Institute of Logistics (CIL) was established in 2004 by the confederation of Indian Industry as a
center of Excellence in Logistics and Supply Chain. With a relentless aspiration to enhance logistics
competitiveness in the industry, CIL provides a complete range of services such as:
 Supply Chain Consultancy
 Corporate Training
 Research
 Warehouse Certification
 Supply Chain Transformation

Confederation of Indian Industry

Phase II, “B” Block, 9th Floor, IITM Madras Research Park , Kanagam Road , Taramani.
Chennai -600 113, Tamil Nadu , India
Phone : +91-44-66360300 Website : www.ciiscmconnect.com / www.cii.in
email : scm@cii.in
Reference Material for
SCM Pro

Module 4
The Role of Information Technology in
Managing Supply Chain Effectively
 Reference Material for SCM Pro

Disclaimer

Certain commercial equipment or software is cited in this document in

order to illustrate a concept or exemplify a feature. This citation should
neither be construed as a recommendation or endorsement by the
Confederation of Indian Industry (CII) nor that those equipment and
software are the best suited for the situation.

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Table of Contents
THE ROLE OF INFORMATION TECHNOLOGY
IN MANAGING SUPPLY CHAIN EFFECTIVELY
Introduction ............................................................................................ .7
Fundamentals of Information Technology ................................................ 9
Need and Role of Information Technology ............................................10.
Software Upgrades .................................................................................12
Customer Service ...................................................................................... 1.2
Mass Customization ................................................................................ 13
Need for Real Time Information ...................................................... ..13
Need for Information Integration ......................................................... 14
Need for Real Time Collaboration........... .................. .. ........... ..................16
Functions of an Information System ....................................................... 18
Aspects of Supply Chain lntegration ................................................... 18
Laws of Supply Chain Management. ...................................................... 19
Facilities ................................................................................................. 20
Inventory ............................................................................................................ 21 ..
Transportation .......................................................................................... 2.3
Enterprise Resource Planning............ ........ ...... ......... .. ........................ .2..8...
Need for ERP ............................................................................................. 2.8
Evolution of ERP .................................................................................... 29
ERP Systems Defined .................................................................................30
Benefits of ERP ........................................................................................... 3.2
Requirements of an ERP Package ......................................................... 32
Selecting an ERP Package ..................................................................... 3.3
ERP Vendors ...............................................................................................34
SCM Software .........................................................................................3.6
Carrier Management .............................................................................. 36
Transportation Management: .................................................................. 3
.7
Distribution Management: .................................................................. 38
Warehouse Management System ........................................................... 4
.0
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Electronic Commerce and E-Procurement ............................................. 42

Introduction ............................................................................................. 4..2.......
B2B Electronic Exchanges .......................................................................... 45
Electronic Data lnterchange....................................... ............ .............. .48.
Introduction ......................................................................................... 48
Hardware Needed for EDI System ......................................................... 48
Value Added Network (VAN) .............................................................. 49
Benefits of EDI ....................................................................................... 49
Demerits of EDI ......................................................................................... 5
..0
..
EDI Standards .............................................................................................50
EDI Software .......................................................................................... 51
Tracking and Tracing .............................................................................. 52
Introduction ......................................................................................... 52
Bar Codes ................................................................................................... 53
Symbologies.......................................................... .......................................... ...5.3
......
Choosing A Symbology .......................................................................... 54
UCC Manufacturing Numbers ............................................................ 57
How To Get A Barcode? ..............................................................................58
UPC Tags/Tickets............................................................................ .................. 59
Radio Frequency Identification (RFID) ................................................... 59
How Do RFID Tags Work?......................................................................... 6..0...
Classes of Tags...................................................................................................... ..6..0....
Radio Frequency Bands ......................................................................... 61
Commercial Applications of RFID Technology ....................................... 61
RFID Concerns ............................................................................ 62
Differences Between Barcodes and RFID Tags ..................................... 62
Benefits of RFID............................................................................................ .6
...3
....
Challenges of RFID ................................................................................ 63
GS1 Standards ............................................................................................64
GS1 Identification Keys .......................................................................... 64
GS1 Data Carriers .......................................................................................66

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GS1 Communication Standards .............................................................. 6..6

Picking Technologies In Warehousing ................................................... 69
Put to Light ............................................................................................... 7.1
A Real Life Case on Put To Light ........................ ................ ........................7.2
...
Robotic Picking ............................................................................ ...........74
Near Field Communication ..................................................................... 75
NFC Vs Bluetooth ................................................................................... 76
NFC forum............................................................................ ....................... 77
NFC Standards ........................................................................................... 77
NFC Modes of Communication .............................................................. 78
NFC Payments - Issues ............................................................................. 79
Google Wallet ......................................................................................... 80
The New Shopping Paradigm .................................................................. 83
Service Oriented Architecture ................................................................ 83
Idea Behind Web Services ............................................ ....... .. .................. ..84
SOA Registry............................................ ................................................. ..85
Composite Applications ....................................................................85
Cloud Computing......................................................................................86
Types of Clouds ..................................................................................... 88
Components of Cloud Computing .......................................................... 8.9
Cloud Computing: New Or Old Technology?........................................... 90
Cloud Computing: ROI ............................................................................. 9.1
The Advantages and Disadvantages of Cloud Computing ..................... 92
Advantages.....................................................................................................9.3.
Disadvantages ....................................................................................... 95
Cloud Computing: To Adopt Or Not? ...................................................... 9.6
Cloud Computing and SOA ................................................................. 98
Green Computing and Cloud .............................................................. 98
References.................................................................................. .........................9
. 9.

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THE ROLE OF INFORMATION TECHNOLOGY

IN MANAGING SUPPLY CHAIN EFFECTIVELY
Introduction
Supply Chain Management is undergoing a fundamental, rapid transfor­
mation forced by a host of factors. Globalization has brought goods from
different nations available to citizens of one country often at a lower price
and higher quality than the indigenous ones. Multinational companies
have perfected the art and science of combining globalization and local­
ization to give'Glocalization' i.e., global products and services customized
to meet the need of the locals (people) and locales. Current economic
woes have made the customer, very cost conscious. Yesterday’scompeti­
tors are cooperating today and are working "coopetively':

Advancements in digital technologies are producing significant changes

in all walks of life. A very classic example of how advancements in micro­
electronics and information technology can affect a business, that does
not notice and accept the change and adapt to it fast, is the fall of Eastman
Kodak Company in USA. On 6 January 2012, the market cap of Eastman
Kodak fell from its 1997 peak of US $28 billion to US $ 100 million. On 19
January 2012, Kodak filed for bankruptcy. Kodak is the iconic company
famed for its advertising slogan -'the Kodak Moment'- invented the point­
and-shoot camera in 1900 and the digital camera in 1975 and is a member
of select group of 30 companies that constitute the Dow Jones Industrial
Average. The astounding fall is due to competition from Japanese digital
cameras and camera phones of all kinds (The Economic Times).

Today's consumers not only have a plethora of models and manufactur­

ers to choose from, but are also actively participating in the design of the
product, something unheard of in the last millennium. Web 2.0 technolo­
gies like Facebook, Twitter, Biogs etc., have given consumers the power
to voice their concerns vociferously and fearlessly, to literally, the whole
world. Also, politically sensitive issues such as resource scarcity, ozone
depletion and global warming, piracy, security, and new regulations pose
additional challenges and constraints to the industry. Consumerization
has brought in increased consumption. These realities are making the

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manufacturers revisit the entire supply-chain from different angles to en­

sure the right product is delivered at the right cost, to the right customer
at the right time.

In the report titled'2016: The Future Value Chain; published by the Global
Commerce Initiative (GCI) in conjunction with Cap Gemini and Intel, the
Board of Global Commerce Initiative identified and approved three proj­
ects aligned with the Board's strategic direction that GCI would pursue.
(Cap Gemini, 2008)

• NewWays of Working Together

• Information Sharing
• The 2016 Future Supply Chain
The continued rapid strides that are being made in the field of informa­
tion technology have also touched the field of supply-chain management.
Advancements in existing technologies and emerging technologies have
impacted all stages of the supply chain. Today, real-time global tracking,
continuous and automatic monitoring and instant notification are pos­
sible. Distance and time are no longer barriers.

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Fundamentals of Information Technology

Information Technology refers to collection, processing, transmission, and
storage of information. Active information refers to information that is cur­
rent and available in real-time. Passive information refers to information
that is either not current or is not available in real-time. Obviously any IT
system must provide active information, though passive information has
its uses and needs. The IT infrastructure should facilitate decision-making,
make changes to processes or procedures, preferably in real-time.

Data refers to the atomic bits of fact that constitute the raw material of
knowing about a business. Data in some recognizable form, which shows
one or more patterns that, may justify a change in the enterprise. Infor­
mation taken to the next level of abstraction, which is revealed in relation­
ships, is called knowledge. Insight is the highest level of abstraction. Hav­
ing insight (or vision) means understanding the meaning of knowledge
and of seeing the implications of decisions far in advance.

For example, the home address of an employee is data. It is atomic (indivis­

ible) because to divide it renders it useless. If all addresses are arranged
and correlated with the map of the city, then it shows the areas from where
employees come to work. If those address maps are overlaid over a pe­
riod, then we know how people migrated.This can assist the city planners
to develop new routes for buses, companies to start new branches, busi­
nesses to offer new localized services etc.

In organizations, IT is present in the form office suites, Decision Support

System (DSS), Enterprise Resource Planning (ERP), Supply Chain Man­
agement (SCM), Customer Relationship Management (CRM), Knowledge
Management Systems (KMS), Warehouse Management Systems (WM S),
Human Resource Management Systems (HMS), Product Data Manage­
ment (PDM), Product Life Cycle Management (PLM), and Manufacturing
Systems (MS). They are accessed via intranet, internet and extranets us­
ing desktops, laptops, and palmtops, either via cables or wireless manner.
The software applications can reside in mainframes, big servers that use a
variety of operating systems including CICS, UNIX, Linux, VMS, AS 400 and
Microsoft Windows. The software may be written in languages including
COBOL, C, C++,Java, and .Net. The databases can be hierarchical, relation-

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al or object-oriented. Additionally, the network technology can be TCP/ IP,

ATM, or SONET.

Ideally, any user or any computer must be able to access the data residing
in any computer at any time from any type of device. This means that data
must be converted from its native (stored format in the source computer),
be modified if necessary to suit transmission via the type of networks and
changed back to the form in which it will be stored in the destination com­
puter. This is the biggest challenge in collaboration and int egration . And
if this access were to be made in real-time it becomes more challenging .
This chapter discusses the role and use of information technology in sup­
ply chain management.

Need and role of Information Technology

In a supply chain, the primary objective is to maximize the surplus or the
profit which is the difference between the price paid by the consumer and
the total cost of making the product (or delivering the service). Among
the three components, assets and products flow forwards, funds flow
backwards while information alone flows along both the direction s. There
are six drivers that affect the performance of a supply chain: Facilities, In­
ventory, Transportation, Information, Sourcing and Pricing (Chopra, S., et
al., 2010).

In the design of facilities, IT tools enable the development of mathemati­

cal models of different scenarios. These models are analyzed and the ef­
fect of different parameters studied using a computer.

Considering inventory, IT plays a vital role in identifying, locating, moni­

toring, tracking, and in notifying when levels have fallen below a threshold
value. In the case of Vendor Managed Inventory, (VMI), computers auto­
matically order the next consignment without any human intervention.

For transportation, IT helps in developing and solving mathematically

different modes and options of transport. These problems typically fall in
the general area of optimization and involve integer programming, goal
programming and linear programming.

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Information is the heart of planning and execution. IT systems help in

gathering, storing, processing, transmitting, analyzing and visualizing the
information.

Sourcing refers to the selection of vendors for performing different activi­

ties such as transportation, warehousing, managing IT systems etc. Again,
IT helps in modeling the different options mathematically and analyzing
them.

Finally, pricing refers to deciding the price to be charged for a product.

Balancing the immediate needs of customers who are willing to pay more
and those who can wait to buy at a lower price is a challenging task. Also,
consumer buying patterns need to be analyzed to decide the price. IT sys­
tems help by providing data mining tools.

Securing a supply chain is an important task considering the different

types of products that are transported. IT plays a role in controlling access,
detection, tracking, screening, and surveillance.

Also, managers have to take decisions at the strategic, tactical and opera­
tional levels. IT systems play a vital role in all these stages. Consider the
operational level decisions to be taken. The head of a manufacturing shop
should at any time know which machines are operating and which have
broken-down, the operators who are on leave, and the status of a cus­
tomer order in terms of the ability to meet the promised delivery date. An
IT system that monitors the activities in the shop can akin to an air traffic
control system provide the above information in real time. The system can
provide alerts, alarms and automatically notify those who need to be.

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Thus, information technology plays a pervasive and all-encompassing role

in a supply-chain.

FUNCTION/ ROLE OF IT IN SCM DRIVERS FOR USING IT

Transaction Processing Elimination of human errors

Reduction of costs Speedy transfer of
information Volume of transactions
Planning and collaboration Unpredictable and logistically
demanding environment
Order tracking and delivery Project-orientation of the business In-
coordination transit delivery consolidation

Software Upgrades
Today software can be purchased directly over the internet by paying for
it with a credit/debit card and downloading the software from the com­
pany's website. Even version upgrades, bug fixes, patches are all procured
the same way. User manuals have taken the form of off-line help either as
help documents built into the software or as on-line help where the user
connects to the vendors ‘website. Except in the case of very large software
packages of the size of gigabytes, the days of manufacturers sending soft­
ware in CD/DVD are almost a passe. The speed and availability of broad­
band transmission is increasing both in size and geographical reach. With
some Governments considering giving free access to broadband, the day
when it becomes ubiquitous as air is not too far away. This is aided by ad­
vances in very high secure transmission modes and tamper-proof meth­
ods to transmit information via internet. So is the case with user manuals.
Large volumes of printed manuals are no longer sent.

Customer Service
Generally customer seek support in one of two ways: (1) to find out how
to use a particular function/feature in the software or how to connect two
pieces of hardware (2) to fix a malfunction in the hardware or a bug in the
software. This requires the user to "talk to the customer service depart­
ment': The vendor can assist via chat (synchronous and live mode) ore­
mail (asynchronous mode). The vendor also can remotely connect to the

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User’s computer and run diagnostic tests. All these are done without the
user and the vendor visiting each other's office. A product called iTwin
costing about Rs. 5000 invented in December 2011 allows one to connect
to home PC form anywhere across the globe via internet.

Mass Customization
Mass customization refers to customization by the masses and not for a
mass i.e. individuals can customize a product they want to buy. Dell Com­
puters is a pioneer in this approach. Users can configure a computer (hard
drive, RAM size, processor type, type of monitor, operating system etc.).
EGreetings is another example. One can choose the type of card, message
and the audio tune and send personalized greeting cards to each of one's
friends.

Need for Real Time Information

Consider a company that makes products-to-order. Co nsider an order be­
ing placed by a customer and that the company must process. The basic
information consists of:

1. a customer order
2. a production schedule
3. a purchase order
4. an inventory order and
5. a shipping notice

A customer order is a list of items and quantities required by the customer.

A production schedule is an instruction for the manufacturing depart­
ment to produce the products by a certain date. A purchase order is the
reverse of a customer order and lists the items that the manufacturer has
to procure from his/her supplier. An inventory order is the list of items
and quantities that need to be brought from the warehouse. A shipping
notice is one sent to the customer listing the different items that are being
shipped by the company.

Each of these pieces of information exists at different links in the supply

chain in different forms. As companies fulfill customer's orders these piec-

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es of information must be kept current for the organization to know the

status. For example, if manufacturing department has produced certain
parts, then it must be updated in the schedule. If warehouse has sup­
plied some components, then the inventory must be depleted so that the
warehouse manager at any point of time knows how much of each item
is available to fulfill other customers' orders. This flow of information in a
seamless manner is possible only when different systems are connected
and can "talk" in real time.

Many factories use 'Enterprise Resource Planning (ERP) System ‘to perform
different functions in different departments. These systems can perform
the tasks mentioned in the above paragraph. Companies involved in the
distribution of products use a'Distribution Requirements Planning ' System
to track each finished component as it moves from the factory floor to the
warehouse and to the consumer. These help in connecting the customer
order points (called demand or receiving points) with supply or delivery
points and facilitate delivery of new goods or those returned by the con­
sumers.

Need for Information Integration

One of the common problems due to lack of or inadequate sharing of in­
formation is the often talked about problem called Bullwhip Effect. The
term was coined by Proctor and Gamble who found that even though the
consumers' demands for diapers were fairly stable, the retailers' orders
were highly variable. The production orders were even more variable.
They identified the following four causes of the Bullwhip effect:

1. links in the supply chain updating their information

independently
2. batching of orders
3. large orders during times of shortage and
4. fluctuations in price
Information is either destroyed or distorted because the partners in the
supply chain use local information to forecast demand and pass this to
partners upstream. Many factors like local economic conditions, con-

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straints, performance measures all influence the prediction of local de­

mand. A common business practice is to inflate the orders when there
are perceived uncertainties (either at the supplier end or logistics end or
consumer side). If dealers adopt this practice and pass it on to local dis­
tributor who, if in turn use local information, they pass it on to the regional
distributor. Thus, at each stage the demand is amplified and an unrealistic
value reaches the manufacturer who is the last link in the upstream end of
the supply chain.

Complete transparency of demand information across the entire supply

chain is one of the ways to prevent the Bullwhip Effect. In the early 90s,
the grocery industries in the U.S.A. initiated such a transparent means
known as “Efficient Consumer Response:' A sample of the information that
the partners should share is: production plans, holiday and maintenance
schedules, shipment schedules, status of the inventory, demand for cause
at the global, regional and local levels, plans for promotion and offers, new
product/model launches, sales data and disruptions such as labor short­
age/unrest, political instability etc. This initiative ensures that all parties in
the supply chain are well informed.

Today the internet allows all partners to be networked in real time. The
overall network can form a hub and spoke system with participants, in­
ternal computers constituting the spokes. An information hub akin to the
hubs used by airlines can facilitate flow and consolidation of information.
This can be similar to cross-docking where products from multiple manu­
facturers are brought together at one location and distributed to vendors
based on the role, authorization and need. Additionally there are other
benefits arising out of this information integration.

Product roll over is defined as a switch form one version of a product to its
recent version. Today the product life cycles are becoming shorter and new
version/models are released frequently. A product roll over may entail the
use of new suppliers, engineering changes and new features/ functions.
The extent of collaboration among vendors depends upon the product.
For example, in the semiconductor industry, designers, plant personnel,
contract manufacturers, sales and marketing and product support staff
should be involved in the launch of a new product. In short, collaboration

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is the key. The internet has also been instrumental in creating new busi­
ness models. For example, companies that have surplus manufacturing
capabilities, obsolete equipment and waste material can use the internet
to dispose them off to those who need them. ChemConnect, the global
chemical exchange is one such virtual marketplace that connects both
the manufactures and buyers in the chemical and plastic industries. It has
more than 2500 members.

Converge, the virtual marketplace for electronics industries allows com­

panies to sell and buy components and parts in the secondary market .
In the high-tech industry where product life cycles are very short, excess
inventory of parts can cause huge obsolescence, while manufacturers are
not always able to produce more of the products that are close to the end
of their life cycle. In this case, a secondary market that facilitates exchange
is very helpful.

Need for real time collaboration

Today, supply chains have become so critical that their impact on com­
panies' outcomes is significant. The best supply chain supplies the right
product at the right time to the right customer at the right price at the
right location. The same can be said about any service rendered by com­
panies. Both are possible only when the customers, suppliers and trading
partners and service providers are all connected so that goods, services
and information flows effectively.

Consider a toy retailer who sells toys over the internet (ecommerce) and
delivers them across the country. During the peak shopping season of
Christmas, there are many orders to be fulfilled. But all toys must be deliv­
ered latest by the evening of Christmas Eve, so that the parents can wrap
them and keep them under the Christmas tree, for the child to pick it up on
the morning of Christmas, joyfully thinking that Santa Claus has gifted it to
him/her. A delayed delivery will disappoint the child and the spirit of
Christmas will be lost. Thus, the retailer must have tight integration with the
delivery company. The user also should be given the option of tracking the
progress of shipment.

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Consider a bouquet of flowers to be delivered on the wedding anniver­

sary. The couple should receive in the morning or afternoon, to enjoy it.
If the bouquet is not delivered then its value is diminished and the gift is
not appreciated as much as it should be. Again, this needs tight integra­
tion with the delivery company that information is exchanged seamlessly.
Though, this and earlier example have more relevance and validity in the
western society, they are equally applicable in Indian context.

Despite the widespread use of email, fax and SMS, there are still occasions
when businesses need hard copies of documents and situations when they
need to be delivered same day. That is why, FedEx, OHL and the like have
same day document delivery across the continental United States of
America. A letter or a small package given to the courier by 10 AM in New
York in the east coast will be delivered by the close of business in Los
Angeles or San Francisco on the west coast. The delivery companies use
the three hour time difference between the east and west coast to ensure
same day delivery.

In an integrated supply chain, managers need to know the so called ‘Order

Winners' i.e., what parameters are considered critical by the consumers?
Are they quality, timeliness of delivery, cost, or convenience? The supply
chain should be accordingly designed to ensure that consumers are hap­
py. These are strategic decisions on policies such as capabilities, choice of
trading partners, extent of customization of product/service. Information
Technology facilitates this decision making process.

During yesteryears, the strategy was to build and wait for consumers to
buy them. The type of products and services was predominantly decided
by the manufacturer with little or no input by the consumers. Based on a
market forecast, manufacturers planned their schedule for the whole year.
Wholesalers, distributors and retailers held large amount of stock to meet
"possible increase in demand': But, times have changed. If the supply
chain were well connected and is responsive, then all parties in the chain
would know the status of demand and accordingly be prepared to meet it
effectively. This implies two things: 1) that they all have to collaborate and
2) Information must be available in real-time to all players.

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Despite the strides made in technology and refinement of supply chains,

out-of-stock still remains a problem. According to Cap Gemini, "A recent
ECR Europe study on out-of-stocks showed that the loss of revenue for all
grocery stores in France alone is estimated at €200 million per quarter':
The global consulting firm Cap Gemini in its report, 'Future Supply Chain
2016: proposes a new concept called 'Collaborative Warehousing'.
Accordingly, shipments from different manufacturers will be consolidated
in a common warehouse (that is strategically located) and from there
consolidated single shipments will be made to retailers. Data exchange
among manufacturers, retailers and logistics providers in a standard
format is the crux behind this idea.

In short collaboration helps in a) reduced inventory, b) meeting new de­

mand, c) new product launch and d) reverse logistics.

Functions of an Information System

An information system must satisfy the following requirements.

Transactions Completed: Transactions record individual activities such as

allocation of resources, arrival of goods etc.

Product and Order Status Information: The customer and the company
should be able to know the current status of each order and shipment. For
a company, this helps in planning and identifying bottlenecks etc. For a
customer, this helps in tracking the shipment.

Status report: Information should be presented in various types of reports

in an easily readable form.

Interaction with other systems: Data should be made available for other
applications to use

Performance measurement: Data should be provided to assess the perfor­

mance of processes and people.

Aspects of Supply Chain Integration

There are three important aspects of supply chain integration . Each of
them is discussed below along with the advantages.

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Aspect: Integration of information

Components: Exchange of information (where needed in real time), trans­

parency and access to databases.

Advantages: Builds trust leading to better relations, less bullwhip effect,

quick problem resolution, faster response to demand fluctuations, and
better preparedness for contingencies.

Aspect: Collaborative planning

Components: Planning together, joint forecast, joint product designs, and

replenishment

Advantages: Less bullwhip effect, efficient service, reduced cost, optimal

utilization of capacity, enhanced customer service and satisfaction risk
mitigation.

Aspect: Coordination of work

Components: Jointly planned production work, procurement, mainte­

nance, replenishment design, development and other activities.

Advantages: Reduced cost, lesser delay, higher efficiency ability to pen­

etrate new market, create new products, expand market share, beat com­
petition, enhance custom service and satisfaction, resource pooling.

Laws of Supply Chain Management

The fundamental law of supply chain coordination is the bullwhip phe­
nomenon. According to this, the volatility in demand is magnified as
demand information is propagated upstream (away from the consumer)
along the chain. The key reasons for this effect are lack of/inadequate in­
formation sharing among the entities in the chain.

The fundamental law of supply chain design is industry clock speed, the
rate with which products, processes, and organizations evolve over time.
The clock speed which is influenced by competition, regulation, and tech­
nology, determines a shelf life of a supply chain design. For example in the
cellphone industry the clock speed is three to six months whereas in the

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commercial aircraft industry the clock speed is more than a decade. The
new products, processes, and markets may force manufacturers to evolve
new supply chain designs. The publishing of books and magazines is a
classic example for this. Thanks to advances in information technology for
this change.

Facilities
Globalization has allowed the multinational companies to expand into new
geographies, new cultures and new products. New facilities are being
scouted for and along with them, new layouts are being developed. Facilities
refer to both the factories where products are made, and ware­ houses
where products are stored. Also, in response to changing market needs,
existing facilities are being expanded, revamped and redesigned. Facilities
can play the role of an assembler, distributor, producer, and transporter.

An assembler makes products by assembling different modules and parts

given by suppliers. A producer fabricates or manufactures products by
transforming the raw materials. A fulfiller fulfills the orders of customers. A
distributor is one who stores and ships the products to customers.

Location and layout can influence the leanness, agility, and robustness
which in turn can significantly impact the efficiency and effectiveness of a
supply chain. Earlier, the dominant criterion for choosing a facility was the
cost. Now, with the impact of a facility on a supply chain becoming large,
cost is only one among the many criteria. There are many nonfinancial
criteria that need to be considered for designing layouts. Some of these
may be competing in nature. For example, workers will stress safety, ease
and convenience. Customers will prefer short lead times and flexibility.
Vendors will prefer ease of access by vehicles for loading and unloading.
The management views options from the perspective of financial outlay,
ROI etc.

Computer Aided Design tools help in preparing the layouts and modify­
ing them at will to evaluate different options. Two approaches are used in
preparing layouts: simple heuristics and mathematical programming.

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A software specific to a type of heuristic, is developed with capability to

edit and modify the layout and show the changes graphically. Different
people have developed their own software for the heuristics they choose
to use. In these, features such as GUI and interactive editing are limited.

In the mathematical programming approach, the problem is treated as one

with different constraints and finding the optimal solution in the given so­
lution space. Software called optimization solvers are readily available to
solve complex problems in optimization.

The most important advantage of using computers is the interactive de­

sign. This involves the use of different software such as spreadsheets (like
EXCEL), Computer-aided-drawing and computer-aided-design (CAD) soft­
ware like AutoCAD, CATIA, and SolidWorks along with geographical infor­
mation systems (GIS) like MAPINFO and Google Earth. The spreadsheet is
used for performing simple analyses. The CAD software is used for draw­
ing the layout, editing in real-time and interactively and to show the flow
and relationships among different entities. The GIS software serves the
same purpose but for locations spread across cities.

Now, with computers becoming powerful, storage like RAM becoming

cheap, images can be easily manipulated and data processed and
rendered very quickly. 3D views of different layouts in color, showing the
location of equipment facilitate easy visualization. One can even "walk
through" the facility and"feel"it such as adequate lighting etc. These are
helpful for large layouts, those with many constraints, and multilevel
facilities.

Inventory
Inventory refers to products waiting to be shipped, raw materials to be
processed, goods in transit and work-in-progress. If warehouse is defined
as a place to store the inventory, then a warehouse plays many roles. It
can be a stock room serving a manufacturing facility. It can be an assem­
bly room where kits are assembled before being shipped. It can also be
"transit lounge" where products are kept for a short time before being
shipped.

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The layout of a warehouse will impact the time of shipping/assembly.The

layout design will have to consider different criteria such as:

1. Combustible goods cannot be kept adjacent to each other

2. The location where combustibles are kept must be in a corner
and close to exit and be well ventilated
3. Certain goods must be kept in a climate-controlled (temperature,
humidity, dust, and sunlight) environment
4. Perishables must be well preserved
s. Fast moving goods must be close to shipping dock
6. Certain products cannot be stacked beyond a certain height
7. Again, designing layout is similar to the discussion in the earlier
section, ‘facilities'.

The operations in a warehouse are complex. A Warehouse Management

System (WMS) is software that helps in managing the operations in a
warehouse. Tracking of goods throughout the warehouse is a basic re­
quirement of this software. Today, bar codes are being rapidly displaced
by RFID scanners (more on these technologies in the later sections). The
WMS should notify stock-out-conditions, verify receipts, and identify prod­
ucts to be quarantined, notify products whose shelf-life will expire soon.
For goods receivable, it should suggest location considering proximity
criterion, controlled climate needs, quarantine requirements, velocity and
other criteria. It should support cross-docking. WMS also should generate
bar codes, labels with details (SKU, date received, date of expiry, purchase
order number). The system should present different types of reports re­
flecting stock movements, locations and depletions.

Order processing is an important function inside a warehouse. The

checking for availability of an item, reserving it for a customer, checking
for quantity (one cannot buy more than say, three items) and size
restrictions (one has to buy minimum of 500 gms. or bigger size bottle
only), if any, providing discount in proportion to order size, facilitate choice
of shipping modes, and generation of invoices are some of the activities
that need to be performed. WMS software plays an important role in this.

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Order picking is another important and complex activity. There are many
types of picking - wave picking, batch picking, pick-to-light etc. Based on
location of goods, point of delivery, deadline orders may be grouped and
picked in batches. For each pick, pick list must be generated and picking
path should be suggested. Only a WMS can do this effectively.

Transportation
Transportation forms the backbone of a supply chain. It helps in the move­
ment of goods. Carriers are those who move the goods and are responsi­
ble for the operation and maintenance of the fleet, associated equipment
and facilities. Shippers are those who want to have the goods moved.
They seek the services of carriers. They deal with the packaging, loading
and unloading and are concerned with cost, responsiveness, and timely
delivery.

Consider the air transportation sector. The International Air Transport As­
sociation (IATA) has announced that by 2014, it has set a target adoption
rate of 100% for accepting waybill information electronically (eAWB). IATA
has estimated this 100% adoption will yield in savings about US$ 4.9 bil­
lion across the air cargo supply chain; eliminate 7,800 tons of paper docu­
ments and reduce transfer time by 24 hours (Descartes Group, 2010)

The essential components of an e-airway implementation are:

A repository for Document: A master repository to facilitate exchange of

documents between back-office systems and trading partners. This repos­
itory can be part of other services such as Automated Manifest Systems for
air (AMS) and tracking of shipments. With a web interface, this repository
can be made easily accessible by all forwarders and can be scaled easily to
meet growth.

Web Forms: These are on line forms that can be filled easily to create mas­
ter airway bill and sent via email to other airlines. These forms not only ease
the operations, but also eliminate errors, facilitate instantaneous vali­
dations and compliance with IATA rules.

Federated Network: A federated network connects diverse systems be­

longing to different service providers, trading partners, regulatory bodies

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and facilitates automatic exchange of information electronically in real­

time. According to the Descartes Systems Group, "The world 's most exten­
sive multi-modal business network currently in place empowers an eco­
system of over 35,000 global trading partners - including ground carriers,
airlines, ocean carriers, retailers, distributors, manufacturers, third-party
logistics providers, customs brokers and regulatory agencies- in over 165
countries to collaborate and exchange logistics information across mul­
tiple value-added services".

In transportation, there are two types of situations - one that deals with
planning aspects and other with operational aspects.

Transportation: Planning Aspects

In the planning related to transportation there are many types of prob­
lems. A few of them are discussed below. One example is, given a set of
drivers and loads, which driver should be assigned to which load? The
cost of assigning a driver to a load, should consider the cost of driving the
truck empty from the location of the driver to the location of load pick up,
the nature and size of the load, and driver's preferences and limitations
among other factors. Consider a company having 100 drivers and 100
trucks. It has a choice of 10158 possible combinations to choose from. This
obviously requires only a computer to analyze.

There are loads that require a day or two to be transported and these are
called long-haul loads. For these hauls, one vehicle and driver are assigned
to one load. There are situations where goods have to be hauled for a
short distance. Since these are short runs, a driver can be assigned to more
than one load. The solution for these load-matching problems involving
short haul are different from those for long-haul.

A truckload company may have more trailers than drivers. For instance,
a driver may drop a loaded trailer in one lot, waiting to be unloaded, and
then drive to another shipper to pick up a loaded trailer. Later the first
trailer will be unloaded and may be kept empty or loaded with another
consignment. This trailer may be picked up by the same or another driver.
From a resource management perspective, modeling just the drivers and

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loads represents a two-layer problem and considering trailer movements

makes it a three-layer problem.

There is also a need to forecast the capacity i.e., if there are too many trucks
than needed. This should consider the d river's requirements such as abil­
ity to return home every week etc. The opposite of this is the demand
forecasting which refers to the amount of load that needs to be picked up.
This demand must be forecast daily. This demand must consider effects of
holidays, "special days" such as month end, quarter ending, Friday after a
two day holiday (like Deepavali), Monday after a long festival weekend etc.

Consider a network of 'p' suppliers and 'q' warehouses. Each warehouse has
a specific demand and each supplier has a limit on the capacity of number
of products that can be supplied. There is a unit transportation cost and the
shipment quantity between a supplier and a warehouse. The idea is to
minimize the total transportation costs so that the demands of warehouses
are met while no supplier is forced to supply beyond his/her capacity. This
is a classical transportation problem. The suppliers can be sources,
production centers, factories, mines, or other origin points. The warehouses
can be customers, distribution points or in general sinks.

There are variants to this problem called assignment problem, and trans­
shipment problem. Assignment problems are a special type of transpor­
tation problem in which the supply and demand are unit quantities. For
example, if there 'm' machines and 'm' operators then the problem of as­
signing operators to machines is called the assignment problem. Some­
times, there may be intermediate nodes (be it suppliers or customers) who
serve as transshipment points. These nodes do not have any demand nor
do they produce anything ie., zero demand/ source points. The assign­
ment will have to consider these intermediate points also.These problems
are a special case of transportation problems and are called transshipment
problems.
Examples of transportation problems can also be found in warehouse
operations. Consider a warehouse where "I" items must be stored and "j"
docks are available for loading and unloading. The problem is to find the
optimal assignment of items to docks in order to minimize the total cost of
carrying goods inside the warehouse.

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Another is the classic Traveling Salesman Problem. In this, a salesman has

to leave home, visit "m" cities and return home with the constraint that
each city can be visited only once. Examples of this problem can be found
in vehicle routing, machine scheduling computer-wiring etc. Consider a
warehouse that serves many customers by using limited number of ve­
hicles all having the same capacity. The objective is to find the optimal
routes that minimize the total distance travelled by the trucks. These are
called as Vehicle Routing Problems. There are variants to this problem.
For example, the drivers may not just deliver but also collect defective
products, returns and exchanges. Then there are two types of customers -
the customers who only receive deliveries are called line-haul customers;
those who return are called backhaul customers.

Arc Routing Problems (ARPs) are a special kind of vehicle routing problem
in which the vehicles are constrained to traverse certain paths, rather than
visit certain nodes as in the standard Vehicle Routing Problem. Consider
a postman who has to cover several addresses by taking different roads.
The problem is to find the shortest walking distance for the postman. This
was first proposed by a Chinese mathematician and hence called Chinese
Postman Problem (CPP). An example of this in logistics would be the need
for a delivery vehicle to traverse the shortest path.

A variant of this problem is the Rural Postman Problem (RPP). In Windy

Postman Problem (WPP), the cost of traversing depends on the direction of
travel. An example for this would be situations where along certain
highways, the toll paid while traveling in one direction may be more be­
cause of the presence of exit ramps. Capacitated Arc Routing Problems
(CRPP) are a special case of RPP where the vehicles are restricted to have
finite capacity. For instance, trucks may leave and return to the depot but
the total demand serviced by the truck does not exceed its capacity.

In Vendor Managed Inventory (VMI) scenarios, supplier monitor custom­

ers' inventory and send replenishments as needed. Thus, there may be a
warehouse that delivers to different customers using a set of trucks. The
objective is to minimize average distribution costs and also avoid stock­
outs for all customers. These are called as Inventory Routing Problems
(IRP). If the customers consume at a fixed rate, then the problem is sim-

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pie. If it changes over time but is predictable, then it becomes a Dynamic

Inventory Routing Problems (DIRP) and if it is stochastic, it is called Sto­
chastic Inventory Routing Problem (SIRP). Several application of IRP can
be found in distribution of automotive parts, beverages, and fast moving
consumer goods.

All of the above discussed problems fall in the domain of operations re­
search and involve, linear programming or dynamic programming tech­
niques and computers are the best to solve t hem. Several software prod­
ucts are available to solve these problems.

Transportation: Operational Aspects

Multimodal transportation refers to using more than two modes of trans­
port to move goods. lntermodal transportation refers to using two modes
of transportation. The modes of shipments are courier, postal service,
truck-and-rail, truck-and-water, truck-and-air, rail-and-water, rail-and-air,
water-truck-and-air etc.. The basic idea of this intermodal transport is to
consolidate goods picked up in small consignments locally using trucks,
into large shipments to be sent in containers via rail, ships or aircrafts. The
transfer of containers between trucks and rails takes place in rail yards.
There are three major operations in rail yards:

1. classification which is sorting of rail cars,

2. blocking which is consolidation of rail cars into blocks and
3. train formation which is joining blocks to form t rains. These
operations need extensive planning.
Consider the operations in ports. They can be divided into three kinds.
First one relates to berthing, loading and unloading of containers. When
a ship arrives at a terminal, it is assigned a berth and a certain number
of quay cranes. Typical planning problems in this stage are: allocation of
berths, duration of docking, allocation of quay-cranes and service times
for each vessel (a crane may serve more than one vessel), loading and
unloading sequence of containers and the precise of location in the ship
where the containers must be placed.

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The second scenario relates to arrival and departure of trucks and trains in
the port. Trucks and trains may go back empty or carry other containers.
The planning involves the loading and unloading sequence, stacking area
etc..

The third type of operations involves the handling and storage of contain­
ers in the yard. The location where containers are offloaded and kept sig­
nificantly influences the turn-around time of ships, trucks and rail cars. The
allocation and dispatching of cranes is a challenging task to be addressed
in real-time.

The above discussion illustrates the challenges faced in the operations.

These are best addressed by software that consider various permutations
and combinations and constraints and suggest solutions.

Enterprise Resource Planning

Enterprise Resource Planning (ERP) Software as the name suggests helps
in planning and managing the resources (men, mat erial, money, machines)
of the entire enterprise. ERP can cover departments such as sales, market­
ing, human resources, finance, manufacturing, purchasing and warehouse.
By transcending departmental barriers and seamlessly integrating applica­
tions and by extracting data from different sources, the ERP provides a
holistic view of the organization. With powerful dashboards, it can keep the
senior management informed with information enough to be aware and
11
control and yet have the power to drill and dig “the details with a few
clicks. The ERP evolved from the yesteryear's inventory control system .
Later, it became the material requirement planning software (MRP) and then
material requirement planning software MRP II and finally ERP.

Need for ERP

In any large organization due to decentralization,there is some autonomy
with the departmental heads. Each head is authorized to buy software
costing below a limit, without anyone's approval. Thus, each department
has its own software to run its operations. Over a period, there will be
many types of software to do the same or very similar t ask. They may use
different languages, run on different operating systems and have different

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ways of storing data etc. Exchanging information between departments

(and hence software applications) will be a challenge. Also, preparing re­
ports that give an overall picture will entail culling data from diverse sys­
tems. ERP software is best suited to overcome these challenges.

The Evolution of ERP

The unprecedented growth of information and communication technolo­
gies (ICT) driven by microelectronics, computer hardware and software
systems has influenced all facets of computing applications across orga­
nizations. Simultaneously the business environment is becoming increas­
ingly complex with functional units requiring more and more inter-func­
tional data flow for decision making, timely and efficient procurement of
product parts, management of inventory, account ing, human resources
and distribution of goods and services. In this context, management of or­
ganizations needs efficient information systems to improve competitive­
ness by cost reduction and better logistics.

Starting in the late 1980s and the beginning of the 1990s new software
systems known in the industry as Enterprise Resource Planning (ERP) sys­
tems have surfaced in the market targeting mainly large complex business
organizations.

These complex, expensive, powerful, proprietary systems are off-the-shelf

solutions requiring consultants to tailor and implement them based on
the company's requirements.

These software solutions, unlike the old, traditional in-house-designed

company specific

systems, are integrated multi-module commercial packages suitable for

1
tailoring and adding "add-ons as and when required.
'

The phenomenal growth of computing power and the Internet is bringing

ever more challenges for the ERP vendors and the customers to redesign
ERP products, breaking the barrier of proprietorship and customization,
and embracing the collaborative business over the intranet, extranet and
the Internet in a seamless manner.

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ERP Systems Defined

The architecture of the ERP software facilitates transparent integration of
modules, providing flow of information between all functions within the
enterprise in a consistently visible manner. Corporate computing with ERPs
allows companies to implement a single integrated system by replacing or
re-engineering their mostly incompatible legacy information systems.
American Production and Inventory Control Society (2001) has defined
ERP systems as "a method for the effective planning and controlling of all
the resources needed to take, make, ship and account for customer orders
in a manufacturing, distribution or service company:'

ERP Signifies "One database, one application and a unified interface across
the entire enterprise"

Essential characteristics of ERP Systems:

• Modular design comprising many distinct business modules such

as financial, manufacturing, accounting, distribution, etc.
• Use centralized common database management system (DBMS)
• The modules are integrated and provide seamless data flow
among the modules, increasing operational transparency through
standard interfaces
• They are flexible and offer best business practices
• The modules work in real time with online and batch processing
capabilities
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• They are now Internet-enabled
• Different ERP vendors provide ERP systems with some degree of
specialty but the core modules are almost the same for all of them.
Some of the core ERP modules found in the successful ERP
systems are the following:
◆ Accounting management
◆ Financial management
◆ Manufacturing management
◆ Production management
◆ Transportation management
◆ Sales & distribution management
◆ Human resources management
◆ Supply chain management
◆ Customer relationship management
◆ E-Business

The modules of an ERP system can either work as stand-alone units or

several modules can be combined together to form an integrated system.
The systems are usually designed to operate under several operating plat­
forms such as UNIX, MS Windows NT, Windows 2000, IBM AIX, and HP-UX
systems.

Enterprise systems employ thin client/server (C/S) technology or client/ fat

server (C/FS) architecture, creating a decentralized computing environ­
ment.

In a C/S system a number of client devices operated by end users such as

desktop PCs request services from application servers, which in turn get the
requested service-related information from the database servers. The
requests may be simple data files, data values, communication services,
transaction processing or master file updates. The general practice is to
have three-tier architecture. In this three-tier system the user interface runs
on the client. To run ERP systems relatively powerful PCs (clients) and
powerful servers are required where most of the hundreds of thousands
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of operations are performed. The client/server system functions are per­ formed
following three layers of logic:
• Presentation Layer: Graphical user interface (GUI) or browser for
data entry or accessing system functions
• Application Layer: Business rules, functions, logic, and programs
acting on data received/transferred from/to the database servers
• Database Layer: Management of the organization's operational or
transactional data including metadata; mostly employs industry
standard RDBMS with structured query language(SQL) provisions.
This logical arrangement helps the ERP user interface to run on the clients,
the processing modules to run on the middle-tier application servers, and
the database system to run on the database servers.
Benefits of ERP
1. Bridges the information gap across the organization
2. Provides an organization wide integrated information System
covering all functions like selling, marketing, manufacturing,
inventory, finance, payroll, purchasing etc.
3. Facilitates quick overview of the organization and hence quick
decision making
4. Has built in alarms and alerts
5 . Easy to monitor and identify problem areas
6. Has uniform look and feel across the organization
7. Eliminates the need to maintain diverse systems
8. Helps in data mining and business intelligence
9. Easy to upgrade to latest versions or incorporate new
technologies
Requirements of an ERP Package
1. Should provide single sign-on to all applications and services
2. Should restrict access (to data, application, service, machines,
and features) based on user-defined es
3. Should have a user-friendly interface, preferably web based
browser type
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4. Be capable of capturing data from different sources - email, fax,

scanners, SMS, telephone (IVR systems), other applications and
today even social media.
5. Permit capturing of data in different types (CSV, EDI, XML, PDF,
TIFF)
6. Have event-triggered actions, alerts and alarms
7. Be capable of archiving of historical data

Selecting an ERP Package

The process of shortlisting and choosing an ERP package is a long drawn
one and should consider the following aspects:
1. Identify and justify the need
ERP should not be construed upon as a replacement for existing applica­
tions. It should enhance the value and user experience. The projected
growth of the organization and the accompanying needs must be consid­
ered.

2. Constitute a Cross-functional team

A team of domain experts, users, system and network administrators, da­

tabase administrators should be assembled to assess the different ERP
packages
3. Vendor Selection
While choosing a vendor, following factors must be considered.

• Strength i.e., reputation, user base, number of years since

inception
• Technology - Operating system, languages used, capability to
handle emerging technologies
• Stability of code
• Reseller Channels - How many resellers are available and how
efficient are

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• Customization Needed :This refers to the amount of

customization that must be done before the package becomes
ready-to-use
• Coverage: How good is it in covering the different functions of the
organization?
• User Friendliness - How easy is it use?
• Maintenance and Support provided by the vendor
• Training needed for employees to use it
• Cost - consider both tangible and intangible cost
• Technical features - scalability, reliability

4. Hardware needs

5. Issues related to data migration

6. Integration challenges - how easy is it to interact with the existing ap­

plications
ERP VENDORS
There are many ERP vendors in today's market. Following is a list of the
important ones.

Abas Business Software: Abas (founded 1980) provides business and tech­
nology solutions to midsize manufacturing, distribution and service enter­
prises.

Epicor ERP- EpicoriScala :Epicor (founded 1984) has more than 20,000 cus­
tomers in 150 countries. It provides industry-specific ERP software

IFS : ERP covers service & asset management, manufacturing, SCM and
uses SOA technology

lnfor LN: ERP that covers many platforms and has adapters for integration
with external applications like SCM

Lawson: Lawson has customers in more than 40 countries. It provides

software to include enterprise performance management, enterprise as-

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set management, SCM, CRM, and HRM.

Microsoft: The Microsoft Dynamics line of business management software

covers financial, customer relationship and supply chain processes.

Oracle: Oracle Corporation (founded in 1977) has E-business suite, JD Ed­

wards ERP and PeopleSoft ERP applications. The latter day were acquired
by Oracle.

QAD Enterprise Applications: QAD (founded in 1979) has ERP software to

meet needs of customers in automotive, consumer products, electronics,
food and beverage, and medical industries. It has applications running in
27 languages in 90 countries.

Ramco: Ramco systems corporation meets the needs of manufacturing,

third-party logistics, aviation and high-tech industries.

SAP: SAP is probably the largest ERP vendor and has customers in more
than 120 countries. Its suite covers practically all industries.

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SCM SOFTWARE
In this section, some of the features of select software used in SCM are
discussed below. The material is taken from the website of respective soft­
ware vendors.

Carrier Management
A typical carrier-management module of SCM software for example devel­
oped by Manhattan Associate has the following components:

◆ Driver & Load

◆ Drop &Swap
◆ Fuel & Route
◆ Load Analyzer
◆ Profit Analyzer
◆ SuperSpin
Driver & Load: This component helps in assigning drivers to the loads to be
picked up considering various factors. The software considers the entire
network and assigns the optimal driver-to-load pairing even considering
driver-load position in real-time. It can optimize operations using inter­
modal capabilities and identify opportunities to assign a driver multiple
loads per day. The software also matches drivers to loads so that those
who want to come home after long-hauls can do so without affecting the
performance. Thus, chances of driving a truck empty are reduced and
driver satisfaction is increased.

Drop & Swap: This component help in identifying drivers with whom load
can be swapped enroute. It also helps in swapping loads with drivers who
do not have access to cross country borders like for example US drivers
from entering Canada.

Fuel & Route: Carriers keep bulk fuel in certain locations and have agree­
ments with different petrol bunks (this is possible in USA). Hence, if drivers
want to refuel their truck, this component will suggest locations minimiz­
ing out-of-route miles, and costs such as fuel prices, taxes and tolls.
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Load Analyzer : Forecasts anticipated load demand for transportation.
From load Forecasts, transportation resources requirement for each lane
and each day of the week, analysing historical load patterns and current
booked-load information are calculated. It Improves visibility of entire net­
work and provides a common operating plan for all of customer service
representatives and load planners. Also gives visibility of the downstream
effect of booking freight.

Profit Analyzer : Profit Analyzer in carrier management software provides

activity-based cost and network analysis to know the true value of each
shipper, lane and freight shipment in a freight network. The Profit Ana­
lyzer tool analyzes meaningful metrics and data that impact the bottom
line, including freight revenue, the cost of hauling freight, network bal­
ance, utilization, and lane profitability.This profitability includes not only
the direct revenue on each shipment, but also direct and allocated costs
to move the shipment including the cost of deadhead and dwell time be­
tween shipments.

Superspin: This component is a strategic network planning optimization

tool that helps carriers plan their less than truckload (LTL) and less than
containerload (LCL) freight shipments.

Transportation Management:
Consider the transportation-lifecycle-management module. It has the fol­
lowing components.

◆ Appointment Scheduling
◆ Audit, Payment & Claims
◆ Fleet Management
◆ Logistics Gateway
◆ Transportation Planning & Execution
◆ Transportation Procurement
◆ Yard Management
Appointment Scheduling: It allows carriers and suppliers to use Electronic
Data Interchange (EDI) or web based interface to self-schedule appoint-
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ments. It helps identify unnecessary “dwell time “and tasks that need to be
improved. The module also assists carriers in complying with government
regulations such as U.S. Hours of Service, the European Working Time Di­
rective.

Fleet Management: Carriers may use dedicated fleet as well as private

fleet. This module helps in integrating them and planning for maximum
utiIization.

Logistics Gateway: This is a private and secure portal that connects suppli­
ers, shippers, carriers to communicate and exchange all the information
- schedules, invoices etc. It gives real-time visibility into the status of or­
ders, shipments and sends alarms about delays. This portal, allows print­
ing of standard shipping documents such as manifests, pack lists and bills
of lading, and enables trading partners to generate electronic Advance
Shipping Notices (ASN) and UCC-compliant shipping labels. Also, claims
for damaged products, late shipments, demurrage or virtually any non­
compliance event can be done automatically by trading partners

Transportation Procurement: This component is useful for managing

transportation related bids and contracts. It automates the entire procure­
ment process from RFP to final contract. The software considers the best
carriers available for each lane and each mode in the organization's global
network- including road, rail, sea, and air- and ensures that best rates are
obtained. Other factors such as price, quality, service and capacity factors
are also considered.

Yard Management: This component helps in managing the inbound and

outbound goods from yards. It considers the type of shipment, labor
needs, dock and warehouse capacities and helps in planning, executing
and tracking loads. It offers complete real-time status of all trucks and
trailers.
Distribution Management:
Consider the Distribution Management Module: This has the following
components:

• Billing Management
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◆ Hub Management
◆ Labor Management
◆ Labor Scheduling
◆ Slotting Optimization
◆ Supplier Enablement
◆ Warehouse Management
Hub Management: A hub can be distribution hub, cross dock, pool pint,
transload facility or consolidation/de-consolidation point. This software
provides web-based technology to enable scan-based receiving, ASNs and
shipping labels, and cross-docking services. Hubs can even consolidate
shipments directly to stores and end customers, bypassing warehouses
altogether.

Labor Management: This component helps in matching laborers with

tasks on hand considering their availability, capabilities, skills, seniority,
specific limitations, and performance. It helps in identifying their
productivity by comparing against industry standards. This component
is very useful in meeting seasonal demands, reduce overtime pay, and for
planning for extra temporary labor. Slotting Software: This is a very
important component. Warehouse slot­ ting-managing the physical
location of inventory-is critical to the ability to fill orders quickly,
accurately and safely. The Slotting Optimization software uses data on
each products physical characteristics and order frequency to calculate
a relative value for each potential slot position within the warehouse. The
values for all products are aggregated. It then compares millions of slot
combinations against the user-configured strat­ egies to determine the
optimal layout for the warehouse.

As input data changes, such as seasonal ordering trends or new/discon­

tinued products, Slotting Optimization can incrementally revise its rec­
ommendations to keep the warehouse operations at maximum efficiency
without costly overhauls. Slotting Optimization can also track changing
inventory to enable continual improvements. The software can be used
from day one to plan racking requirements and maximize capital invest­
ments in costly warehouse infrastructure.
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Slotting Optimization automates and manages many critical warehouse
slotting components, including:

• Determining the best placement of inventory

• Solving space utilization problems by determining the
appropriate storage capacity and volume-balancing levels
• Determining the appropriate amount of racking and racking type
based on projected inventory levels
• Maintaining the preferred item sequencing and family groupings
• Importing sample sets of data and simulated picking assignments
to enable advanced cost analysis and determine optimal personnel
placement
• Capturing data and simplifying analysis for tracking key slotting
performance indicators
• Recommending incremental adjustments as products are added
or deleted, to meet seasonal demand, or to accommodate other
changes as they occur.

Warehouse Management System

Warehouse is the heart of supply chain. The operations inside a warehouse
are complex and need to be managed efficiently to obtain productivity
gains in labor, physical space, time, inventory and costs. Warehouse Man­
agement System (WMS) can enhance inventory management by increas­
ing accuracy, improving order fulfillment and reducing order cycle time.

Warehouse Management monitors vendor compliance, efficiently man­

ages multi-channel distribution, and responds quickly to shifting demand
to optimize performance. It also enhances inventory management by in­
creasing accuracy, improving order fulfillment and reducing order cycle
time. Receiving and shipping are streamlined as well to facilitate cross­
docking and expedite back-ordered products. And cycle counting capa­
bilities eliminate annual physical counts.

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Additional WMS benefits include the ability to:

• Automate picking, packing and shipping and minimize the

number of moves per order
• Improve the accuracy of every order and reduce safety stock
• Consolidate orders to reduce transportation and shipping costs
• Eliminate annual physical counts
• Reduce expenses on labor and storage by managing tasks and
improving processes
• Plan and balance workload and monitor activities with Labor
Management integration
• Improve warehouse layout for faster fulfillment and overhead
reduction
• Minimize the need for warehouse space with cross-docking and
flow-through capabilities
• Provide voice-enabled capabilities from pick/pack to forklift
operations
• Facilitate efficient receiving and disposition of returns
• Integrate material handling equipment (diverts, inductions, pick/
pack, complex sortation)
• Support numerous parcel and LTL carriers, including native rating,
routing, label and paper manifest generation, and end-of-day
electronic invoicing

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ELECTRONIC COMMERCE AND E-PROCUREMENT

INTRODUCTION
Ecommerce refers to the buying and selling of goods and services over a
network of electronic devices. It is more than a decade since people used
the web to buy products. The most common types of ecommerce are the
B2B (Business to Business) and B2C (Business to Consumer). Ecommerce
has many benefits. Among them, significant ones are:

• Allows small players into the arena

• Helps to discover new suppliers
• Tap into new geographies not usually reached into.
E-commerce provides the opportunity to bring together a practically un­
limited number of offers from different suppliers across the globe. For the
supplier, in particular the smaller ones, e-commerce offers access to po­
tential markets hitherto impossible. Also, e-commerce provides the ca­
pability to manage the yield of manufactured goods. A company with low
capacity utilization in a particular time can bid for orders to fill up its fixed
production capacity. Likewise a buyer with an unpredicted surge in
demand may face shortage of raw materials. He/she can bid for raw
materials using the web. Thus, better utilization of capacity or liquidation
of excess stock - both of which increase the bottom line - is possible via
e-commerce. The web also extends the reach and provides richer infor­
mation to facilitate better and quicker identification, selection and certifi­
cation of suppliers.E-markets are the electronic version of yesteryears'
marketplaces in physi­ cal locations like village square where goods could
be bought, sold or ex­ changed. In unilateral markets one seller negotiates
with several buyers, called one-to-many markets. Alternatively one buyer
may deal with sev­ eral sellers and these are called many-to-one markets.
The latter is found in company procurement processes. In multilateral
markets many buyers and sellers meet under one "electronic roof': The
markets may be dedi­ cated to one product only or may allow the selling
of many products simultaneously. The products may be indivisible (e.g. a
barrel, basket, bush­ el, or a container) or divisible (e.g.
telecommunication capacity) and may
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be traded one or several at a time. In the logistics industry the auction­
ing of distribution routes to carriers is an example of one-to-many case.
The routes (commodities) may be divisible (several carriers may serve the
same route) or indivisible (service for a route is sold to one carrier only).
Freight exchanges where loads (in single containers or full trucks) of differ­
ent shippers are given to different carriers belong to many-to-many, multi­
commodity, indivisible markets.

Auctions are part of marketplaces. Participants in an auction declare

bids, i.e. participants indicate the quantity and the price at which they are
ready to buy or sell. Several types of auctions exist. The most common
one used by governments and public institutions is the closed envelope
mechanism. In this, the participants bid once and the auctioneer selects
the winner -the one who bids the lowest price for offering a service or the
highest price for buying a product. This type however provides inefficient
allocations. In Vickrey-Clarke-Groves auctions, the highest bidder wins
but pays the second highest price. This incites participants to bid truth­
fully which is an advantage, but this is also open to manipulations (like
collusion) by participants. The different types of procurement methods
are:

a. Conduct an online auction in which different suppliers bid against

each other. This is best suited for large volumes of goods or for
periodic purchases or products that cost very high.
b. Participate in electronic auction sites
c. Buy directly from manufacturers or distributors or retailers by
browsing through their electronic catalogs
d. Procure from an industrial mall or exchange
e. Buy from an intermediary (or e-distributor) who aggregates
different manufacturer's catalogs
f. Buy from an internal buyer's catalog, in which the company
approved vendors catalogs, prices, terms of delivery, payment
are all spelled out clearly. This allows employees to directly order
mundane and routine items from the vendors directly from their
desktops using company's intranet. This is called desktop
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purchasing
g. Become a member of a group that pools the needs of its members
and thereby creates a substantial volume. The group negotiates
with manufacturers and procures at a very competitive price for
all its members.
h. Collaborate with vendors and allow them to track the company's
inventory and order new consignments when the inventory falls
below a threshold value. This requires the buyer to specify the
threshold limits for each product, the terms of delivery and
payment (payment is typically via electronic fund transfer). This is
called as Vendor Managed Inventory (VMI). This also allows just­
in-time delivery which is practiced by Walmart and many other
companies.
The benefits of e-procurement are:
1. Reduces the time spent on the different steps involved in the
purchasing process
2. Increases the productivity of the employees by providing them
additional (freed up) time to focus on other activities
3. Lowers the cost through product standardization, vendor
standardization, consolidation of needs, volume discounts
4. Minimizes purchases made from nonstandard vendors (reduces
maverick buying)
s. Streamlines the purchase process and makes information flow
and management smooth
6. Enhances the relationship with vendors
7. Minimizes the inventory by adopting just-in-time delivery
8. Structures the payment methods
9. Minimizes human errors
10. Reduces the number of vendors and thereby consolidates the
payments to be made
11. Makes account reconciliation easy and quick

12. The process of negotiation and establishing the initial contract

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process can be done by a few skilled people while others who are
less skilled can just focus on placing the orders. Thus, the entire
purchase department need not be very highly skilled (hence paid
high) and also trained
13. Monitoring and regulating the purchase process is easy
14. New suppliers /vendors can be found quickly.
15. Administrative costs and cost of other non-value adding activities
are reduced

B2B Electronic Exchanges

Electronic exchanges are trading venues that allow many-many transac­
tions. Many exchanges also support community activities, such as dis­
tributing industry news, discussion forums, and blogging. Exchanges are
known by many names e-marketplaces, e-markets, trading exchanges,
trading communities, exchange hubs, internet exchanges, and Net Mar­
ketplaces. The Exchanges serve three major roles:

1. Matching Buyers and Sellers: This process of connecting the two

parties includes the following activities:

• Offer a variety of products

• Pool different needs and post them
• Organize bids, barters and auctions
• Match suppliers, offerings with buyers preferences
• Facilitate comparison of different products their features, prices
• Offer directories of buyers and sellers
2. Facilitating Transactions: This includes the following activities:

• Provide a platform for trading and include logistics of delivering

information, goods and services to buyers
• Set the policies and guidelines for all to abide and ensure their
compliance
• Provide billing and payment services
• Facilitate search
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• Register and qualify buyers and suppliers with appropriate

screening
• Ensure transactions are secure
• Facilitate volume purchases and hence discounts

3. Maintain policies and infrastructure:

• Advertise the exchange, products, offers, and discounts
• Ensure compliance with contract law, import and export laws, and
intellectual property laws for transactions made via the exchange
• Maintain hardware and software infrastructure needed to
facilitate transactions and accommodate growth in volumes
• Be capable of interfacing with computer systems of buyers and
sellers
Examples of Exchanges

www.thomasglobaI.com

A directory of over 7, 00,000 manufacturers and distributors located in

about 30 countries and has over 11,000 products and service categories
in 9 languages. It includes regional guides such as Thomas Register of
America (www.thomasnet.com).

www.alibaba.com

It was first launched in China in 1999 as an infomediary. Later it has be­

come a trading exchange. In June 2001, the site had more than 156 mil­
lion visitors, i.e., about 20% of the worldwide Internet population.

www.agentrix.com

This is probably the world's largest exchange for retail and packaged con­
sumer goods. It was formed as a merger of several exchanges, including
the World Wide Retail Exchange (WWRE) and GNX. It has more than two
thirds of world's top 25 retailers (including Sears, Safeway and Tesco).

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www.toboc.com

This is a Canadian initiative for global trade. It sells a variety of products

from the mundane to the exotic. For instance, the products include appar­
els, automobiles, electronic and electrical goods, food, home appliances,
medical supplies, Gold bars, marble clocks,

www.fibre2fashion.com

This is world largest and highly visited B2B platform for Apparel - textile
fashion vertical. According to the web site, ''Fibre2fashion offers its ser­
vices in various forms of business enhancement models for the textile in­
dustries to scale up their business. With more than 1 million visitors per
month, mostly professional buyers and sellers, we raise the community of
buyers and sellers, posting around 25000 business leads a month, global
coverage of news and views- almost 100 a day, current researched articles
to almost 50 a month and fortnightly trends of 22 major fibre and feed­ stock,
1
necessary for decision makers'

www. bizxchange.in

This is an electronic exchange started by the Times Group (India's leading

media conglomerate) in India primarily to provide a platform to provide its
members access to list of suppliers and buyers.

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ELECTRONIC DATA INTERCHANGE

INTRODUCTION
In simple terms, Electronic Data Interchange (EDI) is the electronic ex­
change of business documents between companies. This includes Invoic­
es, Purchase Orders, Shipping Notices, Sales Forecasts, etc. The company
with which these documents are exchanged with is called EDI trading
partner. In 1969, Sears Roebuck and Co. started EDI. It has since expanded
to medical, retail, auto and food industries. The flow of information using
basic EDI is as given below. Consider two companies A and B with A being
the seller and B the buyer.

Company B generates an electronic purchase order and sends it via the

network called Value Added Network (VAN) to a mailbox.

EDI system of company A picks up this PO, converts into it a human read­
able form and prints a hard copy. The EDI system sends an acknowledg­
ment to B via VAN stating that the PO has been received. The PO is also
formatted so that it can be imported into the computers in A.

The computers in A import the formatted PO and then it follows the normal
process how a new order is processed. The EDI system also will generate
UPC labels for each product in the PO.

When the order is ready to be shipped, company A sends an invoice via

VAN to the mailbox.

The EDI system in B picks up the invoice from the mailbox and processes it
the usual way.

Thus, two companies A and B transact electronically by sending the nor­

mal business documents in standard formats allowing the computers to
process them electronically.

Hardware Needed For Edi System

1. A personal computer
2. A Uniform Code Council (UCC) Manufacturing Number
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3. UPC codes for each item that is sold

4. EDI software to import PO and export Invoices

Value Added Network (VAN)

A VAN is an intermediate clearinghouse that receives and holds EDI docu­
ments to be picked up later by the receiver. The VANs function as a cen­
tral repository or like a hub in the airline industry. All businesses can send
and receive documents from one central repository. As different business­
es use different computer systems and possibly different protocols VAN
helps in overcoming the problems associated with diversity. Though EDI
documents have been standardized, sometimes a few businesses use pro­
prietary formats. Then, vendors must send documents to that company
using the proprietary format.

But, VANs eliminate this inconvenience. The businesses send documents

to VAN which then checks them for conformance to the formats, identifies
any missing entries and those documents that do not comply are returned
to the sender. Thus, only complete and valid documents are received.
VANs charge based on the number of characters transmitted. The charge
is on a per kilo character (KC) basis. Sometimes, EDI documents are sent to
one VAN and then get picked up by another. For t his, there is an"intercon­
nect charge"for each trading partner.

Benefits of EDI
1. The transfer of information is automated as two computers talk
to each other. This eliminates data entry at multiple points and
thereby possibly introducing human errors.
2. Processing EDI based orders is faster and cheaper.
3. Customer satisfaction is significantly improved as orders are
processed correctly and quickly.
4. Customers can track the progress of orders like shipments sent
via couriers.
s. Rudimentary computer skills are needed to maintain EDI systems
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Demerits of EDI
1. Requires significant upfront investment and considerable expense
for maintainance.
2. As it is a one -to-one connection it must be replicated for each
supplier. This investment is difficult to justify in the early stages of
a buyer supplier relationship when the buyer has still not assessed
the supplier's capability.

EDI Standards
The documents that trading partners commonly exchange are request for
quotation(RFQ), purchase order (PO), invoice, bill of lading, shipping no­
tice, receiving advice and other similar ones. A computer must "extract"
information from these documents and process them. If the information
is presented in these documents in a standard form that all trading part­
ners agree then it becomes easy for any partner to do business with any
other partner electronically. This is the idea behind developing common
standards.

In US, the transportation industry was one of the early adopters of EDI
standards. The retail industry followed suit, but they developed their own
standards to suit their needs which were different from transportation sec­
tor. The Uniform Communication Standard (UCS) developed by the gro­
cery industry was adopted by other manufacturers in the retail sector. The
companies in Europe independently developed their own standard s. A few
of them were Trade Data Interchange (TOI) for warehouse operations,
Organization for Data Exchange by Tele Transmission in Europe (ODETTE)
for the automobile industry, and Data Interchange for Shipping (DISH) in­
dustry.

The proliferation of standards caused confusion and was unmanageable.

The American National Standards Institute formed a committee Xl 2 called
Accredited Standards Committee. The common standards developed by
this committee for use by all US businesses are called ANSI Xl 2 standards.
In 1987, the United Nations announced United Nations EDI for Administra­
tion, Commerce and Transport called UNEDIFACT.
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As per UNEDIFACT, the basic unit of communication is called an inter­

change. An interchange consists of functional groups of messages. Each
functional group may contain many messages of the same type and each
message is a collection of data segments, with each segment comprising
of data elements.

EDI Software
This software "reads" the information contained in business documents
and converts them into the standard formats and sends them to the VAN.
When a company retrieves documents from the VAN, the process is re­
versed ie., the information is converted from the standard format to the
format of the business document. An EDI document is typically a flat file
containing data separated by delimiters (similar to a comma separated
values). If a few trading partners use proprietary formats, then the soft­
ware must be able to convert it to those proprietary formats also. Good
EDI software must be able to handle multiple formats.

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TRACKING AND TRACING

INTRODUCTION
In logistics part of the supply chain, the physical operating layer remained
disconnected from the information layer for many decades. People knew
that the product has been shipped or is being produced or has been or­
dered. The status update was limited to 1'it is in truck'; or "it has been sent
1
by ship' and the like. But, the exact status (when will shipment arrive, what
stage of production is it in, or where the shipment is) was not known. But,
today complete, real-time visibility across all the links in the supply chain
is a must.This visibility has been necessitated due to competition, custom­
er's demands, the need to plan based on status updates and importantly
to reduce the costs due to shrinkage (theft, misplaced and missed goods).
Information Technology facilitates such visibility.

Shrinkage affects all retailers. The total retail losses are estimated to be
more than €30 billion across Europe. The retail giant Wal-Mart is estimated
to lose about a $1 billion per year. A study conducted by Tuck School of
Business and Merchant Risk Council in 2005, found that supply chain loss­
es within the U.S. retail supply chain (excluding store theft) total nearly 1%
of sales revenue. Product leakage occurs across the chain from inbound
freight to outbound distribution. Apart from tangible losses, shrinkage
also causes inaccuracies in the inventory. This in turn affects customer ser­
vice, lost sales and customer dissatisfaction and probably customer deser­
tion - all intangible but significant losses.

Today, information technology allows the status of goods (individual

items, cartons, totes, dollies, barrels, bottles, containers, trucks, ships, rails,
and other conveyances) to be known in real-time and accurately. Many
technologies (RFID, 802.11, Bluetooth, pagers, cellular, GPS, bar codes)
along with Internet to transmit the collected data in real-time to central
locations are available. By way of clarification, the two terms tracking and
tracing are defined. Tracking refers to monitoring the status of a shipment
or product or person. Tracing refers to searching to find the “lost goods/
products':

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Bar Codes
Barcode is an automatic identification (AutolD)technology that helps com­
puters to identify products. It was developed in the 1950s and expanded
into the retail industry in 1960s. It is easy to identify products with codes
than with descriptions for processing by computers. Thus, each product is
given a number (either numerals alone or alphanumeric). For example, in
retail chains, products can be identified and billed directly by reading the
codes. In manufacturing, inventory can be tracked by reading the codes
and checking the total number of items available in each type. In the
healthcare industry, even patients can be tagged for better tracking and
for matching the medication and treatment recommended to them. One
way to read the code would be capture a photograph of it and inter­ pret
the image. This is complicated and involves optical character recogni­ tion
(OCR) technologies which is of recent origin and still has not matured
completely. Bar codes are precursors to OCR. They designate letters and
numbers in the form of lines of varying height and widths. By using a la­
ser beam that reads this height and weight, the alphanumeric characters
can be deciphered and the product code determined. With this code, the
product description and cost can be automatically read from a database.
Symbologies
The mapping between messages and barcodes is called a symbology. The
specification of a symbology includes

1. the encoding of the single digits/characters of the message

2. the start and stop markers into bars and spaces,
3. the size of the quiet zone required to be before and after the
barcode and
4. the computation of a checksum.
A matrix code, also known as a 2D barcode, is a two-dimensional way of
representing information. It is similar to a linear (1-dimensional) barcode,
but has more data representation capability. Some symbologies use in­
terleaving techniques. In these, the first character is encoded using black
bars of varying width are used to represent the first character. The second
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character is then encoded, by varying the width of the white spaces be­
tween these bars. Thus characters are encoded in pairs over the same sec­
tion of the barcode. An example of this type of symbology is the barcode
called Interleaved 2 of 5.

Choosing a Symbology
There are many factors to be considered in choosing a symbology.

Symbol Set: All symbologies have some limitations on the number of

characters that can be encoded. UPC (Universal Product Code) is the most
limiting. It is a numeric-only bar code. Code 128 is the most flexible, with
the full (128-character) ASCII set available.

Density: The number of characters that are packed in unit space, say an
inch, varies with the type of symbology. For instance, numeric-only bar
codes such as Interleaved 2 of 5 can encode many more numbers in a
given space than a more flexible symbology such as Code 128. Some bar­
code scanners are designed to read symbols of specific densities. Hence,
the choice of symbology is very important.

Readabilitv: Some bar codes are inherently more readable than others. For
example, Code 128 is easily and successfully read by most readers.

Durability: Some symbologies are more durable than others. As a rule of

thumb, those with better readability are more durable than others. It is better
to test the bar codes by subjecting them to some abuse or wear and then
checking if the scanner can still read them.

Setup: Many bar code readers have certain symbologies disabled in their
default configuration. If at all possible, it is best to use a symbology that
the reader will read"out of the box."This will reduce the time needed to set
it up and also avoid customization when a scanner is replaced.

Trading Partner: The bar codes chosen must be compatible with those
used by the trading partners.

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Numeric-only barcodes
• Codabar: Older code often used in library systems, sometimes in
blood banks; the character set consists of barcode symbols
representing characters 0-9, letters A to D and the following
symbols: - . $ / +.
• Code 11: Used primarily for labeling telecommunications
equipment and consists of barcode symbols representing the
numbers 0-9, a dash symbol, the start character and the stop
character
• EAN-13: European Article Numbering international retail product
code consists of 13 numbers.
• EAN-8: Compressed version of EAN code for use on small products
and consists of 8 digits.
• Industrial 2 of 5: The character set consists of barcode symbols
representing the numbers 0-9, the start character and the stop
character; older code not in common use
• Interleaved 2 of 5: Compact numeric code used for encoding pairs
of numbers in a high density format; widely used in industry, air
cargo
• MSI: Variation of the Plessey code commonly used in USA

• Plessey: Older code commonly used for retail shelf marking

• PostNet: This is a special barcode developed by the US Post Of­

fice to encode zip code information; helps in automated mail
sorting; POSTNET stands for Postal Numeric Encoding Technique
• UPC-A: Universal product code seen on almost all retail products
in the USA and Canada and consists of 12 numbers
• Standard 2 of 5: Older code not in common use

• UPC-E: This consists of 12 numbers that are compressed into 8

numbers for small packages.

Alpha-numeric barcodes
• Code 128: Very capable code, excellent density, high reliability y;
in very wide use world-wide; Character set A allows for uppercase

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characters, punctuation, numbers and several special functions

such as a return or tab and Character set B allows for upper and
lower case letters, punctuation, numbers and a few select
functions
• Code 39: General-purpose code used widely across the globe ;
is designed for character self-checking, thus eliminating the
requirement for check character calculations.
• Extended Code 39: The full 128 character ASCII character set can
be printed with the Extended Code 39 barcode
• Code 93: Compact code similar to Code 39 and character set
consists of barcode symbols representing characters 0-9, A-Z, the
space character and the following symbols: /, +, %, - , . , $
• LOGMARS: Same as Code 39, this is the U.S. Government
specification

2- Dimensional barcodes
• PDF417: Excellent for encoding large amounts of data; uses
Reed Solomon error correction; the printed PDF417 barcode can
withstand damage without losing data
• Data Matrix: Is a very area efficient 2D barcode symbology that
uses a unique square module perimeter pattern that helps the
scanner determine cell locations.; can encode letters, numbers,
text, data; Can hold large amounts of data, and is best suited for
making very small codes
• Maxicode: uses barcode symbologycontaining hexagon modules
in a 1,, square area; used by United Parcel Service for automated
package sorting
• QR Code: can encode characters, numbers, text, data including
Unicode characters and photos; used for material control and
order confirmation
• Data Code
• Code 49
• 16K
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Industry Standards for Barcodes and Labels

• Bookland EAN encodes ISBN numbers, used internationally to
mark books
• ISSN and the SISAC Barcode: International Standard Serial
Numbering
• OPC: Optical Industry Association barcode for marking retail
optical products
• UCC/EAN-128: Widely used data formatting model for Code 128;
Character set C encodes only numbers and because the numbers
are "interleaved" into pairs, two numbers are encoded into every
barcode character which makes it a very high-density barcode.
• UPC Shipping Container Symbol: ITF-14

UCC Manufacturing Numbers

In the early 1970s, executives from the grocery industry established the
"Uniform Grocery Product Code Council:' In 1973, an adhoc committee
chose a 11 digit linear bar code as the Universal Product Code . In 1974,
a package of Wrigley's chewing gum was the first grocery product to be
scanned using the Universal Product Code in Ohio, USA. Same year, the
name of the council was changed to Uniform Product Code Council
(UPCC), and in 1984, the name was again changed to the Uniform Code
Council (UCC). The UCC as a private, not-for-profit organization.

The UCC expanded its reach in addition to grocery to other types of indus­
tries including general merchandise, healthcare, and logistics/ t ranspo rta­
tion and developed many bar code symbologies and bar code standards.
The UCC co-managed the EAN-UCC System with EAN International. In
2005, UCC and EAN merged and a new entity called GSl was created. By
2003, more than 300,000 UCC numbers were issued. Today, GS1 focuses
on establishing B2B supply chain solutions, promotes the use of the suite
of open, industry-supported business standards, and conducts workshops
and conferences. The bar codes have proliferated that every day more
than 5 billion bar codes are read by scanners across the globe. (www.
gsl us.org).
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A few examples, for both mundane and novel uses of barcodes in various
industries are given below. Since 2005, airlines are using an IATA-standard
20 barcodes on boarding passes and from 2008, these have been sent to
mobile devices facilitates electronic boarding passes. All checked in bags
have been stamped with 20 barcodes. This idea has been expanded to
tickets issued in theme parks, casinos, ski resorts and other places of
entertainment. Ev en in fash­ ion shows, barcodes assigned to models,
help the designers to match the outfits that must be worn, with the models.
In the health industry, patients are given wrist bands with barcodes and
this helps the health officials to match the medication and treatment with
the patients very conveniently and most im port ant ly, the chances of
errors are minimized. With a single scan, the entire patient history is
pulled up on the computer screen.

Entomologists have mounted tin barcodes on bees to track their mating

patterns without disturbing their natural behavior. In 1997, high school
girls in Tokyo had temporary tattoos in the shape of a barcode that had
embedded secret messages such as "I love you': The company that made
the tattoos sold more than 1 million packages in a year.

In certain web sit es, 20 barcodes are embedded with a hyperlink . A smart­
phone reads this barcode, browses the linked website, and gets store loca­
tion information, offers and coupons. In USA, during telethons conducted
on TV, barcodes are displayed on TV and smartphones can scan them and
make donations easily using their cell phones. Customer loyalty programs
use barcodes printed on the cards given to members. This allows the busi­
nesses to customize and effectively meet the needs of diverse customers.
The applications in Military are also many.
HOW TO GET A BARCODE?
A company must pay a fee to UCC (now called GS1) and obtain a unique
six digit 'Manufacturing Number'. The company can then assign any five
digit number to the products it makes. Thus, each manufacturer can have
100000 unique products. In USA, barcode consists of 12 digit s. The combi­
nation of t he'Manufacturing Number'and the company assigned five digit
number comprise the first eleven digits (start ing from left) of the barcode

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for the product. The last digit (from left) or the twelfth digit is obtained by
running the eleven digits through a special formula. This digit is called
the'check digit'. Thus, a blue and a red permanent marker produced by a
company will have two different barcodes, the first six digits of which are
the same because they are produced by the same manufacturer.

UPC TAGS/TICKETS
This is a label with the barcode and a brief description of the product. It
can be the size, color, model number or anything that the manufacturer
chooses to add or the customer desires to see. An EDI system will auto­
matically print these tags to be attached the products.

Radio Frequency Identification (RFID)

Radio Frequency Identification refers to the use of radio frequency waves
to read information contained in a microchip embedded in a small tag
which is placed on any object. This chip can store any type of information.
The tag can serve three purposes:

1. It can be similar to Universal Product code (bar code) and serve

merely as an identifier
2. It can store information related to the product and assist people
who handle the product, those who use the product and those
who ship the product. In this way, it functions as a packaging
label, instruction sheet and guidelines.
3. For global shipping of packages or containers, in combination with
GPS (Global Positioning Systems) Technology, the shipment can
be tracked in real-time. This is very useful when expensive items
(such as gold, diamonds, and art) or sensitive items (bombs,
nuclear fuel, and nuclear waste) are shipped.
Examples of information that can be stored in the chip (tag) are:
In pharmaceutical industry, it can contain the batch code, date of manu­
facture, date of expiry, storage (do not expose to sunlight, keep it in refrig­
erator etc.) instructions
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In the shipping industry, it can list the items packed in the container, ori­
gin of container, shipper's name, insurance related details, and unloading
instructions.

The Electronic Product Code (EPC) is one of the popular pieces of informa­
tion stored in a tag. It is a 96-bit string of data. The composition of them
is as follows:

• 1 - 8 bits Version of protocol

• 9 - 36 bits code for the organization that manages the data
contained in the tag
• 37 - 60 bits identifies type of product
• 61 - 96 bits unique serial number allotted to the tag
In this, 1-8 bits are decided by choice of protocol made by the organiza­
tion. 9-36 bits contain the number assigned to the organization by the
Electronic Product Code (EPC) Global consortium. The remaining bits are
assigned by the organization using the tag.

HOW DO RFID TAGS WORK?

The RFID tag is placed on the surface of the object to be identified or
tracked. If the tag contains a battery power, then it is called an active tag
and if it does not, then it is called a passive tag. The active tags can send
the information (using their power source) which can be captured by a
RFID reader. The passive tags derive their power from the RFID reader's
magnetic field and transmit the information. Active tags are expensive
and have longer read ranges while passive tags cost less and have short
read ranges.

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Commercial Applications of RFID Technology

There are myriad applications of RFID in the business environment. A few
of them are discussed below.

PAYMENT: RFID tags are used in mass transit systems like buses, t rams,
trolleys and subways to pay for tickets. It is also used to collect tolls on
highways.

HEALTHCARE: It is used in hospitals for identification, workflow and inven­

tory management. The Federal Drug Administration in USA has approved
the implanting of RFID chips in humans. These chips operate 134 KHz and
contain patient identification information, history, treatment provided and
medication.

TRACKING: Animals and birds have been tagged with RFID tags primar­
ily to track their movements and migration. It is also used as a means to
check the inventory. Libraries have used RFID tags to bags to check
theft.
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EDUCATIONAL INSTITUTIONS: School going children carry RFID enable

Identity cards, have cards on their clothing, books and personal belong­
ings. They also help in tracking small children and ensure that they don't
leave the school premises. The tags can be used to take attendance auto­
matically.

PASSPORTS: RFID enabled passports have long been in use. Malaysia was
the first country to introduce them in 1998. Today, many European coun­
tries and US have RFID enabled passports.

RFID Concerns
The products that have RFID tags can be tracked even without the owner
not knowing it. Thus, many customers feel that this is an invasion into peo­
ple's privacy . But, some of these fears have been proven to be unsubstan­
tiated. IBM has suggested the use of clipped Tags to overcome these con­
cerns. Once a customer has bought a product, he can tear a portion off the
tag. This will convert the tag into one capable of transmitting data only
over a few inches. Thus, remote tracking is not possible. However, since
the tag is still on, it can be used for product return, recall and recycling.

Differences Between Barcodes and RFID Tags

Barcodes are used only for identifying an object'code alone whereas RFID
tags can store information (in descriptive text, and data)

Barcode readers require line-of-sight whereas RFID readers do not.

Barcode of objects inside a carton or box cannot be read unless the reader
11
"sees the barcode whereas RFID readers do not pose such a const raint.

Barcodes can be read one at a time, whereas RFID tags can be read hun­
dreds at a time.

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Benefits of RFID
RFID helps businesses in the following ways:

1. Asset security: anti-theft, anti-counterfeit, intrusion detection

2. Regulatory compliance: Helps in preventing counterfeit products
and obsolete ones from being used
3. Labor Reduction: Automation reduces the dependency on
physical labor and the associated costs and possible errors
4. Inventory: Counting and movement of inventory is easily and
accurately done
s. Sorting: Packages can be easily sorted
6. Returns: Goods that are returned can be quickly processed

A direct impact of the above are the intangible benefits such as improved
customer service, better customer satisfaction, and higher customer re­
tention.

Challenges of RFID
1. The cost of the tags is still significant especially for large scale
commercial use by the developing countries.
2. Tags cannot be read easily in environments where interference
from other devices, high temperature or high humidity, or
vibration is present.
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3. Readability is poor for objects that contain liquids (bottles), and

highly curved surfaces.
4. The very large amount of data generated by the RFID tags poses
a challenge in storing, managing and processing the data.
s. Privacy concerns discussed above also pose a significant
challenge.

GS1 Standards
GS1 is an international not-for-profit organization based in Belgium. It has
developed standards for use in the supply chain which today have been
adopted by many industries.

GS1 Identification Keys

The GS1 System of standards includes a range of GS1Identification Keys,
including the GTIN, GLN, SSCC, GRAI, GIAI, GSIN and GINC, as described
below.

The Global Trade Item Number (GTIN), is used to uniquely identify trade
items (products or services) that may be priced, or ordered, or invoiced at
any point in any supply chain. Each trade item that is different from an­
other is allocated its own separate GTIN. Their main function is to provide a
way to uniquely identify any item so it can be looked up in a database -for
example to get its price, record its sale, confirm its delivery or identify its
order - and this, at any point during the supply chain and from any place
in the world.
The Global Location Number (GLN) is the GS1 ID Key used to identify
locations and legal entities. Being able to identify locations with a unique
number is vital to many business processes; GLNs are also the essential
building block for a variety of EPC/ RFID applications built around loca­
tion. Using a GLN rather than a proprietary internal numbering system for
locations gives a company significant advantages, because it provides a
standardized way to uniquely identify entities and locations throughout
the supply chain.

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The Serial Shipping Container Code (SSCC) is the GSl ID Key used to
identify individual logistic units. A logistic unit can be any combination of
units put together in a carton, in a case, on a pallet or on a truck, where
the specific unit load needs to be managed through the supply chain. The
SSCC enables a unit to be tracked individually, providing benefits for order
and delivery tracking and automated goods-receiving.

The serial reference component of the SSCC provides virtually unlimited

number capacity, simplifying number allocation and guaranteeing unique
identification.

The Global Returnable Asset Identifier (GRAI) is used to identify return­

able assets such as re-usable transport equipment like trays, crates, pallets
or beer kegs that are used and then returned to be used again. The GRAI
can be used simply for asset identification and tracking purposes, or it can
be as part of a hiring or rental system where two or more companies col­
laborate, as it allows enterprises to scan assets into and out of their busi­
nesses.

The Global Individual Asset Identifier (GIAI) is used to identify fixed as­
sets of any value within a company that need to be identified uniquely, for
the transportation purposes this can include a truck, a trailer, a Unit Load
Device (ULD), a container, a rail car, and so forth.

The Global Shipment Identification Number (GSIN) is a number as­

signed by a seller (sender) of the goods . It provides a globally unique num­
ber that identifies a logical grouping of physical units travelling under one
dispatch advice and/or one bill of lading as part of a specific seller/buyer
relationship: from the consignor (seller) to the consignee (buyer). The GSIN
fulfils the requirements of the Unique Consignment Reference (UCR) of
the World Customs Organisation (WCO), which can be used by Customs
authorities to identify shipments subject to import or export processes.

The Global Identification Number for Consignment (GINC) identifies a

logical grouping of goods (one or more physical entities) that has been
consigned to a freight forwarder or carrier and is intended to be trans­
ported as a whole.

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The GSl ID Keys are complemented by GSl Application Identifiers (GSl Als).
GS1 Als act like a code list of generic and simple data fields for use in multi-
sector and international supply chain applications. Each GSl Al con­ sists of
two or more digits and provides the definition, format and structure of the
data field encoded in a GSl Data Carrier. For example, a GSl Al exists for each
GS1 ID Key, allowing them to be encoded in GS1 Bar Codes or EPC/ RFID
tags. Supplementary data is always associated with a GSl ID Key and, while
the intention is that the GSl ID Key is used to find information about the
identified object in a database, GSl Als exist for supplementary data that
cannot be looked up in a database by reference to the GS1 ID key.
GS1 Data Carriers
The GS1 System of standards also includes an entire portfolio of data car­
riers: different kinds of media that can hold GSl ID Keys and application
identifiers. The same content can, in fact, be encoded into different kinds
of carriers, depending on what use will be made of it. GSl Data Carriers
include:
GS1 BarCodes are data carriers which enable the rapid and unambiguous
encoding of GTIN, GLN, SSCC and other GSl Identification Keys and GSl
Application Identifiers (Als). Using bar codes can greatly reduce human
errors in data entry and processing.

EPC/RFID tags, which use Radio-Frequency Identification technology to

encode GSl ID Keys in the GSl Electronic Product Code (EPC). The GSl I­
dentification Key of the item (e.g. SSCC, GRAI, etc) is stored on a tag that is
attached to the item and carries data programmed into a small computer
chip and operates at a wide range of radio frequencies. The data relating to
the item can then be used within and between organizations and tradiing
partners in a secure manner via the EPC global Network.

GS1 Communication Standards

Finally, the GSl System of standards also comprises a set of communica­
tion standards:

GSl eCom Communication Standards, for example, uses GSl Identification

Keys such as GTIN, GLN and SSCC to unambiguously identify the products,
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services and parties involved in any electronic business transaction, en­

abling these exchanges to be smoothly compatible, between companies,
and also across borders and across industries.

GS1 eCom provides two complementary standards:

GS1 EANCOM® and GS1 XML. They both allow a direct link between the
physical flow of goods or services, and information related to them.

The GS1 Global Data Synchronisation Network, or GDSN®, is another GS1

Communication Standard. The GDSN is built around the GS1 Global Regis­
try®, GDSN certified data pools, the GS1 Data Quality Framework and GS1
Global Product Classification, which when combined provide a po werful
environment for secure and continuous synchronisation of accurate data.

CASE STUDY (Source: www.gs1.org)

Unilever operates several dozen warehouse sites across Europe with a
number of different logistics partners. In 2005, this global manufacturer of
food, home care, and personal products identified an opportunity to im­
prove the way it works with these partners, through the standardization of
processes, the establishment of electronic messaging and the conso lida­
tion of connectivity. OHL Supply Chain, the contract logistics arm of OHL,
was one such partner.

The two companies worked together on what they named the Warehouse
Communication Integration (WCI) project. WCI is a business process mod­
el based on common business processes and messages and connectivity
standards. WCI was established as a pan-European effort, covering all Uni­
lever product categories and focusing on OHL Supply Chain's core ware­
house management activities. Warehouse management is the receipt,
storage and preparation of products for customer delivery on the basis of
orders, as well as the control and disposal of damaged or obsolete sto ck.
The WCI standard's objectives were to establish a limited set of 16 GS1
XML message-types that would be used to cover all the business require­
ments for warehousing for the Unilever business units involved, as well as
to create a single point of connectivity between Unilever and OHL.

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Unilever and DHL also aimed to standardize best practice processes in the
warehouses covered by the project. Unilever and DHL jointly created strong
central teams consisting of IT and business champions covering the United
Kingdom, Spain, Belgium, Slovakia, Hungary, Ireland and Portugal. The
WCI project became an enabler of the Unilever SAP Consolidation
programme and was also linked with DHL's enterprise Systems Integration
(ESI) developments, ensuring that the two partners were technically very
well aligned from the start of the project.

By the end of 2008, WCI standards were deployed to DHL sites in UK, Spain,
Hungary, Belgium and Slovakia,and standards will continue to be deployed
for new business and new warehousing sites servicing the participating
Unilever business units. Connectivity was moved to Internet and away
fromVANs. This resulted in significant cost benefits. Use of GSl eCom XML
messages has significantly streamlined communication between Unilever
and DHL
Common business processes mean better
communication
WCI makes use of a wide range of GS1 standards, including GSl Identifica­
tion Keys such as GTIN, GLN, and SSCC; GSl Bar Code standards such as
GS1-128 for labeling; and a wide range of GS1 eCom XML messages. WCI
covers all the processes that take place within the four walls of a ware­
house, with a set of 16 standard interfaces based on GS1 eCom XML stan­
dards. The messaging includes processes in master data management for
items and locations; inbound goods such as upfront notification of receipt,
receipts confirmation; outbound goods such as instruction to dispatch,
delivery, re-pack and dispatch confirmation; inventory control and man­
agement such as stock reconciliation, sampling, scrapping, (quarantine)
status, re-palletisation, pallet de-topping and physical movement s.

Deployment of the WCI standard has significantly streamlined communi­

cation between Unilever and OHL, speeding up the launch of new busi­
ness activities and sites. The creation of a single point of connectivity has
also improved the reliability of connectivity to levels well above what was
achievable before WCI. Best practices identified in individual warehouses

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are now more easily transferred to other sites. The standardization de­
livered by the WCI standard has also allowed Unilever to roll out its SAP
consolidation program more quickly. Because it is based on the concept
of "develop once, deploy anywhere:' another major benefit has been the
reduction of support and maintenance costs.

The level of efficiency gains realised by the project partners through the
initial WCI rollout has led to the decision to deploy the standard to the re­
maining sites, and to all new sites. During the project, the partners found
that the then available versions of the GSl XML messages did not always
cover all the requirements of the warehouse processes they were operat­
ing. In some cases, extensions to the standard GS1 eCom XML messages
had to be created.

Picking Technologies in Warehouse :

The principal goal of any warehouse is to fulfill customer orders by ensur­
ing,the Right Product at the Right Quantity is reaching the Right Customer
at the Right Time in Right Condition at the Least Possible Cost.

Common root causes for any failure in meeting this goal is due to errors
like - item omitted/missed, wrong item picked, count errors/miscount of
quantity etc, which all point towards: "pick efficiency': Added to this,
When considering the level of effort involved in warehouse operations,
the greatest expenditure of effort is in the picking process. Close to 60% of
time and effort of resources is spent on pick activity.

Technology lends a helping hand to improve the Pick Efficiency with a

number of ways. Pick To Light, Pick To Display, Pick To Voice are discussed
here. Especially considering the current acute shortage of manpower in
warehouse operation, the benefits of these technologies are:

• Improved productivity,
• reduced customer returns,
• reduced employee training,
• higher employee retention,
• more accurate inventory accounting.
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• Applications abound, Order selection being the most widely

used application. But also adept at handling receiving,put-away,
replenishment, sortation, truck loading, and cycle counting func­
tions.

Pick to Light (PTL) involves a display device that is mounted at the front of
the shelf on which an item is stored, and all the display devices are wired
together. When an order is to be picked, the main business system (mostly
WMS) sends data to the PTL computer-server, which illuminates a light on
the display device (module) for each involved item; the device also dis­
plays the quantity to be picked. After an item is picked, the picker presses a
button on the device to indicate that the item has been picked. When the
button on all the item-specific displays have been pressed, a master dis­
play device illuminates a green light to indicate that the picker is ready for
the next order; a red master light indicates there is an error that needs to
be corrected. As buttons are pressed, data is transmitted to the computer­
server, which in turn transmits it back to the main system. If the display
system called module, has only one light, then only one picker can pick at
a time. To overcome this constraint, today's modules have five or six lights
of different colors, so that five or six pickers can pick simultaneously.

Fig: Pick To Light module:

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Put to Light:
Similar to Pick To Lights system, Put To Light systems are engineered to
meet the specific requirements of Retail distribution operations. Put to
Light solution has productive applications in distribution centers servic­
ing retail stores. Also called Put to Store, Put to Light is ideal for retail store
replenishment order fulfillment and optimizes cross-docking operations
where a percentage of full case quantities are broken down to store level
carton boxes.

Put to Light for retail is also sometimes called Pack to Light, because this
light-directed process begins when a case of product arrives to the break
pack area. An operator scans the case and lights ill uminate, directing sorta­
tion of product to the right store carton box and in the right unit quantities
required by that departmental stores or showroom or any retail out let.The
product is'put'or 'packed' to the store carton box or pallet. When finished
with that carton the light module LED is pushed, confirming completion
of the sortation.

A successful Put to Light system effectively manages flow-through sorta­

tion processes throughout multiple distribution centers in larger supply
chain networks.

A typical Put to Light/ Put to Store system will have Features:

◆ Carton Level Manifest Updates

◆ Labor Productivity Data
◆ Warehouse Control Systems
◆ Real-time Event Messaging
◆ Manages Multiple Open POs
◆ Close Carton & Split Case Capability
◆ Scan Product UPC Option
◆ Multi-Case Distributions
◆ Dynamic Zoning

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A Real Life Case on Put To Light:

At the warehouse of Future Supply Chain Solutions in Bhiwandi, on the
outskirts of Mumbai, a worker scans the label on a packet of shirts. Little red
bulbs light up to tell her how many shirts to put into which box. Each box will
go to a different store, and the lights guide her based on the or­ ders
received from the stores. This technology, called 'put to-light sorting: is 99.9
per cent accurate, is also faster, increased the sortation speed by more than
40 percent and substantially amplified the order processing ca­ pacity of the
Distribution Centre.

Mr. Anshuman Singh, Managing Director and CEO at Future Supply Chain
Solutions, which is part of the Future Group said in an interview for LOG.
India and in CII Conference.

Pick to Display:
Pick To Light system present the picker with only a number indicating a
quantity to pick. Pick to display (PTO) lets add a display of digital image of
the item, display additional text such as item number or item instructions,
stored in the location for picking. Pick To Display module has all the features
of a Pick To Light system - a light, counter and push button. Additionally it
has a LED screen to display the image of the item to be picked. Working is
similar to pick To Light system. This feature helps the picker prevent an
order from being fulfilled incorrectly.

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Voice Assisted Picking : (VAP) A picker wears headphones and a micro­
phone, attached to a wireless computer worn on the person's work belt.
Each picker is assigned their own wireless computer, and teaches it his/her
speech patterns. When an order is to be picked, the main business system­
usually a WMS sends data to the VAP computer-server, which in turn trans­
mits that data to the wireless computer of the system-selected picker. The
wireless computer in turn transforms that data into audible "commands"
the picker is told where to go, what to pick, and how much to pick. As
he/she picks, the picker talks into the microphone, identifying what was
picked and the location; the portable computer transforms the speech
into data, and transmits it to the computer-server, which in turn transmits
it back to the main system for verification. The picker is immediately “told"
about any picking errors. VAP can also be used for put away.

Radio Frequency (RF) picking is an extremely popular, widely used tech­

nology in distribution centers and warehouses that has outgrown the pa­
per-based picking process.

As the name implies, RF picking requires the establishment of a radio

frequency wireless network, within the facility. The RF system has a host
server that communicates directly with the higher level Warehouse Man­
agement System (WMS) in order to send and receive order information. The
information is relayed to the RF terminals that warehouse operators and
order pickers wear, typically on their wrists (hand heIds). These terminals
direct the order picker to the proper pick location and provide item
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description and quantity to pick. Once complete, the order picker sends a
confirmation signal to the host signal either by scanning the item with the
terminal or manually pressing product identification buttons on the termi­
nal. Once all lines in an order are complete, the order status in the WMS is
updated by way of the host system and the next order in the queue is sent
through the host to the terminal on the order picker. These kind of mobile
applications and RF picking have become 'musts' in meeting today's ware­
house productivity requirements.

Robotic Picking :
The use of Automated Guided Vehicles (AGVs) and Robots are increasing
in high velocity distribution centres. For example one unique system is Ki­
va's automated material handling systems which consists of several com­
ponents. The robotic drive units (bots), mobile inventory shelves (pods),
and software are unique to Kiva Systems. The complete material handling
solution includes work stations configured to fit customer requirements,
a wireless network and a server-based back end system. All of these are
deployed within a distribution center and the final pieces are the human
operators who pick, pack and ship orders using the automated system.
Kiva is the ultimate goods-to-man (goods-to-person) automation system.
Instead of being stored in static shelving, flow racks or carousels, products
are stored in mobile inventory pods in the center of the warehouse while
operators stand at inventory stations around the perimeter. When an or­
der is received, robotic drive units retrieve the appropriate pods and bring
them to the worker, who picks out the appropriate item and places it in
the order container. Completed orders are stored on separate pods, ready
to get up and move to the loading dock when the truck arrives.
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Near Field Communication

Near-field Communication or abbreviated asNFC is a standard defined by
the NFC Forum - a global consortium of hardware manufacturers, soft­
ware product companies, software service providers, credit card compa­
nies, banks, network-providers,and others who are interested in the ad­
vancement and standardization of this promising technology.

NFC is a short-range radio technology that operates on the 13.56 MHz fre­
quency, with data transfers of up to 424 kilobits per second. NFC com­
munication is triggered when two NFC-compatible devices are brought
within a distance of about four centimeters. Since the transmission dis­
tance is so short,NFC-based transactions are inherently secure.

There are many short range radio technologies like RFID, Bluetooth and
infrared. Of these, NFC has the shortest range. RFID is somewhat similar to
NFC but the other two (Bluetooth and infrared) are completely different,
yet complimentary to NFC. A good scenario of such compliment is the
combination of NFC and Bluetooth, where NFC is used for pairing
(authenticating) a Bluetooth session used for the transfer of data. A
comparison of these technologies is given in the following table.

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NFC vs BLUETOOTH
NFC operates in 13.56 MHz. This is an extension of the proximity card stan­
dard that supports radiofrequency communication requirement for ISO/ IECl
4443 and FeliCa smartcards. The standardization body for NFC is ISO/ IEC.
The Bluetooth Special Interest Group sets the standard for Bluetooth
devices. Bluetooth is a proprietary standard developed by Ericsson. It uses
2.4 GHz, the Unlicensed Industry Scientific and Medical (ISM) bandwidth.

NFC has a maximum data transfer rate of 424 Kb/s whereas Bluetooth has
a maximum speed of 2.1 Mb/s.

NFC is based on inductive-coupling where loosely coupled inductive cir­

cuits are used to share data between devices very close to each ot her.
Bluetooth is a packet based communication.

A NFC device can talk to only one device at a time. Bluetooth is based on
the Master and Slave architecture and a Master can connect to a seven
slave devices concurrently.

NFC uses low power compared to Bluetooth. However, the latest version
Bluetooth 4.0 uses half the power of previous versions. Apple was the first
manufacturer to use this technology in its iPhone and MacBook Pro.

NFC does not support cryptography with RFID where Bluetooth supports
cryptography.

NFC uses point-to-point connection whereas Bluetooth uses Wireless Pri­

vate Area Network (WPAN).

• Some General Application of NFC

• Electronic Money
• Electronic Identity Document
• NFC device can read NFC tags
• Electronic Key
• Ticketing and transport
@ Loyalty and couponing
@ Secure access to buildings and PCs

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® Inventory control with tags and readers

® Information exchange (NFC device to device)
® Security patrols
® Patient monitoring
® Smart Posters
A NFC device can connect with Bluetooth and Wi-Fi. A smartphone or a
tablet PC fitted with an NFC chip can serve as an ID card, keycard and also
help in making payments with credit card. NFC tags fitted on any object can
contain a description about that object in text, audio or video form. These
tags can be read by NFC devices. Such tags have found wide use in shops,
mannequins, museums etc. NFC devices can share a contact, photo, song,
application, or video.

NFC Forum
The Near Field Communication Forum (NFC Forum) was formed in 2004
by Nokia, Philips and Sony to promote the NFC technology. It develops
standards for data transfer and also certifies devices for compliance with
NFC standards. The NFC Forum has about 140 members and these in­
clude leading phone makers (like RIM, Samsung, Nokia, LG, Huawei, HTC,
Sony) chip manufacturers (like Motorola, NEC,Tl,Toshiba and Philips) Tele­
com provides (such as AT&T, Sprint, Qualcomm) and software companies
(Google, Microsoft,) and credit card companies (Visa, MasterCard, and
American Express)

NFC Standards
NFC is ISO standards-based. The ISO 14443 Type A and Type B standards
Felica is a four-part international standard for contact-less smart cards op­
erating at 13.56 MHz in close proximity with a reader antenna. The ISO
18092 standard defines communication modes for NFC Interface and Pro­
tocol.

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Peer-to-Peer: This mode is usedfor device to device link-level communica­

tion. This mode is not supported by the Contactless Communication API.
Examples are connecting NFC-enabled laptops and printers, sharing pho­
tos between a camera and a TV.

Reader/writer: This mode allows NFC enabled devices to act as Reader/

Writer and interact with NFC tags and transmit NFC Forum-defined mes­
sages. This mode is supported the Contactless Communication API, but is
not a secure one. Examples include NFC-enabled smartphones used to
read "smart posters".

NFC Card Emulation: This mode allows the NFC-handset to behave as a

standard contactless Smartcard. This mode is secure. This mode is sup­
ported by the Contactless Communication API. Examples include NFC­
enabled smartphones used for payment and transit.

How does Java Card reader read?

The Contactless Communication API Java specification, led by Nokia and
defined under the Java Community Process as JSR-257, defines a set of
APls for proximity, contactless-based communication. The Contactless
Communication API helps to Discover and Exchange data with contact­
less targets such as RFID tags, and external smartcards. External readers

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include contactless payment readers in Point of Sale stations, ticketing

systems on transportation systems, external radio, visual tags such as NFC,
RFID and barcodes, or Smartcards.

In May 2011, Google introduced Google Wallet to make secure payments

by simply tapping a smartphone on any Mastercard PayPass-enabled ter­
minal. It is being piloted in New York and San Franscisco. In UK, Orange
tied up with Barclays and introduced the first NFC mobile payment sys­
tem. Juniper Research estimates that by 2014, NFC mobile payments will
reach 300 million devices globally and 20% of smartphones will have NFC
capability. Surveys show that in UK, almost half the population will use
NFC enabled smartphones to conduct financial transactions.

NFC Payments - Issues

Retailers will have to spend money to upgrade their Point-of-Sale termi­
nals to support NFC devices. Secondly, contactless debit payments cost
merchants more than debit card swipes in terms of the service charges
levied by banks. There have been occasions where retailers have fought
with Credit card companies over these charges. BestBuy in USA and VISA
could not agree on the terms for these contactless payments and BestBuy
stopped accepting Visa's contactless payments. But, retailers who have
large customers to be serviced in short times will have to accept and
adapt to NFC payments because of the ease, convenience and speed.

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Source: NFC Forum

Google Wallet uses NXP's contactless technology also used for e-pass­
ports,Transport for London smart travel cards and RFID tagging on games
such Microsoft Xbox 360. Google Wallet requires an app-specific PIN and
all payment related credentials are encrypted and stored on a SmartMX
security chip, separate from the Android device memory and is accessible
only by authorized programmes. Standards are being developed to man­
age the applications on secure chip technology to ensure interoperability.
Though this ensures a certain level of security, if the smartphone is not
very secure then there will be compromises in security.

Google Wallet
Google wallet is a virtual wallet that stores your payment information se­
curely and makes paying fast both in-store and online. It is a NFC based
service that was launched in May 2011. The Google Wallet mobile appli­
cation is available on Sprint phones with NFC technology. An example of
such a phone is Nexus S. Just tap the phone on the NFC reader (such as
Mastercard's PayPass readers) and the phone sends payment and at some
merchants, offers and loyalty information. Presently the system is avail­
able in the United States only and works with Visa, American Express and
Discover Credit cards and the Google Prepaid Card.

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According to Google.com, "The Google Prepaid Card allows you to use

Google Wallet even if you don't have an eligible Citi Mast erCard. It is a vir­
tual card powered by MasterCard and Money Network®. You can fund this
prepaid card with any of your existing plastic credit cards. And since it's
purely virtual, you won't get a physical plastic card in the mail.You can tap
and pay immediately after funds are added':

As per Google,"Google Offers (www.google.com/offers)are deals on prod­

ucts and services at local or online businesses.. We are also testing oth­
er types of offers in different Google products, including Google Search,
Maps, Latitude, and Shopper. Featured Offers are discounts available that
are exclusive to Google Wallet and can be discovered in the Offers tab of
the app and redeemed with NFC".

All Google Wallet users can redeem featured offers at select SingleTap™
merchant locations within New York, San Francisco, Los Angeles, Chicago,
and Washington DC. By typing the ZIP (similar to PIN code in India) code in
http://www.google.com/wallet/where-it-works.html the location of mer­
chants who accept Google Wallet can be found.

Nearby Offers are discounts shown to Google Wallet users from a wide
range of local businesses that are near the user's location. At most stores,
users can redeem Nearby Offers by simply showing their offer to the ca­
shier at checkout. The cashier will either scan the offer's barcode or manu­
ally type in the offer code.

Google SingleTap™merchants are those who have partnered with Google

and allow consumers to pay, redeem offers, and earn loyalty points - all in
a single tap of the phone. A few of these merchants have also integrated
their gift cards into Google Wallet thereby giving the shopper the choice to
pay either with a credit card or a gift card.

Google has partnered with leading companies across the mobile, financial,
and retail ecosystems to develop Google Wallet. Citi, MasterCard, First Data,
and Sprint are key launch partners for Google Wallet. Google is also
partnering with point of sale systems companies, including Verifone, Hy­
percom, lngenico, and ViVOTech, to introduce rich interaction between
Google Wallet and the point of sale. Samsung, NXP, and Google have

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worked together to create the Nexus S 4G by Google, available on Sprint,

which will be the first phone to support Google Wallet. Also, Visa, Discover
and American Express have made available their NFC specifications that
could enable their cards to be added to future versions of Google Wallet.

Google continues to partner with many kinds of companies for Google

Wallet, including:

◆ Issuing banks
◆ Payment networks
◆ Point of sale systems
◆ Semiconductor companies
◆ Mobile handset manufacturers
◆ Mobile operators
◆ Merchants
The payment credentials are stored in a chip called the Secure Element
contained within the Smartphone Nexus S 4G. The Secure Element has
many features designed to protect the security of the data it stores. The
Secure Element is isolated from the phone's main operating system and
hardware. Only authorized programs like Google Wallet can access the Se­
cure Element to initiate a transaction. There are multiple levels of protec­
tion for data stored on the Secure Element and it is protected at the hard­
ware level from snooping or tampering. Additionally, because Google
Wallet enforces a PIN, the only way to transmit payment credentials is by
first entering the PIN.

Android enforces strict access policies so that malicious applications won't

have access to data stored by Google Wallet. Even Google Wallet itself has
very limited access to the Secure Element, and cannot read or write data
from its memory.

The NFC antenna in your phone is only activated when the screen is pow­
ered on, and even if the antenna is on and in proximity of a reader, pay­
ment credentials can only be transmitted from the Secure Element to a
payment terminal after entering the Google Wallet PIN.

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If there is any unauthorized use of Google Wallet, the same rules that ap­
ply to unauthorized use of your plastic credit card, apply to unauthorized
use of a credit card stored in Google Wallet. Many banks apply a $0 liability
policy for unauthorized use.

The New Shopping Paradigm

A recent survey commissioned by Steria in UK, showed that about 65% of
the 1950 people who participated in the survey indicated that they want
more personalized loyalty schemes to be sent to their mobile devices in
real time and while shopping. This way, they will be able to decide wheth­
erto avail that offer or not while they are in the store. Such personalization
can include individual's preferences, shopping patterns, geographical lo­
cation, time of the day etc. Retailers such as Clinton Cards and Superdrug
in UK have introduced new loyalty cards to address this need. However,
such personalization poses challenges in data aggregation, integration,
and secure transmission all in real time. They also warrant considerable
investments in people, process, technology and training.

The social media networking giant Facebook recently launched a feature

called 'Facebook Deals'. Accordingly people can login via Facebook Places
using their smartphones and receive location specific and context­ sensitive
deals/offers from retailers. This will affect the traditional loyalty schemes.
Retailers like Macy's and Gap, fast-food restaurant chains like McDonald's,
and Chipotle have launched Facebook Deals online.

The growth of the World Wide Web has provided many avenues for
people to interact. Customers can now buy products online using their
smart­ phone, post comments about the products in Facebook or Twitter
and browse through biogs for suggestions and recommendations. Thus
retailers are faced with the challenge of estimating the value of social
media and then devising methods to maximize it. Different retailers use
different approaches but all agree that it is something that cannot be
overlooked.

Service Oriented Architecture

Consider the following scenario in an insurance company. Given the pro­
file of a potential insured, the premium for automobile insurance must be

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determined. For simplicity, consider that the age, sex, history of accidents
(if any), type of car and the city of residence, are the five factors that deter­
mine the premium. Suppose a simple software component is written to
consider these factors, perform a simple check and looks up in a database
to find the premium. If this component were packaged and made avail­
able across the network so that anybody can use it by merely calling it and
providing the five input parameters, it will return the insurance premium
then it saves lot of repetitive work and is beneficial for the entire organiza­
tion.

If this idea were extended beyond the boundaries of the organization and
if the component were made available to anyone via the World Wide Web
(Internet), then it becomes very useful to a very large audience. Thus a ser­
vice which encompasses in this case a business function is made available
globally via the Web. This is called Web Service.

If many such common functions are packaged as services and made avail­
able either within the organization for use by its employees or across the
Web for use by the entire globe then lot of repetitive work can be elimi­
nated. People who write those components can also charge a fee for each
time the service is availed.

Service Oriented Architecture refers to information technology architec­

ture built by using such services. In this scenario, new business applica­
tions can be developed by writing limited code and combining it with a
number of services that are already available within the organization or
those that can be invoked across the Web from external sources. Thus,
businesses don't have to reinvent the wheel and can optimize their re­
sources. Those components that are readily available are called as "off­
the-shelf' components. Of course, the interaction among these services
must be"choreographed': to ensure that security is not compromised.

Idea Behind Web Services

Every business has many processes that define its function. For example,
in the insurance industry, processing a claim is a common function. In
the healthcare domain, admitting a patient is a common process. In the
hospitality industry, reserving a room in a hotel is a process. In the aca-

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demia, enrolling in a course is a process. A business process is nothing but

a "codification of rules' If the logic (or steps ) behind a business process
can be encapsulated as an easily callable function, then anytime such a
process need to be executed, the function can be called. The technology
used to "call" (or invoke) the function may vary, but this will not affect the
function i.e., the function can be called over the web, from mobile device
or from a client desktop. Every time, the process needs to be executed, the
service will be called. The crux behind this idea is to identify the different
processes in the business that can be packaged into services that can be
invoked when needed.

SOA Registry
All the reusable components are stored in an “electronic reposit o ry" called
SOA registry. This registry serves two purposes. One it is like an electron­
ic catalog which stores information about the different components and
how they can interact with each other. The service broker which is akin to
the conductor in an orchestra uses the SOA registry to check about differ­
ent components. The second purpose is that the registry serves as a refer­
ence for programmers and business analysts to select components and
connect them together to create new applications.

Composite Applications
New applications can be built in a modular fashion by combining different
components (or services). Such an application is called composite appli­
cation. A commonly cited example for this is the interactive Google Maps.
For instance, one can get the map of a particular region which shows the
layout of the roads. For discussion let application A provide the map. An­
other application, B, provides the traffic on the roads. Now, by superim­
posing the traffic pattern on the road layout one can identify the roads
that are free and the ones that are choked. If the traffic data is updated
in real time, then the map becomes a real time depiction of the region' s
traffic pattern. This combined application is called the composite applica­
tion.

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Cloud Computing
Cloud Computing is a new buzzword in the field of information technol­
ogy. Consider a business scenario. A merchant conducting ecommerce
would need to get the credit card details submitted by a customer ap­
proved. For this the merchant can host the data and build an interface to
it using traditional technology; this hardware and the network must be re­
liable, secure and be up 7 x 24 hours. Consider an alternate option where
the merchant just calls 'an API' (or Web Service) and passes on required
information and receives an approval (or disapproval) as reply. There is no
infrastructure to be maintained, and no software to be written specially for
this. The merchant just pays for each time the'APl'is called (or Web Service
is availed).

Consider a second business situation. An employee wants to travel from

city A to city B. He/she wants to know the different flights available along
with timings and charges. Normally, the employee would go to a travel
related web site and check this out. But, if a simple API call was made
with employee just giving the city, date and preferred time of travel and
receives the results how nice would it be. Any other employee who wants
to travel for any other city would also do the same. The employer pays for
each such call made to the API.

In the above two cases, the call to the API will be transparent to the ap­
plication. It does not matter where the API resides. It appears to be local
to the application. Now, in both the situations the business does not own
any hardware or software required to perform the tasks, does not incur any
capital or annual maintenance costs (including software expert's salary) or
does it sink capital and use the resources only a fraction of the time. Also,
the business saves the time, effort and agony needed to develop, test and
launch an application that is reliable and secure. The business only pays
for each time the service is availed. The service provider guarantees 100%
availability and takes the responsibility of maintaining the connectivity,
software etc. What a nice situation it is. From an accounting perspective,
these expenses can be categorized as'operating expenses' and not 'capitaI
expense'.

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The National Institute of Standards and Technology (NIST) in USA, defines

cloud computing as follows. Cloud computing is a pay-per-use model for
enabling available, convenient, on-demand network access to a shared
pool of configurable computing resources (e.g., net works , servers, storage,
applications, services) that can be rapidly provisioned and released with
minimal management effort or service provider int eraction. The resources
can be expanded or contracted at will. The charges are based on the con­
sumption only.

Cloud Computing is very similar to the time-sharing model used in main­

frame computing where the resources of a single large computer were
shared among many users. The fundamental ideas oftime-sharing model
and cloud computing are similar, but in cloud computing the resources
include not just CPU power but also databases, bandwidth, applications
and platforms. Also, the user can mix-and-match these resources which
was not possible in the time-sharing model.

The five key characteristics of cloud computing are:

1. On-demand self-service: A consumer without any human

interaction with a service provider can allocate or consume
computing resources such as server time and network storage.
2. Ubiquitous network access: The resources can be accessed via
wired or wireless mode using standard communication protocols
and a variety of devices such as PDAs, Smartphones, netbooks
etc.
3. Location-independent resource pooling: The service provider
pools all the necessary resources (both physical and virtual)
using a multitenant model to meet the consumer's demand . The
resources can be server CPU time, storage space, and network
bandwidth. This allocation is dynamic and the consumer neither
knows nor has any control over the physical location and
allocation of these resources.
4. Rapid Elasticity: The resources can be increased or decreased
very quickly i.e., scaled up or scaled down rapidly. The consumer
does not have to be concerned with these processes and be

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assured that his/her needs would be met and he/she would pay
for whatever is consumed.
s. Pay per use: The resources are charged using a metered, fee-for­
service or advertising-based model to promote optimization of
resources. For example, the actual storage space and the time
that was availed, the amount of bandwidth and the duration it
was used etc. would be charged for. For clouds within an
organization, the costing could be purely virtual i.e., not paid
using actual currency.

Types of Clouds
The cloud software uses service oriented architecture and ensures low
coupling, modularity and semantic interoperability. There are different
types of cloud computing models.

1. Private Cloud: The cloud infrastructure is owned or leased by a

single organization and is meant only for that organization's
members.
2. Community Cloud: A few organizations form a group and rent
cloud infrastructure and share it among themselves.
3. PublicCloud:The cloud infrastructure is owned by an
organization and anyone can pay for using it just like telephone
or internet access.
4. Hybrid Cloud: The cloud infrastructure is a composition of two
or more types of clouds (private or community or hybrid) that
remain as unique entities but are bound together by standard or
proprietary technology so that data and application can be
ported between (or among) them.
Each of the above cloud deployment models can have two types: internal
or external. Internal clouds reside within an organization and behind the
firewall while external clouds reside outside the firewall. Organizations
may choose to have a private cloud or public cloud or hybrid cloud or a
few organizations may join and create a community cloud.

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Components of Cloud Computing
The components of cloud computing can be considered as a stack. There
are 11 such components.

Platform -as-a-service: A complete platform including application de­

velopment, interfaces, database, storage and testing delivered from a re­
motely hosted machine to the subscriber. Thus users can develop new
applications or run programs on this new platform.

Application-as-a-service: This refers to any application served as a ser­

vice via the Web. The user accesses it via the browser. Salesforce Aut o ma­
tion or SFA is a classic example for this. However, any application that has
been hosted and made available can fall under this category. Examples of
this include Gmail, Google Docs and Google Calendar. This service is also
known as software-as-a-service.

Security-as-a-service: The security related functions are delivered re­

motely as a service. Even identity management, single-sign-on etc. can be
rendered as a service.

Storage-as-a-service: This is the storage space that is available on a re­

mote server made accessible to applications as if it were in a local machine.
This is akin to mapping a remote drive to a local machine. This is the basic
service and is present in most cloud computing applicatio ns.

Information-as-a-service:This refers to the consumption of any informa­

tion available in a remote server and made accessib le via a API. The infor­
mation can be anything like weather in a city, arrival of flights, stock prices,
address validation etc..

Database-as-a-service: A remote database is made accessible as if it

were a local one. This database will be accessed by many users for differ­
ent purposes.

Process-as-a-service: In this, a remote resource binds many resources

together, (like services and data), either hosted within the same cloud or
outside of it, to create business processes. A business process is a se­
quence of tasks required to perform a business function. By developing

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a process this way, changes to it can be made easily without rewriting the
application. This not only makes it easy and fast, but also provides agility
to those who use the process.

Integration-as-a-service:This is the ability to deliver a complete integra­

tion stack from the cloud. This may include interfaces for applications,
data exchange, flow control etc. This is similar to the capabilities of an
Enterprise Application Integration (EAi) tool, but delivered as a service.

Testing-as-a-service: New applications that have been developed or

business processes that have been created using components in the cloud
need to be tested. The tools (testing software) necessary for this testing
are provided as a service. Thus, web sites, and even other cloud applica­
tions can be tested without needing separate hardware and software.

Governance-as-a-service: This service helps to manage one or more cloud

services. This may include topology, resource allocation and the like.
Enforcement of policies on service and data can be done using this service.
This is also known as Management-as-a-service.

Infrastructure-as-a-Service: This refers to the capability to access a serv­

er remotely and use the entire server and applications loaded in it as if it
were part of the company's data center. The difference between this and
mainstream cloud computing is that instead of using an interface and a
meter to track the consumption of a service, here the company has access
to the entire machine. Thus, payment is made for leasing a server as a
whole and not per call to that server.

Cloud Computing: New or old Technology?

Cloud Computing: New wine in an old bottle? Or New wine in a new bot­
tle? Or Old wine in an old bottle? Or Old wine in a new bottle? The wine
refers to the concept behind cloud computing and bottle refers to the
technology. The answer depends on whom you ask.

Cloud computing in simple terms can be considered similar to "time­

sharing" i.e., the ability to share computer resources among many users.
This idea existed even during the days when computers meant only main­
frames (there were no mini/micro/desktop/laptop computers and note-

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books/netbooks/PDAs did not exist then). Back then, people would sign
up for computer time and use it. Depending on the problem to be solved,
the computer would allot CPU time, memory (including swap space). To­
day, people use very friendly GUls and browser has become the default
front-end. So, this part of technology is new. From this perspective, it is
Old Wine in a New Bottle. But the bandwidth was fixed and the platforms
could not be changed.

Today, bandwidth, infrastructure and platforms can be added at will. The

idea of being able to access the cloud from anywhere (via Internet which
did not exist back then) is novel and powerful. But, the technology of man­
aging different users with appropriate access, allocations and apportion­
ing of CPU is old. Thus, one can say that this is New Wine in an Old Bottle.

If one were to consider the fact that today even processors can do mul­
tiple processing and computing tasks can not only be farmed out to differ­
ent computers but also among different processors in the same machine
(these concepts did not exist in the olden days), then it could be catego­
rized as New Wine in a New Bottle.

At a higher level, it is only sharing of computer resources among different

users. This is what computers were designed to be to begin with. Individ­
uals could not afford separate computers and hence organizations bought
a computer and employees shared it. Thus, from this perspective it is only
Old Wine in an Old Bottle.

In short, there is no single answer and it all depends on individual perspec­

tive. For the old timers, there are many clear similarities between cloud
computing and yesteryear's mainframes. Yet, there are a few things that are
new.

The ability to leverage different resources in the cloud and mix and match
them to suit the needs is a big plus. The resources can be database or ap­
plication and providers can differ.

Cloud Computing: ROI

The ROI of an investment on cloud computing cannot be computed di­
rectly and easily. It should consider both the benefits derived using this

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technology, the cost of not having it and the cost of continuing 'status­ quo'.
The cost includes the direct and indirect cost as well as possibly the lost
opportunity cost. ROI calculations should consider the following as­ pects:

Cost of status-quo: This should consider the money spent

a. in procuring the hardware and software,

b. for annual licenses, if any,
c. for operations, design, development, testing and deployment of
new features.
Cost-of-proposed setup: This should consider the cost of procuring the
needed services from a cloud service provider.

Value-of-new setup: The convenience, guarantee, agility, scalability and

reliability that can be achieved using cloud computing must be deter­
mined.

Value of accessing other services: The ability to access additional services,

information, applications that are available on the cloud must also be con­
sidered.

Others: The willingness and the 'mindset' of the organization to learn new
ways of doing things is a factor to be reckoned with. The reliability and
track record of the service provider should be factored in the analysis.

After considering the above, one should decide whether cloud-computing

is the right paradigm for their organization or not. While cloud computing
may seem a very attractive proposition for some, it may not be the case
for others. Any objective and holistic assessment should be done before
jumping into cloud computing.

The Advantages and Disadvantages of Cloud

Computing
Cloud computing on the face of it is an attractive proposition. In simple
terms, cloud computing refers to using computer resources that a business

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• Does not own

• Does not maintain or upgrade
• Does not see
• Can expand or contract at will
• Pays for only when they are used and also to the extent they are
used.

The comparison between on-premise solution and cloud computing so­

lution is akin to comparing the choice between acquiring hardware and
software versus leasing the same. But, actually the true pros and cons are
more complex and far reaching.

Advantages
COST: Cloud computing as an architectural solution is typically less ex­
pensive than an on-premise solution. Even when cloud costs more, it is at
least conceptually cost effective. You pay for what you use, how much use,
how long you use.

UPDATES AND FIXES: As the cloud is hosted remotely, any changes to the
application in terms of updates and bug fixes can be done remotely with­
out affecting the user. This is a big advantage because no human inter­
vention is needed. The flip side is that when the updates are done is not
under the control of the user. If updates are not done timely, the user can
suffer from performance issues, security headaches and lost productivity.
Updates can also affect a certain group of users because after updates,
older versions of software are retired.

NETWORK: The fact that clouds exist in the Internet is itself an attractive
proposition. The Internet provides access to social networking sites, com­
merce APls, other services and clouds thus permitting the business to mix
and match cloud services to suit the needs. Creating a custom cloud ser­
vice by mixing and matching at will is a powerful advantage.

SCALABILITY: This refers to the elasticity of the clouds, a powerful and cost­
saving feature. One can avail as much resources as needed at will, and pay
for them alone. This not only saves the capital cost that must be sunk in

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hardware and other infrastructure to achieve this elasticity and realize that
only a fraction of that investment is used.

RELIABILITY: Cloud provides built-in-backup and failover mechanisms

which are costly to be established in the on-premises set up. This also
protects the organization from being concerned with power outages, net­
work failures etc.

BUSINESS CONTINUITY: With cloud computing disaster recovery and busi­

ness continuity are no longer the concerns of organization. The cloud ser­
vice provider ensures such capabilities.

SPEED-TO-IMPLEMENT: Cloud computing can be done in very short time,

in a few hours to a day or two. In dire contrast with this is the process of
building an on-site solution which involves procurement of hardware, in­
stallation of operating system and applications, hosting of the data, test­
ing and deployment - all painful stages to pass through.

GREEN: Cloud computing is the greenest form of computing because it al­

lows many users to share a common infrastructure and investment. In the
case of data centers, this does save electricity considerably.

LOWER INFRASTRUCTURE COST : In large IT departments, the infrastruc­

ture is often duplicated and is underutilized. Many powerful servers are
bought and only for a fraction of the time, they are used to their fullest
capacity. With cloud computing, companies do no longer have to invest
in dead equipment. They can avail the resources on a need basis. Peak
computing demands can also be met the same way.

UNLIMITED STORAGE CAPACITY: The cloud offers unlimited storage ca­

pacity. Both the desktop and external storage devices have limited capac­
ity. The cloud also eliminates the need to maintain large RAID devices and
network attached storage devices. The capital cost sunk in them and also
maintenance problems are eliminated.

UNIVERSAL ACCESS TO DATA AND DOCUMENTS: This is a big advantage

for those who travel a lot or work from different offices and home. They do
not have to remember to store the needed documents in a portable drive
(pen or external drive) and carry it along. The cloud can serve as a central

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repository. With just access to Internet, any document can be downloaded
anywhere. Far too often, people have forgotten to bring a document and
hence find it difficult to continue their work from a different location.

REMOVES THE NEED TO BE CONNECTED TO A SINGLE

DEVICE:
One does not have to use the same computer - be it desktop or laptop or
any other device. Hence, people do not have carry their devices and are
free to travel.

AVAILABILITY OF MULTIPLE VERSIONS OF SOFTWARE: Today multiple ver­

sions of same software are used in organizations. A simple example would
be use of Microsoft Office Suit e. There are versions of Word 2010, Word
2007, Word 2003, Word 97 in use t oday. Unless one downloads additional
software that ensures compatibility or has all versions (which is most un­
likely), a document formatted in one version cannot be opened in another.
This is a common problem. With Cloud Computing, all versions are avail­
able in the cloud.

Disadvantages
As cloud computing is a new paradigm, there are a few disadvantages.
With passage of time, the technology will improve and most of these may
no longer be considered as disadvantages.

SECURITY: The infrastructure is not under the control of a business. It is

the service provider who holds the data and applications. Though encryp­
tion, password protection, and role based access are provided one should
not place organization's secrets and confidential materials in the cloud. Of
course, this assumes that organizations are good at ensuring security in on-
premise systems.

REPUTATION OF SERVICE PROVIDER: This is a major area of concern. Un­

less the service provider has an established presence and reputation, the
organization may be forced to look for alternate providers.

COMPLIANCE: Organizations have to meet the new laws that are emerg­
ing related to data storage, archival and deletion. With on-premise solu-

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tions, it is easy to implement policies and ensure compliance with local,

state and national laws. But, with cloud computing providers it is a chal­
lenge. Also, for multinational companies that operate in many countries
there are restrictions about transferring data outside the country (even for
back up cases). Cloud providers must comply or else, it is the organization
that will become liable.

ACCESS TO INTERNET: The access to a cloud is dependent on being able to

access the Internet. This is a problem in developing and underdeveloped
countries. The connections may be limited or unreliable thereby hampering
work. When access to Internet is guaranteed and also ubiquitous as in
western nations, then this is a big advantage for one access information
even from restaurants and parks.

BANDWIDTH: When bandwidth is inadequate, or dial-up connections

are used then downloading large documents, images, and other func­
tions such as collaboration become a challenge. It will take a long time
to download and working at that speed is unrealistic. When bandwidth is
not adequate, cloud computing does not work.

PROCESSING SPEED: In a desktop, all the calculations are done locally and
all documents are stored locally. This does not require any transfer of data
across net works . In the case of cloud computing, data input to the cloud
and output from the cloud must reach the user via the internet. There are
times when the traffic on the internet affects this transmission and can cause
cloud computing to be slower than desktop computing.

CLOUD COMPUTING:TO ADOPT OR NOT?

Cloud computing is not a panacea. It is a powerful technology but is not

suited for all. This section describes the factors to consider before adopt­
ing (or rejecting) it.

COUPLING OF APPLICATIONS: For cloud computing, loosely coupled ap­

plications are best fit. In an organization, if the data, applications and pro­
cesses are tightly coupled with other applications or data, then the task of
uncoupling them is a difficult one.

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EASILY AVAILABLE APls: When the application has different APls to transfer
data, then it is easier for it to interact with other applications. They can be
easily hosted in the cloud and other applications can "call"them.

BROWSER IS THE INTERFACE: If browser is accepted as the interface, then

accessing applications on the Web is not an issue. Today, with the use of
AJAX and other technologies, rich Internet Applications can be developed
to have a powerful interface that appears and behaves like the native ap­
plication.

COST: If licensing costs, annual maintenance costs and other support costs
are high, cloud computing could be an option to be explored.

UTILIZATION: If the present infrastructure, (both hardware and software)

are not fully utilized then moving to the cloud and paying fees based on
usage is a wise choice.

NEW APPLICATIONS: When applications are new they can be easily and
directly deployed on the cloud. Porting existing applications to the cloud
is a challenge.

CONTROL: Applications and data on the cloud are managed by a service

provider. The organization has entrusted it to the provider. If the organi­
zation is not comfortable with it, then cloud computing is not a choice.

CONFIDENTIALITY: If the data is very confidential in nature, then hosting it

on the cloud is not a good idea, despite the best security features available
today. As technologies are refined then this option can be revisited.

NATIVE INTERFACE: If the application requires a native interface such as

Win 32 APis, and browsers are not preferred then cloud is not recommend­
ed.

COLLABORATION: If the employees are spread across the globe, or work

from different locations (including home),then collaborating on a proposal
or report is best done when they are posted on the cloud. Each employee
can add his /her comments and post the latest version on the cloud.

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TRAVEL: For people who are on the road most of the time, then cloud
serves as the ubiquitous storage space for data and hosting applications.

Cloud Computing and SOA

The two technologies are mutually exclusive . One can exist without the
other. An organization can have SOA and not use it to access the cloud or
use SOA without using cloud computing. However, if an organization uses
both the technologies, the ideal scenario would be to use SOA to access
the cloud . In fact, cloud computing can be conceived as an extension of
SOA to services that are available on the cloud. The important decision to
make is which information, services and processes can be put in the clouds
and which cloud services should be abstracted and put into the existing
SOA. This is a vital decision and can impact the functioning of an
organization considerably.

The combination of SOA and Cloud Computing can be a compelling and

winning one for any company to not to overlook it. As organizations feel
the benefits of cloud computing, the interest will increase. Along with it,
SOA will pick up.

Green Computing and Cloud

According to a report published by the independent firm Verdantix and
sponsored by AT&T, "In an analysis of UK, French, and U.S. firms that have
used cloud computing for at least two years, the Carbon Disclosure Project
calculated that by 2020 U.S. companies with annual revenues of more than
$1 billion can save $12.3 million in energy costs and achieve carbon reduc­
tions equivalent to 200 million barrels of oil a year if they shift to shared data
networks. Large UK companies could achieve annual energy savings of
GBP 1.2 biIlion if they move to cloud computing"(Reuters.com)

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References
The Economic Times, January 8-14, 2012

Capgemini, "The 2016 Future Supply Chain': Capgemini Report

Chopra, S., Meindl. P., and KaIra, D.V., 'Supply Chain Management: Fourth
edition, Pearson Publishers, 2010.

The Descartes Systems Group Inc.,"e-Freight Success Means Starting With

the Basics': Business White Paper

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 About us
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the
development of India, partnering industry, Government, and civil society, through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive
role in India's development process. Founded in 1895 and celebrating 125 years in 2020, India's premier
business association has more than 9100 members, from the private as well as public sectors, including
SMEs and MNCs, and an indirect membership of over 300,000 enterprises from 291 national and regional
sectoral industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and
enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized
services and strategic global linkages. It also provides a platform for consensus-building and networking on
key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship
programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated
and inclusive development across diverse domains including affirmative action, healthcare, education,
livelihood, diversity management, skill development, empowerment of women, and water, to name a few.
India is now set to become a US$ 5 trillion economy in the next five years and Indian industry will remain the
principal growth engine for achieving this target. With the theme for 2019-20 as 'Competitiveness of India Inc -
India@75: Forging Ahead', CII will focus on five priority areas which would enable the country to stay on a
solid growth track. These are - employment generation, rural-urban connect, energy security, environmental
sustainability and governance.
With 68 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia, China,
Egypt, France, Germany, Indonesia, Singapore, South Africa, UAE, UK, and USA, as well as institutional
partnerships with 394 counterpart organizations in 133 countries, CII serves as a reference point for Indian
industry and the international business community.
To address the need of sharpening India Inc’s competitive edge through better Logistics and Supply Chain
practices, CII Institute of Logistics (CIL) was established in 2004 by the confederation of Indian Industry as a
center of Excellence in Logistics and Supply Chain. With a relentless aspiration to enhance logistics
competitiveness in the industry, CIL provides a complete range of services such as:
 Supply Chain Consultancy
 Corporate Training
 Research
 Warehouse Certification
 Supply Chain Transformation

Confederation of Indian Industry

Phase II, “B” Block, 9th Floor, IITM Madras Research Park , Kanagam Road , Taramani.
Chennai -600 113, Tamil Nadu , India
Phone : +91-44-66360300 Website : www.ciiscmconnect.com / www.cii.in
email : scm@cii.in
Reference Material for
SCM Pro

Module 5
Global Supply Chain Management
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Disclaimer

The Contents presented here are for the sole purpose of reference for SCM
Pro Certification program by the CII Institute of Logistics subject to the­
condition that it shall not by way of trade or otherwise circulated in any
form or used without the Cll's prior consent.

All Monetary values used here are for illustration purpose only. These
values will vary according to Governing laws and Regulations.

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Table of Contents

GLOBAL SUPPLY CHAIN MANAGEMENT

1. Global Supply Chain Management - Definition .... 6
Motivating factors

2. EXIM Procedures/Policy ............................................. 10

1. Introduction
2. Details of Trade Act
3. Details of Policy
4. Export Promotion Scheme
5. Documentation
6. Customs Procedure for Export
7. Customs Procedure for Import

3. lncoterms ............................................................... 34
1. Definition
2. Scope of Incoterms
3. Responsibilities & Liabilities
4. Changing circumstances
5. List of lncoterms
6. Interpretation of lncoterms
7. Latest changes
8. Conclusion

4. Letter of Credit ....................................................... 43

1. Introduction
2. Modes of payment
3. Definition
4. Mode of Operation
5. Types of L/C
6. Conditions of Presentation
7. Scrutiny of L/C
8. Preparation / Submission of documents
9. Insurance policy as Corollary
10. Conclusion

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5. Packaging / LabelIing ............................................... 54

1. Introduction
2. Packaging
3. Labellings
4. Marking
5. Conclusion

6. Risk Management .................................................. 60

1. Introduction
2. Risks in payment
3. Risks in Foreign Exchange
4. Risks in Transportation
5. Types of Risks
6. Marine Insurance
7. Features of Policy
8. Risks not Covered
9. Claim Procedure
10. Conclusion

7. Introduction of Containers .................................... 69

1. Introduction
2. Definition
3. Containers by Size
4.Features
5. Types of Containers
6. Advantages
7. Disadvantages
8. Cargo Ships- Types and Classification
9. Overcoming Disadvantages
10. Shipping Line Strategies
11. Conclusion

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8. Multimodal Transportation.................................... 86
1. Introduction
2. Mode of Operation
3. Basis of MultiModal Transport
4. Advantages
5. Conclusion

9. Air Consolidation ................................................... 89

1. Introduction
2. Definition
3. Rate Structure
4. Participants
5. Documentation
6. Mode of Operation
7. Advantages
8. Conclusion

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1. GLOBAL SUPPLY CHAINS DEFINITION:

As Thomas Friedman of the New York Times wrote in his book,
Yes, The World is flat.

Business today is happening in a global environment. This environment

forces companies, regardless of location or primary market base, to con­
sider the rest of the world in their competitive strategy analysis. Firms can­
not isolate themselves from or ignore external factors such as economic
trends, competitive situations or technology innovation in other countries, if
some of their competitors are competing or are located in those countries.
Companies are going truly global with Supply-chain Management.

A company can design a product in the United States, manufacture in

India and entire globe is the market. Companies have changed the ways
in which they manage their operations and logistics activities. Companies
engaging global Supply chain will incur heavy costs towards their Supply
chains due to its length. In spite of the increasing costs in globalization,
following factors motivate companies to go global.

Motivating Factors:
a) Global Market Forces
There is tremendous growth potential in the foreign developing markets
which has resulted in intensified foreign competition in local markets
which forces the small and medium-sized companies to upgrade their
operations and even consider expanding internationally. There has also
been growth in foreign demand which necessitates the development of a
global network of manufacturing bases and markets.

b) Technological Forces
The diffusion of technological knowledge and global low-cost
manufacturing locations have motivated companies to go global. In
response to this diffusion of technological capability, multinational firms
need to improve their ability to tap multiple sources of technology located
in various countries. There has been technology sharing and inter-firm
collaborations. The well-known joint ventures in the auto industry
between US and Japanese firms (GM-Toyota, Chrysler-Mitsubishi, Ford-

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Mazda) followed a similar pattern. US firms needed to obtain first-hand

knowledge of Japanese production methods and accelerated product
development cycles, while the Japanese producers were seeking ways to
overcome US trade barriers and gain access to the vast American auto
market. As competitive priorities in global products markets shift more
towards product customization and fast new product development, firms
are realizing the importance of co-location of manufacturing and product
design facilities abroad. Understanding technological know-how was the
main motivation for establishing design centers in foreign countries for
many companies. Other industries such as pharmaceuticals and
consumer electronics also have taken this approach.

c) Global Cost Forces

New competitive priorities in manufacturing industries, that is product
and process conformance quality, delivery reliability and speed,
customization and responsiveness to customers, have forced companies
to reprioritize the cost factors that drive their global operations strategies.
The Total Quality Management (TQM) revolution brought with it a focus
on total quality costs, rather than just direct labour costs. Companies
realized that early activities such as product design and worker training
substantially impact production costs. They began to emphasize
prevention rather than inspection. In addition, they quantified the costs of
poor design, low input quality and poor workmanship by calculating
internal and external failure costs. All these realizations placed access to
skilled workers and quality suppliers high on the priority list for firms
competing on quality. Similarly, Just-in-time (JIT) manufacturing
methods, which companies widely adopted for the management of mass
production systems, emphasized the importance of frequent deliveries
by nearby suppliers. A number of high-technology industries have
experienced dramatic growth in the capital intensity of production
facilities. Such high costs drive firms to adopt an economies-of-scale
strategy that concentrates production in a single location, typically in a
country that has the required labour and supplier infrastructures. They
then achieve high-capacity utilization of the capital­ intensive facility by
aggressively pursuing the global market. Besides this the host
government subsidies also become an important consideration.

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d) Political and Macroeconomic Forces

Getting hit with unexpected or unreasonable currency devaluations in
the foreign countries in which they operate is a nightmare for global
operations managers. Managing exposure to changes in nominal and
real ex­ change rates is a task which the global operations manager
must master. If the economics are favorable, the firm may even go so far
as to establish a supplier in a foreign country where one does not yet
exist. For example, if the local currency is chronically undervalued, it is
to the firm's advantage to shift most of its sourcing to local vendors. In
any case, the firm may still want to source a limited amount of its inputs
from less favorable suppliers in other countries if it feels that
maintaining an ongoing relationship may help in the future when
strategies need to be reversed. The emer­gence of trading blocks in
Europe (Europe 1992), North America (NAFTA), and the Pacific Rim
has serious implications for the way firms structure or rationalize their
global manufacturing/sourcing networks. The trade protection
mechanisms which exist in the form of tariff and non-tariff barriers effect
the global operation strategy; but these are readily losing importance
in the new borderless trade regime. Yet, as global logistics
professionals know only too well, it is still a long way from one domestic
location to overseas location, especially when the product being
moved will have to go through numerous steps from manufacturing to
delivery, involving multiple governments, trade compliances and third
party service providers. On this context, economics of Global Supply
Chains are considered by total Landed Cost Evaluation. By and large,
following factors influence Total Landed Costs:

• Product Purchase Price

• Transportation Cost
• Warehousing Costs
• Expedited Transportation Costs
• Increased Safety Stock
• Shrinkage of Inventory in Transit & Warehouse
• Insurance on the Inventory
• Customs Costs

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• Customs Processing
• Carrying Costs on the Inventory
• Carrying Costs on Increased Accounts Receivables
• Import/Export Compliance
• Taxes - Income & Property
• Supplier Payment Processing
• Variability and market analysis

Many intermediaries are involved in an Export/ Import process as:

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2. EXIM PROCEDURES/ POLICY

1. INTRODUCTION:
Every country has its own Export/ Import Policy which is framed by the
Government of that country. The Policy is based on the country's needs,
requirements, its resources and strengths/weaknesses.

India's Exim Policy is announced every five years and runs concurrent to
the Five Year Plan. The aims and objectives of the Policy are implemented
during the Plan period. The Policy is announced every year by the Office of
the Director General of Foreign Trade, which functions under the Ministry of
Commerce.

2. DETAILS OF TRADE ACTS:

The very first Exim Policy of Independent India was framed under the Im­
port-Export (Control) Act 1947.Under this Act, the emphasis was on Trade
Control, exercised by the Government through several bureaucratic meth­
ods, as below:

a. Licensing Systems- many commodities of import and export were

brought under Licensing System, making it mandatory to obtain
Export/Import Licence prior to trading.
b. Regulatory Bodies- the Government exercised control over
export/import formalities, procedures and documents through
Government bodies with vast regulatory and restrictive powers,
such as
i. Chief Controller of Imports and Exports- for issuing licences
and certificates.
ii. The Reserve Bank of India- with stringent laws on
movement of foreign exchange through the Act known
as FERA.
iii. Central Excise- which had provision to impose heavy Excise
duty on locally manufactured goods and imports.
iv. Customs- which was empowered to levy heavy duties
and penalties on imports.

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On the whole,the Government felt that the best way to regulate trade is to
impose controls and restrictions.

It was in the early 1990s that the Government realized that this mode of
controlled trade was not conducive for the growth of the country's econ­
omy. Hence in 1992, a more liberalised Act was passed known as Foreign
Trade (Development and Regulation) Act 1992.

Under this Act the emphasis was shifted from Control to Growth .The Policy
was so framed as to allow growth of the economy through globalization
and liberalisation .The following were the aims of the Act:

• To produce quality products at competitive prices - to make

Indian products acceptable in the global market which is full of
competition.
• To create a vibrant, growing economy with global orientation -
the Indian economy was so far insular, protected by Government
policies on import/export. The new Act opened the economy to
the outside world and exposed Indian products to foreign
competition so that the quality and prices of Indian products
would become competitive.
• To enhance technological strength and efficiency in agriculture,
industry and services - it was realized that only with advanced
technology and efficient, well-trained manpower, India could
produce goods and services that the rest of the world wanted.

Important Acts, Rules & Regulations

• Customs Act 1962
• Customs Tariff Act, 1975
• Central Excise Rules, 1944
• Customs (Attachment of property of Defaulters for recovery of
Government dues) Rules, 1995
• Customs (Import of Goods at Concessional Rate of Duty for Man
ufacture of Excisable Goods) Rules, 1996
• Customs and Central Excise duties Drawback Rules, 1995

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• Customs House Agents Licensing Regulations, 1984

• Customs valuation (Determination of Prices of Imported Goods)
rules, 1988
• Export and Import Policy Foreign Exchange Management (Export
of goods and services) Regulations 2000
• Foreign Exchange Management Act, 1999
• Foreign Exchange Regulation Act, 1973
• Project Import Regulations, 1986
• Foreign Trade (Development and Regulation Act), 1992
• The Multimodal Transportation of Goods Act, 1993
• The Foreign Trade Policy 2015-2020

3. DETAILS OF POLICY:
The Foreign trade Policy 2015-2020 is published by the Ministry of
Commerce (DGFT) in four Chapters :

a. Chapter 1. The Foreign Trade Policy 2015-2020. This is a

current broad frame-work and rules relating to exports and
imports.
b. Chapter 2:The Handbook of Procedures -Vol 1. This gives in
detail the procedures to be followed for exports and imports. For
example, if one is applying for Import/Export Code Number, the
handbook gives details of how to apply, formats of application
etc.
c. Chapter 3 : Exports from India Schemes. This gives details of
each export schemes, Merchandise exports from India Scheme
(MEIS), Service exports from India Scheme(SEIS) and
common provisions for Exports from India Schemes.
d. Chapter 4 :The Hand book of procedures about Duty
Exemption / Remission Schemes

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4. EXPORT PROMOTION SCHEMES:

a. Export Promotion Policies in India
The government of India has liberalized the schemes for the export
oriented units and export processing zones, agriculture, horticulture,
poultry, fisheries and dairying have been included in the export
oriented units. Export promotion capital goods schemes (EPCGS)
has been started to permit the exporters to import capital goods on
concessional import duties. Under the EPCGS scheme, such
importers of capital goods have to export goods of 4 times values of
import within next five years. Establishment of the EXIM bank and
SEZs promoted the export from country.
Government of India has liberalized the schemes for export oriented
units and export processing Zones. Agriculture, Horticulture, poultry,
fisheries and dairies have been included in the export oriented units.
Export processing zones have been allowed to export through
trading and star trading houses and can have equipment on lease.
These units have been allowed cent percent participation in foreign
equities.
Export Promotion Schemes
Foreign Trade Policy 2015-20 and other schemes provide
promotional measures to boost India’s exports with the objective to
offset infrastructural inefficiencies and associated costs involved to
provide exporters a level playing field. Brief of these measures are
as under:
A. Exports from India Scheme
. Merchandise Exports from India Scheme (MEIS)
Under this scheme, exports of notified goods/ products to notified
markets as listed in Appendix 3B of Handbook of Procedures, are
granted freely transferable duty credit scrips on realized FOB value
of exports in free foreign exchange at specified rate (2-5%). Such
duty credit scrips can be used for payment of custom duties for
import of inputs or goods, payment of excise duty on domestic
procurement, payment of service tax and payment of custom duties

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in case of EO default.
Exports of notified goods of FOB value upto Rs 25, 000 per
consignment, through courier or foreign post office using e-
commerce shall be entitled for MEIS benefit.
ii. Service Exports from India Scheme (SEIS)
Service providers of notified services as per Appendix 3E are
eligible for freely transferable duty credit scrip @ 5% of net
foreign exchange earned.
B. Export Houses, trading houses and star trading houses:
To increase the marketable efficiency of exporters, the
government introduced the concept of export houses, trading
house and star trading houses. Those registered exporters who
have shown good performance over the past few years have
been given the status of export houses and trading houses.
Since 1994n a new category of golden super star trading house
was added by the government which has the highest average
annual foreign exchange earnings.
C. Duty Exemption & Remission Schemes
These schemes enable duty free import of inputs for export
production with export obligation. This scheme consists of:-
i. Advance Authorization Scheme
Under this scheme, duty free import of inputs are allowed, that
are physically incorporated in the export product (after making
normal allowance for wastage) with minimum 15% value
addition. Advance Authorization (AA) is issued for inputs in
relation to resultant products as per SION or on the basis of self
declaration, as per procedures of FTP. AA normally have a
validity period of 12 months for the purpose of making
imports and a period of 18 months for fulfillment of Export
Obligation (EO) from the date of issue. AA is issued either to a
manufacturer exporter or merchant exporter tied to a supporting
manufacturer(s).
ii. Advance Authorization for annual requirement
Exporters having past export performance (in at least preceding
two financial years) shall be entitled for Advance Authorization

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for Annual requirement. This shall only be issued for items
having SION.
iii. Duty Free Import Authorization (DFIA) Scheme
DFIA is issued to allow duty free import of inputs, with a
minimum value addition requirement of 20%. DFIA shall be
exempted only from the payment of basic customs duty. DFIA
shall be issued on post export basis for products for which SION
has been notified. Separate schemes exist for gems and
jewellery sector for which FTP may be referred.
iv. Duty Drawback of Customs/Central Excise
Duties/Service Tax
The scheme is administered by Department of Revenue. Under
this scheme products made out of duty paid inputs are first
exported and thereafter refund of duty is claimed in two ways:

i) All Industry Rates : As per Schedule

ii) Brand Rate : As per application on the basis of
data/documents
v. Rebate of Service tax through all industry rates
Refund of service tax paid on specified output services used for
export of goods is available at specified all industry rates.
D. Export promotion Capital Goods (EPCG) Scheme
I . Zero duty EPCG scheme
Under this scheme import of capital goods at zero custom duty
is allowed for producing quality goods and services to enhance
India’s export competitiveness. Import under EPCG shall be
subject to export obligation equivalent to six times of duty saved
in six years. Scheme also allows indigenous sourcing of capital
goods with 25% less export obligation.

i. Post Export EPCG Duty Credit Scrip Scheme

A Post Export EPCG Duty Credit Scrip Scheme shall be
available for exporters who intend to import capital goods on full
payment of applicable duty in cash.

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E. EOU/EHTP/STP & BTP Schemes
Units undertaking to export their entire production of goods and
services may be set up under this scheme for import/
procurement domestically without payment of duties. For details
of the scheme and benefits available therein FTP may be
required.
F. Other Schemes
i. Towns of Export Excellence (TEE)
Selected towns producing goods of Rs. 750 crores or more are
notified as TEE on potential for growth in exports and provide
financial assistance under MAI Scheme to recognized
Associations.
ii. Rebate of duty on “export goods” and “material” used in
manufacture of such goods
Rebate of duty paid on excisable goods exported or duty paid
on the material used in manufacture of such export goods may
be claimed under Rule of 18 of Central Excise Rules, 2002.
iii.Export of goods under Bond i.e. without payment of
excise duty
Rule 19 of Central Excise Rules 2002 provides clearance of
excisable goods for exports without payment of central excise
duty from the approved factory, warehouse and other premises.

iv. Market Access Initiative (MAI) Scheme

Under the Scheme, financial assistance is provided for export
promotion activities on focus country, focus product basis to
EPCs, Industry & Trade Associations, etc. The activities are
like market studies/surveys, setting up showroom/warehouse,
participation in international trade fairs, publicity campaigns,
brand promotion, reimbursement of registration charges for
pharmaceuticals, testing charges for engineering products
abroad, etc. Details of the Scheme is available
at www.commerce.nic.in

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v. Marketing Development Assistance (MDA) Scheme

Financial assistance is available for exporters having an annual
export turnover upto Rs. 30 crores for trade fairs, buyer seller
meets organized by EPC’s/ Trade promotion organizations.
MDA guidelines available at www.commerce.nic.in
vi.Status Holder Scheme
Upon achieving prescribed export performance, status
recognition as one star Export House, two Star Export House,
three star export house, four star export house and five star
export house is accorded to the eligible applicants as per their
export performance. Such Status Holders are eligible for
various non-fiscal privileges as prescribed in the Foreign Trade
Policy.
In addition to the above schemes, facilities like 24X7 customs
clearance, single window in customs, self assessment of
customs duty, prior filing facility of shipping bills etc are
available to facilitate exports.

DOCUMENTATION :
For the logistics manager whose experience is limited to domestic move­
ments, both the documentation and the insurance requirements of in­
ternational movements will be an additional challenge. In global Supply
chains, documentation flows are as much a part of the main logistical flow
as flows of product.

Documents are important for the following reasons:

b. as an evidence of shipment and title of goods;

c. for obtaining payment;
d. to provide a specific and complete description of the goods;
e. for assessment of correct Duty for clearance purpose;
f. for obtaining Export Licences;

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g. for obtaining export finance;

h. for completing Pre-shipment Inspection;
i. for claiming export benefits like Duty Drawback, etc.
Documents involved in Global Supply chains can be Com
mercial or Regulatory Documents.

• Commercial set of documents are mainly used for Commerce.

In other words these are documents normally exchanged
between buyer and seller.
• Regulatory documents are required in dealing with various
regulatory authorities such as customs, RBI, Excise, Licensing
authorities Inspection and other Export Promotion bodies for
availing incentives etc.

Again, Commercial documents could be either principal documents or

Auxiliary documents as listed below.

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Commercial Documents
I
Principal Auxiliary
1. Commercial Invoice 1. Proforma Invoice
2. Inspection Certificate 2. Intimation for Inspection
3. Insurance Certificate 3. Declaration for Insurance
4. Certificate of Origin 4. Application for Certificate of
Origin
5. Bill of Lading 5. Mate receipt
6. Shipment Advice 6. Shipment Order
7. Packing List 7. Shipping Instructions
8. Bill of Exchange 8. Letter to Bank for negotiation
of documents

A Commercial Invoice is the basic statement of the seller to the buyer

for payment of the goods shipped. It must conform to any Letter of Credit
requirements, foreign government requirements, and export control re­
quirements regarding destination statements.

It is used as one of the primary documents in the collection process, and

is the main document used by foreign Customs for control , valuation,
and duty determination. The Commercial Invoice should contain a full
descrip­ tion of the goods, pricing, terms of sale, payment and delivery,
bills of lad­ ing numbers, method of shipment, and ship date, letter of
Credit num­ bers, import license numbers, shipper and consignee names,
and shipping marks and numbers. Commercial invoices are usually
signed by the ex­ porter.

CONSULAR INVOICE - Prepared from the information on the commercial

Invoice by the buyer's consulate or embassy in the shipper's country, these
documents are usually stamped with an official seal.

Consular Invoices are required for control of certain commodities and to

ensure valuation control in specific countries.

PRO FORMA INVOICE - The Pro Forma is used primarily to document to

the buyer, in advance, the cost and terms of sale of a proposed export. It is

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used by the foreign buyer as a quotation from the exporter, and also to as­
sist in applying for a Letter of Credit from his bank. The Pro Forma Invoice
serves as the basis for the subsequent Commercial Invoice.

CUSTOMS INVOICE - Certain countries require special invoices containing

specific information for the Customs clearance and valuation of imported
shipments. These documents contain most of the elements of the Com­
mercial Invoice, and are usually in the language of the importing country.
The Canadian Customs Invoice is the most popular of this type.

INSPECTION CERTIFICATE - To protect themselves, many foreign firms re­

quest a Certificate of Inspection. This may be an affidavit by the shipper, or
by an independent inspection firm hired by the buyer, certifying the qual­
ity, quantity, and conformity of the goods to the Purchase Order.

INSURANCE CERTIFICATE - An insurance certificate gives evidence of risk

coverage for goods shipped. It is sent to the bank with other collection
documents, and normally is used only when required by Letter of Credit
or Documentary Collection procedures. There are many types of insurance
policies available. Coverage requested is usually 110% of the value of the
cargo shipped.

CERTIFICATE OF ORIGIN (COO) : It is a certificate indicating the fact that

the goods which have been exported have originated or manufactured in
a particular country. So it is a sort of declaration testifying the origin of
export.

It is normally required by an importer to clear goods from the customs.

For political and social reasons, it is insisted by Customs Authority of im­

porting country before goods are allowed to enter in the country.

It helps the importer to take an advantage in duty concession, if any. For

e.g. goods imported under Free Trade Agreement.

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BILL OF LADING : is the transport document associated with Sea freight. It

is issued by the Shipping Company or its agent or master of a ship ac­
knowledging that specified goods have been received on board as cargo for
conveyance to a named place for delivery to the consignee. It is a docu­ ment
of title to the goods and, as such, is freely transferable by endorse­ ment
and delivery. Bill of Lading serves three purposes as:

• Receipt given by Shipping Company as goods described on

document has been received by carrier.
• Evidence of the contract of carriage by sea between the shipping
company and the shipper (exporter or importer).
• Document of title to the goods and can be used to obtain payment
or a written promise before the merchandise is released to the
importer.
Bill of Lading, is generally made out in the sets of two or three originals
duly signed by the master of the ship or the agent of the steamship
company. All the originals are equally valid for taking the delivery of the
goods. Once one original is utilized the other originals become null and
void.

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SHIPMENT ADVICE: Depending upon the terms of sale and immediately

after shipping the goods, the exporter has to inform the foreign buyer of
the fact of shipment .This is usually done in the form of a 'shipment advice'
giving invoice number; description of goods, quantity, number of pack­
ages, marks and numbers, name of the carrier, bill of lading/airway bill
number and date, expected time of arrival of the carrier at the port of des­
tination, etc. This enables the foreign buyer to arrange insurance coverage
in respect of goods in transit and also for making advance arrangements
for the clearance of the goods at the port of destination.

PACKING LIST describes all items in the box, crate, pallet, or container,
plus the type, dimensions, and weight of the container. It is used to de­
termine total shipping weight and volume (cubes) by Customs officials to
check cargo, and by the buyer to inventory merchandise received. Prices
and item values are usually omitted from the packing list. Shipping marks,
reference numbers, and carton numbers are also important additions to
the packing list.

Bill Of Exchange: [BE] is a document drawn and is an order by the export­

er to the buyer to pay the money in specified exchange. It is also known
as a draft. A bill of exchange is accompanied by commercial documents
which are presented by a bank and released to the buyer either against
payment (at sight) or against a signature for payment on a specified future
date. It is an unconditional written order.

When a BE is drawn on foreign firm it is termed as a foreign draft or bill of

exchange.

It is prepared either in an international currency or Indian rupees depend­

ing on the terms of the contract. Accordingly, the bill is known by the name
of currency in which it is drawn.

e.g. a bill drawn in US dollars is known as a “Dollar Bill" and when

drawn in Rupees, it is termed as “Rupees Bill”.

The most common versions of a bill of exchange are:

A) Sight Draft - When the drawer (exporter) expects the drawee (im-

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porter) to make payment immediately upon the draft being pre­

sented to him.

Unless and until the Draft is received, the Negotiating/ Collecting

Bank does not hand over the Shipping documents and the buyer
cannot take delivery of goods.

B) Usance Draft-When draft is drawn for payment at a date later than

the date of presentation. It may be a fixed future (specific) date or
determinable date according to the period of credit viz. 30 days, 60
days or 90 days etc. It is presented to the drawee (importer) who
will retire the documents by accepting the draft by putting his sig­
nature and date. When the payment is received in advance no Bill
of Exchange is required to be drawn.

Parties to a bill of exchange are :

Drawer - who makes the order for making payment.

Drawee - whom the order to pay is made.

Payee - whom the payment is to be made.

Features of a Bill of Exchange:

a. A bill must be in writing, duly signed by its drawer, accepted by its
drawee and properly stamped.
b. It must contain an order to pay. Words like 'please pay US $ 5,000
on demand and oblige' are not used.
c. The order must be unconditional.
d. The sum payable mentioned must be certain or capable of being
made certain.
e. The parties to a bill must be certain.
SHIPPING INSTRUCTIONS : These instructions, often prepared along with
a Shipper's Export Declaration, are the exporter's directions to the freight
forwarder on how to handle the exporter's shipment. The information pre­
pared on an Shipping Instruction includes a description of the goods and

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containers, the ultimate consignee, shipping method desired, insurance

requirements, and special instructions pertaining to the shipment.

MATE RECEIPT : Mate's receipt is a receipt issued by the Master or Mate

of the vessel stating that certain goods have been received on board his
vessel.
It is prima-facie evidence that the goods are loaded in the vessel.

It contains:

• the name of shipping line and vessel,

• port of loading, port of discharge and place of delivery,
• marks and numbers,
• number and kind of packages, gross weight,
• description of goods,
• container status/seal number,
• shipping bill number and date and
• condition of cargo at the time of its receipt on board the vessel.

REGULATORY DOCUMENTS :
SHIPPING BILL: Shipping Bill is a document required to seek permission
of customs to export goods by Sea/Air. It is prepared by the exporter and
submitted to the Customs.

The exporter of any goods has to file a "SHIPPING BILL" as an entry for the
purpose of export by air or sea and a "BILL OF EXPORT" in respect of export
by land.

Cargo will be allowed to be carted to Dock/Port sheds only after stamping

and passing of the shipping bill by customs authorities.

The exporter has to sign a declaration in the Shipping Bill regarding the
genuineness of its contents.

Different types of Shipping Bill are:

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FREE SHIPPING BILL: Used for export of goods which neither attract any
Export duty/cess nor entitled to any Duty Drawback

DUTIABLE SHIPPING BILL: Used when export goods are subject to Export
Duty/Cess. Duty is charged either on quantity basis (Fixed amount per kg.
or per Metric tonne) or on certain percentage of assessable value.

DRAWBACK SHIPPING BILL: Used when Duty Drawback is to be claimed.

SHIPPING BILL FOR SHIPMENT EX-BOND: Used when the goods are to be
exported which have been imported earlier and kept in bond prior to re­
export.

DEPB SHIPPING BILL: When DEPB benefit is to be claimed.

DEEC SHIPPING BILL: This shipping bill is used for export of goods under
Advance Authorization (Duty exemption scheme).

DEEC CUM DRAWBACK SHIPPING BILL: This shipping bill is used for export
of goods where both the schemes Duty Exemption as well as Drawback
are to be taken into account.

ARE : ARE stands for "Application for Removal of Excisable" goods for ex­
ports by Air/Sea/ Post/Land. Goods which are sold overseas are exempted
from payment of excise duty or entitled for Rebate of Excise Duty, if excise
paid goods are exported. Under both these circumstances, the document
to be used is ARE.

When goods are removed without payment of duty for the purpose of
export, they will get covered under the provisions of Rule 19 of the Central
Excise Rules. When excise paid goods are exported and rebate of Excise
Duty is to be claimed, they will get covered under Rule 18 of Central Excise
Rules.

ARE is prepared before clearance of goods from the factory gate.

ARE will specify whether goods are to be exported under Rule 19 or under
Rule 18.

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The three types of ARE are:

a. ARE 1: is used for physical export of goods.
b. ARE 2: is used when goods are removed for manufacture and
packing of the goods is to be exported.
c. ARE 3: is used when goods are supplied as deemed exports.

BILL OF ENTRY :

• is a statement of the nature and value of goods to be imported

or exported
• prepared by the shipper and presented to a custom house
• In case of export, it is termed as Shipping Bill
• For goods cleared through the EDI system
• no formal Bill of Entry is filed as it is generated in the computer
system
• the importer is required to file a cargo declaration for processing
of the entry for customs clearance.

DECLARATION FORM :
As per the exchange regulations, exporters, wishing to ship goods abroad,
are required to submit Export Declaration Forms to the Customs authori­
ties (whenever the value of the shipment exceeds US $ 25,000) before any
export of goods from India is made.

It is to be filed by exporter stating that export proceeds would be realized

within 180 days for non-status holder exporters and 360 days for status
holder exporters.

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CUSTOM CLEARANCE PROCEDURE

Export:

Customs Procedure for Export.

The following procedures to be followed for exports from India
1. Registration
2. Processing of Shipping Bill
3. Quota Allocation
4. Arrival of Goods at Docks
5. System Appraisal of Shipping Bills
6. Customs Examination of Export Cargo
7. Stuffing / Loading of Goods in Containers
8. Drawal of Samples
9. Amendments
10. Export of Goods under Claim for Drawback
11. Generation of Shipping Bills
1. Registration
Any exporter who wants to export his good need to obtain PAN based
Business Identification Number (BIN) from the Directorate General of
Foreign Trade prior to filing of shipping bill for clearance of export
goods. The exporters must also register themselves to the authorised
foreign exchange dealer code and open a current account in the
designated bank for credit of any drawback incentive.
Registration in the case of export under export promotion schemes:
All the exporters intending to export under the export promotion
scheme need to get their licences / DEEC book etc.
2.Processing of Shipping Bill - Non-EDI:
In case of Non-EDI, the shipping bills or bills of export are required to
be filled in the format as prescribed in the Shipping Bill and Bill of
Export (Form) regulations, 1991. An exporter need to apply different
forms of shipping bill/ bill of export for export of duty free goods, export
of dutiable goods and export under drawback etc.
Processing of Shipping Bill - EDI:
Under EDI System, declarations in prescribed format are to be filed
through the Service Centers of Customs. A checklist is generated for

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verification of data by the exporter/CHA. After verification, the data is
submitted to the System by the Service Center operator and the
System generates a Shipping Bill Number, which is endorsed on the
printed checklist and returned to the exporter/CHA. For export items
which are subject to export cess, the TR-6 challans for cess is printed
and given by the Service Center to the exporter/CHA immediately after
submission of shipping bill. The cess can be paid on the strength of the
challan at the designated bank. No copy of shipping bill is made
available to exporter/CHA at this stage.
3. Quota Allocation
The quota allocation label is required to be pasted on the export
invoice. The allocation number of AEPC (Apparel Export Promotion
Council) is to be entered in the system at the time of shipping bill entry.
The quota certification of export invoice needs to be submitted to
Customs along-with other original documents at the time of
examination of the export cargo. For determining the validity date of the
quota, the relevant date needs to be the date on which the full
consignment is presented to the Customs for examination and duly
recorded in the Computer System.
4. Arrival of Goods at Docks:
On the basis of examination and inspection goods are allowed enter
into the Dock. At this stage the port authorities check the quantity of the
goods with the documents.
5. System Appraisal of Shipping Bills:
In most of the cases, a Shipping Bill is processed by the system on the
basis of declarations made by the exporters without any human
intervention. Sometimes the Shipping Bill is also processed on screen
by the Customs Officer.
6. Customs Examination of Export Cargo:
Customs Officer may verify the quantity of the goods actually received
and enter into the system and thereafter mark the Electronic Shipping
Bill and also hand over all original documents to the Dock Appraiser of
the Dock who many assign a Customs Officer for the examination and
intimate the officers’ name and the packages to be examined, if any, on
the check list and return it to the exporter or his agent.
The Customs Officer may inspect/examine the shipment along with the
Dock Appraiser. The Customs Officer enters the examination report in

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the system. He then marks the Electronic Bill along with all original
documents and check list to the Dock Appraiser. If the Dock Appraiser
is satisfied that the particulars entered in the system conform to the
description given in the original documents and as seen in the physical
examination, he may proceed to allow "let export" for the shipment and
inform the exporter or his agent.
7. Stuffing / Loading of Goods in Containers
The exporter or export agent hand over the exporter’s copy of the
shipping bill signed by the Appraiser “Let Export" to the steamer agent.
The agent then approaches the proper officer for allowing the
shipment. The Customs Preventive Officer supervising the loading of
container and general cargo in to the vessel may give "Shipped on
Board" approval on the exporter’s copy of the shipping bill.
8.Drawal of Samples:
Where the Appraiser Dock (export) orders for samples to be drawn and
tested, the Customs Officer may proceed to draw two samples from the
consignment and enter the particulars thereof along with details of the
testing agency in the ICES/E system. There is no separate register for
recording dates of samples drawn. Three copies of the test memo are
prepared by the Customs Officer and are signed by the Customs
Officer and Appraising Officer on behalf of Customs and the exporter or
his agent. The disposal of the three copies of the test memo is as
follows:-
Original – to be sent along with the sample to the test agency.
Duplicate – Customs copy to be retained with the 2nd sample.
Triplicate – Exporter’s copy.
The Assistant Commissioner/Deputy Commissioner if he considers
necessary, may also order for sample to be drawn for purpose other
than testing such as visual inspection and verification of description,
market value inquiry, etc.

9. Amendments:
Any correction/amendments in the check list generated after filing of
declaration can be made at the service center, if the documents have
not yet been submitted in the system and the shipping bill number has
not been generated. In situations, where corrections are required to be
made after the generation of the shipping bill number or after the

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goods have been brought into the Export Dock, amendments is carried
out in the following manners.
The goods have not yet been allowed "let export" amendments may be
permitted by the Assistant Commissioner (Exports).
Where the "Let Export" order has already been given, amendments
may be permitted only by the Additional/Joint Commissioner, Custom
House, in charge of export section.
In both the cases, after the permission for amendments has been
granted, the Assistant Commissioner / Deputy Commissioner (Export)
may approve the amendments on the system on behalf of the
Additional /Joint Commissioner. Where the print out of the Shipping Bill
has already been generated, the exporter may first surrender all copies
of the shipping bill to the Dock Appraiser for cancellation before
amendment is approved on the system.
10.Export of Goods under Claim for Drawback:
After actual export of the goods, the Drawback claim is processed
through EDI system by the officers of Drawback Branch on first come
first served basis without feeling any separate form.
11.Generation of Shipping Bills:
The Shipping Bill is generated by the system in two copies- one as
Custom copy and one as exporter copy. Both the copies are then
signed by the Custom officer and the Custom House Agent.

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3. INCOTERMS
1. DEFINITION:
INCOTERMS is a short form for International Commercial Terms. They are a
series of international sales terms published by International Chamber of
Commerce (ICC) and widely used in commercial transactions in interna­
tional trade.

Besides they are also accepted by governments, legal authorities and prac­
titioners for the interpretation of the terms in international trade.

2. SCOPE OF INCOTERMS:
The scope of INCOTERMS covers matters relating to the rights and obliga­
tions of the parties to a Sale Agreement. The parties to a sale are Seller and
Buyer. In international trade, they are known as Exporter and Importer, or
Consignor and Consignee.

The terms are therefore used to divide all transaction costs, responsibili­
ties between the Seller and Buyer. At the same time, these terms reflect
needs of state-of-the art transportation practices. The terms are subject to
effects of changes in mode of transport, means of transport, equipments
and technology changes, evolving and ever-changing transport and ware­
housing practices.

The INCOTERMS correspond to the UN Convention on contracts for inter­

national sale of goods. lncoterms therefore have acceptance and recogni­
tion of the UN ,Governments, legal institutions, carriers, all types of logistic
service providers and parties to sale agreements. Thus the terms are uni­
versally recognized as legal terms.

3. RESPONSIBILITIES AND LIABILITIES:

As described above, the relationship between Seller and Buyer is defined
with regard to responsibilities and liabilities on either side with reference
to:

a. The cost of the goods.

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b. ost of packing, labeling, marking, warehousing, pick up etc at

different stages.
c. Customs clearance costs and duties at origin.
d. Freight charges from origin to destination.
e. Insurance Charges
f. Customs Clearance at destination and cost.
g. Door-delivery at importer's premises.
These costs and functions could lead to a lot of misinterpretation, mis­
understanding and neglect and ultimately lead to losses and litigation
between the Seller and the Buyer. The situation is even more aggrevated
given the fact that in international trade, the Seller and the Buyer belong
to two different countries, cultures, languages, social, legal and political
systems. Hence the chances of misinterpretation and misunderstanding
are more. To remove the possibilities, lncoterms are necessary, which in­
terpret legal responsibilities in a language that is understood by people
all over the world in the same way. Hence, the imperative need to have
INCOTERMS.

4. CHANGING CIRCUMSTANCES:
The INCOTERMS were first published in 1935, they underwent changes in
interpretation in 1953, 1967, 1990 and 2000. The changes in lncoterms
were necessitated due to fast changing patterns and practices in transpor­
tation. The following factors were responsible for these changes:

a) Introduction of Sea Containers:

The advent of containers in sea transport brought about a revolu­

tion in ocean mode of transport. The important developments that
came about as a result of containers are three-fold:

i. Door-to-door transport was made possible, as containers could

be moved easily by road and rail to exporters' and importers'
factory for loading. This was not possible earlier as cargo had
to be necessarily brought to ports for loading on ships. This
changed the point of loading or stuffing thereby affecting

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the responsibilities and liabilities of the Carrier, exporter and

importer.
ii. Multi-modal transport was made possible with the entry of
containers .The containers are so designed and built as to enable
them to be carried by road, rail and ship. The entire transport
by various modes became possible under a single Document
of Carriage, making multimodal transport a reality and a viable
mode of transport.
iii. Since containers could be carried anywhere, even inland points
where there are no sea ports, it gave rise to creation of Inland
Container Depots(ICD) and Container Freight Stations (CFS).
These are cargo processing hubs/centres located away from sea
ports. Exports and imports brought to these cargo centres could
be customs cleared, warehoused, stuffed into containers and in
turn moved from there to sea ports for export or to importers'
premises thus making possible creation of hubs close to and
immediately accessible to export/import centres in inland areas
of the country.

b) Introduction of EDI (Electronic Data Interchange):

With the invention and wide-spread use of computers and telex,

e-mail and fax, speed at which information could be transferred to
any point in the globe became phenomenal. Transfer of informa­
tion is the backbone of logistics. As nervous system to the human
body, so is transfer of information to logistics. Information transfer,
vertically, horizontally and criss-cross is necessary to have a live lo­
gistics industry. This had an impact on INCOTERMS since informa­
tion on cargo at any given time could be obtained at the click of a
button .This changed the cost factors between the Seller and Buyer
and therefore the responsibilities/liabilities of both changed.

c) Introduction of Air Cargo:

The movement of cargo by planes phenominally increased the

speed and decreased the time taken to transport cargo from one
point to another. With the invention of wide-bodied, high- speed

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planes and exclusive cargo carriers, the time taken for transport was
drastically reduced and volume of cargo carried by air increased,
thus making possible air cargo as a commercial venture. Cargo
could now be carried over long distances in a matter of hours or 2 or
3 days. This again affected the interpretation of lncoterms. The
responsibilities and liabilities shifted in matter of hours from Seller to
Buyer. Hence the lncoterms had to be re-interpreted to accom­
modate this speed of carriage.

5. LIST OF INCOTERMS:
Group E ExW Ex Works

Group F FCA Free Carrier

FAS Free Alongside Ship

FOB Free on BOARD

Group C CFR Cost & Freight

CIF Cost Insurance & Freight

CPT Carriage paid to

CIP Carriage & Insurance paid to

Group D DAF Delivered at Frontier

DES Delivered ex ship

DEQ Delivered at Quay

DDU Delivered Duty Unpaid

DDP Delivered Duty Paid

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6. INTERPRETATION OF INCOTERMS:
a) 'E'TERMS

Ex W-Ex-Works:

Under this term, the Seller makes the goods available, packed and ready
for carriage, at his premises. All costs from that point and liabilities are to
be borne by the Buyer.

b)'F'TERMS

FCA- Free Carrier:

The Seller hands over the goods, cleared for export, into the custody of the
first carrier( named by the Buyer) at the named place. This term is suitable
for carriage by air, road, rail and containerised and multimodal transport.
From this, point the Buyer bears all costs and liabilities up to his factory in
his country.

FAS-Free Alongside Ship:

The Seller undertakes to place the goods cleared for export, alongside
the ship at the harbor. It is suitable for maritime transport only. From that
point, the Buyer bears the costs and liabilities till the goods reach his fac­
tory in his country.

FOB-Free on Board:

Having cleared the goods for export, the seller must arrange to load the
goods on board the ship nominated by the Buyer. The costs and risks up
to the board of the ship are borne by the Seller. After that all costs and li­
abilities are to the account of the Buyer.

c) 'C'TERMS:

CFR- Cost & Freight:

The Seller pays all the pre-shipment costs like pick-up, customs-clearance,
port charges etc. and also the freight charges up to destination port. The
Buyer bears the costs after that point up to his factory in his country. How-

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ever, the risk is transferred to the Buyer the moment the goods are placed
on board the ship. This term is suitable for maritime transport only.

CIF- Cost, Insurance & Freight:

It is the same as CFR, but in addition, the Seller must pay for insurance
cover. This again applies to maritime transport only.

CPT- Carriage Paid To:

It is an equivalent of CFR but suitable for general, containerised/multi­

modal transport. The Seller pays all pre-carriage costs and freight up to
destination point, but risk alone passes to the Buyer once the goods are
handed over to the first carrier.

(IP-Carriage & Insurance Paid To:

It is CIF equivalent of general containerized transport/multimodal trans­

port. The Seller pays for all pre-shipment charges and freight up to the point
of destination. The risk, however passes to the Buyer as soon as goods are
handed over to the first carrier.

d) 'D 'Terms:

DAF- Delivered at Frontier:

The Seller makes the goods available, cleared for export, at the named
place at the border of the importe'rs country. It is suitable for road and rail
transport.

DES- Delivered ex Ship:

The Seller makes the goods available to the Buyer on board the ship at the
port of destination, and pay for all the costs pertaining to pre-shipment
procedures. The Buyer has to make arrangements to clear the shipment
from Customs.

DEQ- Delivered ex Quay:

This is one step further than DES. The Seller must pay for all costs till the
cargo is unloaded from the ship and placed on the wharf. The Seller pays

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for import clearance in his country and pays the duties. From there the im­
porter makes arrangements to take the goods to his factory at his cost.

DDU- Delivered Duty Unpaid:

The Seller agrees to deliver the goods at importer's premises in his country
at his own cost: pick-up, customs clearance at origin, freight and customs
clearance at destination and delivery at the importer's factory. The Seller
pays the customs duty alone.

DDP- Delivered Duty Paid:

Here the maximum obligation is on the Seller. He, not only, pays all charges
up to importer's factory, but also pays the customs duty in the importer's
country.

7. LATEST CHANGES:
As of 1st January 2011, all the terms in Section Dare obsolete and replaced
with:

DAT - Delivered at Terminal: Seller bears cost, risk and responsibility until
goods are unloaded (delivered) at named quay, warehouse, yard, or ter­
minal at destination. Demurrage or detention charges may apply to seller.
Seller clears goods for export, not import. DAT replaces DEQ DES.

DAP - Delivered at Place: Seller bears cost, risk and responsibility for goods
until made available to buyer at named place of destination. Seller clears
goods for export, not import. DAP replaces DAF, DDU.

DDP - Delivered Duty Paid: Seller bears cost, risk and responsibility for
cleared goods at named place of destination at buyers disposal. Buyer is
responsible for unloading. Seller is responsible for import clearance, du­
ties and taxes so buyer is not “importer of record”.

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8. CONCLUSION:
From the above it is clear that

a) lncoterms are necessary to clear all possible misinterpretation and mis­

understanding between the Seller and the Buyer, and

b) lncoterms are subject to constant changes in interpretation, brought

about by technological and social changes in the world.

It is important to remember that all international transactions, if done ac­

cording to the scope of INCOTERMS, would be within the ambit of the ac­
cepted legal frame-work.

Cii institute of Logistics pg. 41

 AREA OF ORIGIN MAIN TRANSPORTATION DESTINATION AREA
Packaging Licenses Load at Inland transport export Handling costs Main Insurance Handling costs Import Inland transport Unload
verification authorizations the truck or country of clearance at origen. transport merchandise. at origenl. Port, clearance at origen
control others container origin. From Formalities Port, airport, Transport airport, shot, duties and From port, airport
formalities in factory or factory to port, shot, train, etc. insurance from train, etc. taxes or factory terminal
warehouse airport to the point of or logistics operator
terminal or delivery to
carrier destination

RemAir RemTrain RemLine

RemLine
Incoterms® 2020 ICC - RULES FOR ANY WAY OR TRANSPORT WAYS

EXW Cost
Ex works.
Risk

FCA Cost
Free carrier.
Risk

Cost
CPT
Carriage paid to.
Risk

CIP Cost
Cariage and
insurance paid to. Risk

Cost
DAP
Delivered at place.
Risk

DPU Cost
Delivered at place unload.
Risk

DDP Cost
Delivered duty paid.
Risk

RemLine
Incoterms® 2020 ICC - RULES FOR MARITIME TRANSPORTATION AND INLAND WATERWAYS

FAS Cost
Free alongside ship.
Risk

FOB Cost
Free on board.
Risk

Cost
CFR
Cost and freigth. Risk

CIF Cost
Cost, insurance
and freigth. Risk

Seller Buyer The seller must provide the necessary documentation for Depending on the agreed Mandatory / Compulsory / Required
export and import clearance at the the buyer's request, delivery point Mandatory / Compulsory / Required
risk and cost

Training in company / In-company consulting and training in International Supply Chain

 Reference Material for SCM Pro

4. LETTER OF CREDIT
1. INTRODUCTION:
The success of Export business depends to a large extent on efficient
management of finance, which are subject to risk of losses due to interest
on export loans, exchange rate fluctuations and possibilities of not receiving
payments from Buyers after the shipments are effected. Export business
becomes a profitable venture as long as payments are received promptly
by the Sellers from the Buyers.

2. MODES OF PAYMENT:
There are several modes of making payments in exports from the Importer
to the Exporter. Some of these are:

a. Documents Against Payment (D/P)

b. Documents Against Acceptance (D/A)
C. Consignment Sales (Stock and Sale)
d. Open Account
e. Bill of Exchange
f. Telegraphic Transfer (TT)
g. Mail Transfer(MT)
h. Demand Draft
i. Letter of Credit (L/C)

All these are different ways in which Exporters realize their payment from
Importers. There are varying degrees of risk involved. The mode of
payment chosen depends on the level of trust and business relationship
existing between the Exporter and Importer.

Among the various modes, the Letter of Credit is rated as the most trust­
worthy Banking instrument where the interests of both exporters and
importers are taken care of equally.

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3. DEFINITION:
A reliable Bank undertakes to pay the exporter on behalf of the importer
once the exporter fulfils certain obligations.

The L/C may be defined as an arrangement whereby a Bank (issuing L/

C } acting at the request of a customer is to make a payment to or to the
order of a third party (the beneficiary) against stipulated terms and
conditions laid by the beneficiary. The beneficiary, in turn , is to submit
to the Bank specified export documents.

4. MODE OF OPERATION:
The following are the step­ by­ step operations involved in opening a L/C :

1. The importer opens a LJC through his bank which is known as

OPENING BANK/ISSUING BANK.
2. This bank will advise credit to the exporter through its
correspondent bank in the exporter's country.
3. The correspondent bank is called the ADVISING BANK/NOTIFYING
BANK.
4. The bank which negotiates the draft under L/C is called the
NEGOTIATING BANK.
s. The opening bank itself may become negotiating bank.
6. The opening bank may request any bank in the importer's country
to confirm the credit­ called the CONFIRMING BANK, which
undertakes all obligations of the opening bank.
7. The opening bank is the bank on which the draft has to be drawn
as per the L/C . It may be the issuing bank, confirming bank or
advising bank.
8. a} The exporter has to ship the goods first, by carrying out all
the Customs/carrier formalities.
b) After the shipment is effected, he has to submit the shipping
documents as per L/C terms to the negotiating bank

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c) he negotiating bank will forward the documents to the

importer through the opening bank.
d) The payments to the exporter is guaranteed by the
importer's bank, provided all the conditions on the L/C are
fulfilled by the Exporter in terms of shipping documents and
submission of the same to the negotiating bank.

5. TYPES OF LETTER OF CREDIT:

There are primarily seven types of L/C. The exporter and Importer may
agree on the type of L/C that is most suitable to their requirements.

a) Revocable/Irrevocable L/C:
Irrevocable L/C cannot be cancelled, amended or changed by the
importer once it is established. Most exporters would prefer an Ir­
revocable L/C to a Revocable one.

b) Confirmed/Unconfirmed L/C:
This L/C constitutes a definite undertaking of the confirming bank and issuing bank
that payment would be made to the exporter. Only Irrevocable Lies are Confirmed. In
an Unconfirmed L/C, the correspondent bank merely notifies the credit to the export

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er.

c) Transferable L/C:
Transferable L/C carries instructions that the benefits can be
transferred to a third party/parties. Generally merchant exporters
prefer this type of L/C since they have several supporting
manufacturers, to whom the benefits of the L/C can be transferred.

d) Revolving Credit:
When there are periodic and continuous orders for exports on an
exporter, the exporter would prefer Revolving Credit, whereby the
payments are reinstated on the same L/C and made available to
the beneficiary again after a period of time. This type of L/C is
good for long­term transactions. It saves a lot of time and money.

e) Back­to­back Credit:
The exporter uses his export L/C as a cover for opening credit in
favor of local suppliers. This type of L/C is favored by merchant
exporters as identity of ultimate Buyers is kept secret. Since Back­
to­ back UC is opened in INR, it is in effect a domestic L/C .

f) Restricted/Unrestricted L/C :
When L/C does not specify a particular negotiating bank, it is called
an Unrestricted L/C But where a bank is nominated on the L/C it
is called a Restricted L/C .

g) Red Clause UC:

There is a Red Clause on the L/C which authorizes the negotiating
bank to release advance payment to the exporter before the
shipment is effected. The advance paid may be liquidated from the
sale proceeds of the bill when it is negotiated finally after the
shipment. This facility is available only in an Irrevocable L/C . The
advance is granted against the exporter's undertaking to tender
the shipping documents on completion of shipment.

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6. CONDITIONS OF PRESENTATION:
After the shipment is completed, the exporter has to submit the export/
shipping documents to the bank as proof of shipment. There are certain
conditions to be met while presenting the same to the bank:

a. All L/C s stipulate an expiry date before which the documents

have to be submitted to the bank and also the place of bank
where
they should be submitted.
b. Therefore, the documents should be submitted on or before the
expiry date.
c. The L/C also stipulates the last date of shipment. The transport
document or document of carriage should bear a date as on or prior
to this date. The bank will not accept a document which is dated
later than that date.
d. The documents must be presented within 21 days from the date
of shipment. The Bank would refuse to accept documents
presented after that period.
e. If the expiry date falls on a holiday, the next day is considered as
expiry date.
f. The documents may be presented only during bank working
hours.
g. The banks deal with the documents only, but not with actual
shipment transactions. The banks are not expected to verify the
actual transactions.

7. SCRUTINY OF LETTER OF CREDIT:

The L/C must be scrutinized by the exporter for the details on it, as per
below points:
a. Whether the L/C is Revocable or Irrevocable
b. Verify the name/address of the beneficiary
c. Whether L/C is transferable or not
d. Check the expiry date on the L/C
e. Whether the value of the L/C covers the full value of the goods in

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appropriate currency
f. Whether the L/C mentions the correct quantity and quality of
goods as per the Purchase Order of the importer
g. Whether all the documents called for in the L/C can be furnished
by the exporter
h. Whether payment terms like advance, credit, instalments shown
on the L/C are as per Sale Contract/Purchase Order or not.
i. Various terms on the L/C should not be contradicting each other.
any unfortunate event, the bank may turn the Policy in its favour.
6. The risk coverage as per the Policy should not start later than the
date of shipment.

8. CONCLUSION:
In conclusion, the L/C is the best form of payment mode because

a. the exporter is sure of receiving his payment as soon as the

shipping documents are submitted.
b. the importer is also assured that the bank ensures that the
exporter meets all his export obligations with regard to shipment,
documentation and payment.

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h.

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5. PACKING,LABELLING & MARKING

1. INTRODUCTION:
Packing, labelling and marking, though they sound like very basic
requirements and of no major importance in transportation of cargo,
these factors are essential and integral part of logistics.

There is a scientific method behind these activities if they are to serve

the purpose for which they are meant. Basically, the purpose of packing,
label­ ling and marking is to ensure the safety and identity of cargo.

2. PACKING:
Packing is a method of storing cargo in a container like a cardboard box,
crate etc. for the purpose of transportation. The material used for packing
depends on the nature of the cargo and the rigours of transport and
handling. Solids are packed in cardboard boxes or crates depending on
the material, weight and volume. Liquids are stored in drums and cans,
gases are transported in cylinders. Besides, there are prescribed
specifications for packing of cargo that is of hazardous nature in order to
protect other cargo, handlers and handling equipment.

i. Purposes of packing:
Packing is expected to serve the following purposes:

a) to ensure safety of the cargo.

Packed consignment is less prone to loss, pilferage or damage.

b) to enable easy handling.

Packed cargo can be moved or transported easily from place to

place. It is easy to store them in warehouses and showrooms
etc.

c) to maintain temperature.
Packed cargo is not exposed to extreme weather conditions,
like
pharmaceutical products, chemicals, crackers etc.
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d) to enable longevity of cargo

Cargo that is packed can be stored for a long time. When it is
ex­ posed, it is open to damage, contamination and spoilage.

e) to prevent theft and pilferage

Packed contents cannot be pilfered as much as open

contents. Packing therefore provides a protection against
vandalism also.

f) to help in storage.
Packed boxes/crates are easy to store on racks in a
warehouse, one on top of the other or display them in a
showroom.

g) to help display information.

Packing helps to display information on the nature of the

cargo, contents and constituents of the finished product.

h) to display handling information.

Special handling instructions and storage requirements are

shown on the boxes in writing and pictorial form.

i) to display warning and cautions.

There are warnings and cautions shown on the packing to indicate

any hazard, caution in handling and storing etc. For example, 'keep
away from children' is a caution displayed on pharmaceutical products.

ii. Nature of Packing:

The kind of packing used depends on the nature of cargo and its
features such as,

a) liquid, solid or gas

b) volume/weight of the cargo

c) perishability of cargo- eg. Food, vegetables, fruits, meat etc.

d) shelf-life of cargo
e) hazardous nature of cargo - cargo may pose dangers to
other
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cargo or persons like acids, flammable cargo, poisons,

radioactive material etc.

f) sensitive nature of cargo- like medical, telecommunication

equipment.

g) mode of transport- sea cargo has to be packed securely in

view of the rigors of sea transport, sea water/air and time
taken as compared to air transport.

h) climatic conditions - it also determines the kind of packing

required and the packing material to be used. Temperature
can affect the contents.

i) number of transshipments and re-working required -

depending on number of transshipment points where re-
working of cargo is needed to be done, packing has to be
stronger in order to avoid breakage/spillage of contents.

j) value of cargo - valuable cargo like gold, silver etc., currency

notes have to be securely packed in metal packing as they are
prone to pilferage and should be stored in a Strong Room.

k) In the case of Dangerous Goods, especially when carried by

air, there are strict rules about packing prescribed by IATA
(International Air Transport Association). IATA has classified nine
classes of Danger, and the type of packing prescribed depends
on the degree of danger. Packing instructions in such cases are
contained in the DGR Manual of IATA.

3. LABELLING:
Labels are printed paper with writings on them. Labels are primarily
used to highlight details about the cargo like description and to display
special handling instructions.

There are two types of labels:

1. Hazardous Cargo Labels

2. Orientation Labels
Orientation Labels carry instructions on special handling required,
nature of hazard it may pose or caution to be exercised.

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Package Orientation Labels carry instructions on how packages are to

be handled or not handled and how they are to be stored.

Labels play an important role in safe and sound way of handling cargo
by air, sea, road and rail. Handling labels carry instructions like "THIS
WAY UP': "FRAGILE':"PROTECT FROM RAIN 'CARGO AIRCRAFT
ONLY"'etc. with pictorial depictions.
Ground rules on labeling are:

i. Labelling is the responsibility of the shipper.

ii. Labels must be clearly visible and legible
iii. Folding or overlapping of labels is not permitted.

4) MARKING
Marking on packages is necessary primarily in maintaining the identity
of cargo. Hence, packages are marked with Consignor/Consignee
name and address, trademarks of the manufacturer, the Airway Bill or
Bill of Lading numbers or any other identifying marks and signs. This
ensures the security and individuality of the cargo.

If there are no markings, there are possibilities of the consignment

get­ ting mixed with other cargo and identity being lost. Again for air
cargo, IATA has prescribed stringent rules about markings to be shown
on pack­ ages to indicate certain warnings to handlers and carriers.
Hence there are some ground rules in marking:

1. Marking is the responsibility of the sender.

2. Marking should be clearly legible and visible.
3. Marking should be of a permanent nature.

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5) CONCLUSION:
We see from the above that Packing, Labelling and Marking are as
important as the consignment itself. Mistakes in these basic activities
could result in misplacement of shipments, damage, loss, claims,
litigation and even danger to life and property .There are several
cases of such instances resulting from small errors in packing,
labeling and markings. Care and caution has to be exercised to
prevent untoward incidents and these three activities should be
carried out in conformity with rules and existing practices.

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6. RISK MANAGEMENT

1. INTRODUCTION:
Business in general is ridden with risks, more so is export business,
where business is done between two individuals living in two different
countries, with different political, legal and social systems, speak
different languages and have different social and cultural backgrounds.

Under all these adverse circumstances, the success of an export

business depends, apart from above adverse factors, on effective
management of finance. Management of finance consists of three
aspects:

i. To be able to avail of export finance at best terms possible, at

low rates of interest.
ii. To ensure that sale proceeds are received without delay, that
is, payments from Buyers.
iii. To be aware of exchange rate fluctuations in receipt of
payments this could cause losses in a business.
Effective management of these three aspects is what will make a
difference will affect whether the business will win or lose. Rate of
interest at which an exporter is able to raise loans has an effect on his
profitability in business. Managing foreign exchange risks and
techniques connected with it also has an equally lasting effect on export
business. Given the marginal profits currently available in business,
these two losses can eat into those meagre profits and make the entire
effort a waste.

2. RISKS IN PAYMENTS:
Unless payment for export goods is received in advance or by Letter
of Credit, the exporter runs the risk of not getting the payment at all from
the importer. There are several risks that the exporter may face in
realizing sale proceeds. The exporter has two options to cover these
risks:
The more popular option is to take a Shipment (Comprehensive Risks)
Pol­ icy from the Export Credit Guarantee Corporation of India (ECGC).

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The ECGC provides cover against commercial risks and political risks,
both of which can pose hurdles to receiving payments. Examples of
commercial risks are insolvency of the Buyer, failure to make
payments, failure to accept goods by the importer at the destination
for various reasons etc. Political risks that make payments difficult are
Government restrictions in importer's country, war, civil war,
revolution, introduction of import licenses, interruption in voyage or any
other cause outside India.

The ECGC policy is meant to cover these risks on all shipments that
may be made on credit terms during a period of 24 months from the
date of policy.

The second option available to the exporter are forfaiting and

factoring. Forfaiting means discounting of export receivables by the
agency, which offers this facility. Currently, EXIM bank and SBI are
offering forfaiting services. Under this scheme, the exporter can get his
credit sales converted into cash sales, by handing over the right of
receiving payment against such credit sales to the forfaiting agency.
The agency will deduct a percentage from such receivables as their fee
and pay the balance to the exporter. The exporter thus overcomes the
uncertainty of receiving payments. The risk and responsibility of
collecting payment is passed on to the forfeiting agency.

Factoring is a new concept in India. Canbank Factors Ltd, sponsored by

Canara Bank, and SBI Factors and Commercial Services Ltd of S81 are
among the leading factoring companies. Factoring is a financial service
wherein specialized agencies called factors take over the debts and
receivables of their clients. The factors are well versed in credit and
financial dealings and hence are in a position to advise their clients on
these aspects.

On receipt of the export order, the exporter approaches a factoring

agency. They consider the transaction and fix limits on the percentage
of the in­ voice value which they will pay to the exporter, which is
normally around 80% of the total value. The exporter dispatches the
goods to the Buyer and then submits the export invoice to the factoring
agency. The exporter adds a notification on the invoice that the debt
due on the invoice is as­ signed to the factoring agency. The agency
then makes 80% of the payment to the exporter and sends the invoice
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to the correspondent in the importer's country. Once the

correspondent gets the payment from the Buyer, the amount is
transferred to the factor. The factor then pays the balance 20% to the
exporter.

Factoring is thus a highly successful means of providing credit risk

protection to the exporters. The factoring charges are quite high, but
the exporter runs no risk of non-payment and therefore, he can offer
better terms to the Buyer.

3. RISKS IN FOREIGN EXCHANGE:

Foreign exchange is a system or process of converting one national
currency into another and of transferring the ownership of money from
one country to another. As per Foreign Exchange Management Act
1999 of the Government of India, "foreign exchange" means foreign
currency, ie . any currency other than Indian currency.

In export and import trade, payments are made and received in

foreign currencies and invoices are raised in currencies other than
Indian currency.

Remittances from foreign countries have to be converted into Indian

rupees and conversely, remittances made to foreign countries have
to be converted into their currency. Inevitably, therefore, the question
of con­ version of foreign currency into Indian rupees and vice versa
arises. As per FEMA 1999 (Foreign Exchange Management Act), only
an authorized person or bank can deal in foreign exchange. While
converting from INR to foreign currency or vice-versa, there is a rate
of exchange applied for conversion which could affect the profitability
of a trader.

The process of conversion in export/import trade is done through the

medium of banks throughout the world. Handling inward remittance
of foreign currency is called 'purchase' and outward remittance of
foreign currency is a 'sale' This purchase and sale is done at a
particular rate among banks which could affect traders adversely or
positively, depending on the rate of exchange applicable for each
such transaction, which in turn depends on the rate of exchange
which is prevailing at the time. The rate of
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exchange is not steady but volatile, depending on several socio-economic

and political reasons.

For example, an exporter may raise an invoice on his Buyer for USD10,
000.00. The payment received by the exporter's bank in INR would depend
on the sale price of USD against the INR. The rate may be, for example, INR
47.50/ USD. At this rate the INR equivalent received into his account would
be INR 475,000.00. If the rate were INR 45.00/USD, the incoming INR at
this rate would be reduced to INR 450,000.00

Thus the exchange rate fluctuation could affect the sale proceeds of an ex­
porter dramatically. Therefore, handling of risks due to foreign exchange
fluctuation can make or break a deal.

In order to overcome this risk, exporters may enter into Forward Exchange
contracts with the bank. Under this agreement, the rate of exchange for
a particular transaction takes place, the amount fixed is received by the
exporter into his account. Thus the exporter protects himself against the
vagaries of exchange of rate fluctuation. This kind of contracts are possible
when the transaction is very big.

4. RISKS IN TRANSPORTATION:
Besides the above financial risks, there are risks involved in transportation
of cargo across thousands of miles from one country to another. In inter­
national transport anything could happen to cargo, given the conditions
under which transportation is carried out.

5. TYPES OF RISKS:
In international transportation, there are two types of risks: Internal Risks
and Extraneous Risks. The following are the examples of these risks.

Internal Risks

a. Fire, Sinking, Capsizing

b. Overturning, derailment
c. Collision, breakage of bridges
d. Air Crash

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a. Acts of God such as earthquake, volcanic eruption, landslide,

floods, storms, tsunami etc.
Extraneous Risks

a. Theft, Pilferage
b. Non-delivery of cargo
C. Damage due to oil/hook/sweat
d. Damage by mud ,acid
e. Breakage, denting
f. Bending, cutting
g. Scratching, chaffing
The internal risks are factors that have source of risks from within.

Extraneous risks are caused by external factors. It is only natural to expect

that risks are part of international transportation and should be guarded
against. Otherwise, they can cause irrecoverable losses to exporters.

6. MARINE INSURANCE:
In order to guard against such risks in international transportation, there is
Marine Insurance. It is defined as a "system of financial protection against
happening of accidental or fortuitous events like sinking, damage. loss,
fire, theft etc.”

The word INSURANCE means a CONTRACT where one party, the INSURER
agrees in consideration of money paid to him called the PREMIUM by an­
other party, the INSURED, to INDEMNIFY the latter against loss resulting to
him on the happening of an event or events specified in the POLICY.

This means that the exporter is given financial protection against such
losses, and not replacement of goods.

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7. FEATURES OF POLICY:
The following are the features of an Insurance Policy:

a. It is issued in duplicate or triplicate

b. The name/address of the insured should be mentioned on the
policy
c. The Policy should have the date of issue - policy without date is
invalid.
d. The insured value on the Policy should be equal to CIF value of
the consignment plus 10%.
e. The value on the Policy should be mentioned in the same
currency as the L/C.
f. The clauses and conditions on the Policy should correspond to
L/C conditions.
g. Claims should be settled at destination in the same currency as
that on the L/C.
h. The Policy should be signed and stamped by the Insurance
Company. Unsigned/Unstamped Policy is invalid.

8. RISKS NOT COVERED:

Despite the Policy, there are some risks that are not covered by Insurance.
They are:

a. Inevitable events- events that cannot be avoided like transporting

cargo on aircrafts that are not air-worthy or ships that are not sea­
worthy. These are bound to result in damage or loss.
b. Loss due to wear and tear - normal wear and tear due to usage is
not covered by Insurance. For example, wear and tear of car tyres
cannot be insured.
c. Inherent deficiency or deficiency in manufacture- an inbuilt fault
or deficiency at the time of manufacture, if proved, cannot be
insured and claims may be rejected.
d. Insurance coverage is not available for perishable goods like
vegetables, fruits, meat, fish etc.

CII Institute of Logistics

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e. Loss due to evaporation or leakage at the time of storage is not

compensated by Insurance, since these are natural events.

9. CLAIM PROCEDURE:
In the event of loss or damage, there is a complex procedure to be
followed for making a claim against Marine Insurance Policy. The
following are the steps involved:

An insurance survey should be conducted by an independent surveyor, in

order to assess the circumstances of the loss, cause of loss, nature of cargo
and value of the loss. This survey should be conducted in the premises of
the carrier before taking delivery.

The following documents are required to file a claim:

a. The Policy in original.

b. Original Document of Carriage.
c. Shipper's Commercial Invoice.
d. Packing List of the consignment.
e. Copy of Customs Clearance Document.
f. Ships Survey Report.
g. Insurance Survey Report.
h. Landing Remarks Certificate from the custodian of the cargo or
carrier.
i. Non-delivery Certificate from the custodian or carrier.
j. Customs Certificate of short age/ damage.
k. Claim Bill.
I. Any other documents required by the Insurance Company.

A claim may be lodged with the Insurance Company with all these
documents. Before that, a formal claim should be lodged with the carrier or
the custodian of cargo at destination port/airport. This is because, the
Insurance Company, after settling the claim, will proceed against the carrier
or custodian by right of subrogation. Hence a copy of claim lodged earlier
on the carrier/custodian should be sent to the Insurance Company.

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10. CONCLUSION:
As seen from the above, import/export business is full of risks at every
stage from various sources. Therefore, an efficient fund flow management
is needed to run the business, minimize the loss and optimize the profit.
Close monitoring and control over foreign exchange alone can help to run
a profitable business. Only persons with complete knowledge of how to
raise loans at best possible rates, avoid exchange rate losses and handle
transportation risks and claims can run the business successfully.

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7. CONTAINERISATION

1. INTRODUCTION:
The invention of sea containers and introduction as alternative carriers of
cargo is recent, perhaps about 35 years ago. But this marvelous techno ­
logical invention has revolutionised transport of cargo by sea in the sense
that the container replaced the vessel in terms of liability and responsibil­
ity of the shipping line .The moment cargo was stuffed into a container the
shipping line's liability started.

The most important development that containers brought about and im­
pact on sea transport is three-fold:

a. It made possible door-to-door transport.

b. It made possible multimodal transport of cargo.
c. It introduced the concept of Group age Services.
The containers are designed and built uniformly all over the world, mak­
ing it possible to move them anywhere in the world by road, rail and sea.
Thus multimodal transport, a boon to exporters and importers, became
viable. By the same means it became possible to move containers to the
premises of exporters and importers by road or rail, thus making viable
door-to-door service. Before the invention of containers, the trade had to
necessarily transport the cargo by trucks to and from the ports. Thus con­
tainers themselves became carriers. Again, with the advent of containers,
several LCL cargo can be grouped together to fill one container, thus mak­
ing possible Groupage services of LCL cargo. This greatly helped to
reduce freight costs for exporters.

2. DEFINITION:
A container refers to a storage and carriage device, that is, an equipment
used to store and carry goods. It is also known as a 'box' or a 'van’.

ISO has defined a Freight Container as:

a. an article of transport equipment.

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b. An equipment of permanent nature, strong enough for

repeated use.
c. equipment fitted with devices for ready handling .
d. an article so designed to fill and empty cargo easily and fast.

These unique features of the container are discussed in the following para­
graphs.

3. CONTAINERS BY SIZE:
There are two sizes of containers: 20Ft container and 40Ft container.
Generally these are the two standard sizes into which cargo can be stuffed
and carried.

There are two types of consignments:

a. LCL- Less than Container Load
b. FCL- Full Container Load

LCL cargo is smaller than one container load and several LCL
consignments are needed to fill one full container. A FCL shipment is
enough to fill one full container. Each 20' container is known as one TEU-
Twenty Foot Equivalent Unit. Therefore one 40' container is equivalent to
2 TEUs.

The standardization of containers is prescribed by the ISO and they are

built according to the dimensions prescribed as below:

20' Container OD {outside dimension) 20'x 8’'x 8.6' {Ix bx h)

ID 19'4"x 7'8"x 7'9"

Volume: 33.02 CBM

Capacity: 17,863 kgs

40' Container OD {outside dimension) 40'x 8'x 8.6' {Ix bx h)

ID 39'6"x 7'8"x 7'10"

Volume: 68.19 CBM
Capacity: 27.866 KGS

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4. FEATURES:

All containers have uniform features, so that they are suitable for multi
­ modal use and all over in the world.

a. They are rectangular in shape, and as per the dimensions

discussed above.
b. They are weather-poof, that is, the contents are not affected
by weather conditions and the containers themselves are
strong and resistant to damage in all weather conditions.
c. They are meant for storing and transporting a number of unit
loads, packages or bulk materials.
d. Being strong steel boxes, they protect the contents from loss
due to pilferage and damage due to vandalism or weather
conditions.
e. The whole container is handled by the shipping line as a unit
load that is each 20' container is one TEU- Twenty Foot
Equivalent Unit. The volume of cargo handled is measured in
terms of so many TEUs.
f. Cargo can be transshipped at a port from one ship to another
or from one shipping line to another, without having to re-
work or re-load the cargo. The containers are transshipped,
thus saving time and labour costs.
g. Containers are made from three different materials:
• Stainless Steel
• GRP (Glass Fibre Reinforced Plastic)
• Aluminum
Generally, they are made of steel. Only in a few cases, the other two
types of material is used. The steel containers are weather-proof and
repairs to damages is easy. In case of damage to other material, they
cannot be re­ paired easily and containers may have to be discarded.

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5. TYPES OF CONTAINERS:
There are different types of containers depending on its usage and type of
cargo that is loaded in them. They are:

a. General Cargo Container- standard container in which all kinds of

general cargo is loaded.
b. Insulated Container- it is temperature controlled for cargo that
cannot withstand extreme temperatures.
c. Reefer Container- it is refrigerated and has a refrigerating
machine on one side with provisions for attaching to power
source. It is used for carrying perishables like food, meat,
vegetables and other perishables.
d. Bulk Containers - they have openings on top through which
cargo like grains, minerals etc. can be loaded and used to store
bulk cargo.
e. Flat Rack Container- It is a container with a base, but no sides or
roof. It is ideal for loading odd-sized machinery.
f. Open Top Container- container without a roof but has side walls.
This again is used for voluminous and odd-sized cargo like
machines, long pipes etc.
g. Platform Container- It has only a floor on which cargo can be
loaded.

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The exterior dimension of all containers conforming to ISO standards are 20 feet
long x 8 feet wide x 8 feet 6 inches high or 9 feet 6 inches high for high cube
containers.

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6. ADVANTAGES:
a. With the use of containers there is reduction in port time of
ships, because it is easier and faster to load or unload
containers into/ from ships and move them to CFS where they
are stuffed or de­ stuffed.
b. There is reduction in cases of damage, theft and pilferage. It
is very difficult to damage or pilfer from a strong steel box.
Hence sealed containers can be stored in open yards without
the danger of loss or damage.
c. The cost of inland transportation is greatly reduced as
several shipments can be moved to and from ports in one
single unit load, thereby reducing transport costs for
exporters, importers and carriers.
d. Fragile and contaminative cargo is well protected inside the
container. Fragile cargo can be carried long distances
without breakage. Moreover, contaminated cargo, stored
inside a steel chamber, cannot contaminate or poison other
cargoes on board the ship.
e. Since containers have reduced chances of loss or damage,
the marine insurance premium is much reduced.
f. Containers ensure faster and reliable delivery of cargo for
reasons discussed above.
g. The original quality of cargo stored inside the boxes is retained
for long time. Sea water or salty air does not affect the cargo
inside the containers. Perishable commodities are preserved
for long time in Reefer Containers.
h. Different commodities are physically separated in different
containers. For ex, hazardous substances are kept separately
so that they do not pose a danger to other cargo or crew.
Similarly, no chemical reaction between different
commodities is possible.
i. For the carriers, the documentation is simplified and made
easy. A container is covered by one Ocean Bill of Lading
only. The LCL shipments in a container are covered by
Forwarder's Bills of Lading.

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j. For consumers, the inventory costs are reduced since there

is a shorter transit time. Inventories also becomes stable
because shipping lines now have fixed periodic sailings or
operating schedules. Hence inventory planning becomes easy
for purchase managers.

7. DISADVANTAGES:
There are also several apparent disadvantages in use of containers:

a. Container operation is capital-intensive:

Cost of containers, specially built ships, special handling
equipment to handle containers, monitoring and tracking
movement of containers, maintenance of containers and
handling equipment and cost of infrastructure like ports,
yards etc. all these make the whole operation capital-intensive
and a lot of investment is needed.
b. For the shipper, he has to re-design his production process,
systems and machinery and factory premises to suit the
requirements of containerization. Fast and bulk production is
now needed. Warehouse facilities should be upgraded to help
in stuffing and de-stuffing containers and storing of
containers etc.
c. For shipping lines and container owners, there are
unexpected problems. Some cargo like livestock cannot be
containerized. Preponderance of one type of cargo in one
way makes it compulsory to bring back empty containers. For
eg. Reefer containers are used to carry vegetables, fruits and
food stuff from Cochin to Gulf countries. The return traffic
consists of consumer goods which do not need reefer
containers. The lines therefore have to closely monitor full
utilization of containers.

Cargo Ships - Types and Classification

A cargo ship or freighter is any sort of ship or vessel that carries

cargo, goods, and materials from one port to another. Thousands of
cargo carriers ply the world's seas and oceans each year; they handle
the bulk of international trade. Cargo ships are usually specially

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designed for the task, often being equipped with cranes and other
mechanisms to load and unload, and come in all sizes. Today, they are
almost always built of welded steel, and with some exceptions
generally have a life expectancy of 25 to 30 years before being
scrapped

Cargo ships/freighters can be divided into four groups, according to

the type of cargo they carry. These groups are:

1. General Cargo Vessels ( Container Vessels)

2. Tankers (Wet Cargo Carriers)

3. Dry-bulk Carriers ( Dry Cargo Carriers)

4. Multipurpose Vessels

General Cargo Vessels carry packaged items like chemicals, foods,

furniture, machinery, motor vehicles, footwear, garments, etc.

Tankers carry petroleum products or other liquid cargo.

Dry Bulk Carriers carry coal, grain, ore and other similar products in
loose form.

Multi-purpose Vessels, as the name suggests, carry different classes of

car­ go - e.g. liquid and general cargo- at the same time.

Cargo ships are categorized partly by capacity, partly by weight, and

partly by dimensions (often with reference to the various canals and
canal locks they fit through). Common categories include:

Dry Cargo Ships:

There are two main types of dry cargo: bulk cargo and break bulk
cargo. Bulk cargoes, like grain or coal, are transported unpackaged in
the hull of the ship, generally in large volume. Break-bulk cargoes, on
the other hand, are transported in packages, and are generally
manufactured goods. Before the advent of containerization in the
1950s, break-bulk items were loaded, lashed, unlashed and unloaded
from the ship one piece at a time. However, by grouping cargo into
containers, 1,000 to 3,000 cubic feet (28 to 85 m3) of cargo, or up to

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about 64,000 pounds (29,000 kg), is moved

at once and each container is secured to the ship once in a

standardized way. Containerization has increased the efficiency of
moving traditional break-bulk cargoes significantly, reducing shipping
time by 84% and costs by 35%. As of 2001, more than 90% of world
trade in non-bulk goods is transported in ISO containers. In 2009,
almost one quarter of the world's dry cargo was shipped by container,
an estimated 125 million TEU or 1.19 billion metric tons worth of cargo.

Dry Cargo Carriers - Types

• Small Handy size, carriers of 20,000 long tons deadweight (DWT)- 28,000
DWT

• Handy size, carriers of 28,000-40,000 DWT

• Seawaymax, the largest size that can traverse the St Lawrence Seaway

• Handymax , carriers of 40,000-50,000 DWT

• Panamax, the largest size that can traverse the Panama Canal
(generally: vessels with a width smaller than 32.2 m)

• Capesize, vessels larger than Panamax and Post-Panamax, and must

traverse the Cape of Good Hope and Cape Horn to travel between
oceans

• Chinamax,carriersof380,000-400,000DWTwithmaindimensions limited
by port infrastructure in China

Container Vessels:
Container vessels owe their existence to an American trucker by the
name of Malcom McLean. In 1931, McLean purchased his first truck to
send and pick up loads to and from vessels in various port s. During
this time, while he used to wait impatiently for the truck's contents to
be loaded on to the ship he kept thinking of a more efficient and quick
way to load and unload vessels and thus save enormous time and
labor.
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Wet Cargo:

A tanker (or tank ship or tankship) is a ship designed to transport liquids

in bulk. Major types of tank ship include the oil tanker, the chemical tanker,
and the liquefied natural gas carrier.

Tankers used for liquid fuels are classified according to their capacity.

In 1954, Shell Oil developed the average freight rate assessment (AFRA)
system which classifies tankers of different sizes. To make it an
independent instrument, Shell consulted the London Tanker Brokers' Panel

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(LTBP). At first, they divided the groups as General Purpose for tankers
under 25,000 tons deadweight (DWT); Medium Range for ships
between 25,000 and 45,000 DWT and Large Range for the then-
enormous ships that were larger than 45,000 DWT. The ships became
larger during the 1970s, and the list was extended, where the tons are
long tons:

+ 10,000-24,999 DWT: General Purpose tanker

+ 25,000-54,999 DWT: Medium Range tanker
+ 55,000-79,999 DWT: Long Range 1 (LR1)
+ 80,000-159,999 DWT: Long Range 2 (LR2)
+ 160,000-319,999 DWT: Very Large Crude Carrier (VLCC)
• 320,000-549,999 DWT: Ultra Large Crude Carrier (ULCC)

Petroleum Tankers

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Specialized Ships:
Specialized types of cargo vessels include container ships and bulk
carriers (technically tankers of all sizes are cargo ships, although they
are routinely thought of as a separate category). Cargo ships fall into
two further categories that reflect the services they offer to industry: liner
and tramp services. Those on a fixed published schedule and fixed tariff
rates are cargo liners. Tramp ships do not have fixed schedules. Users
charter them to haul loads. Generally, the smaller shipping companies and
private individuals operate tramp ships. Cargo liners run on fixed schedules
published by the shipping companies. Each trip a liner takes is called a
voyage. Liners mostly carry general cargo. However, some cargo liners
may carry passengers also. A cargo liner that carries 12 or more
passengers is called a combination or passenger-cum -cargo line.

POST PANAMAX SHIPS:

The Panama Canal joins the Atlantic and Pacific oceans across the Isthmus
of Panama. It runs from Cristobal on Limon Bay, an arm of the Caribbean
Sea, to Balboa, on the Gulf of Panama. The length of the Panama Canal is
80 kilometers (SO miles) from the deep waters of the Atlantic to the deep
waters of the Pacific.

An impressive engineering feat, it was built 1904 - 1914 at an initial cost of

$366,650,000. Unlike the Suez, which is at sea level for its entire length, the
Panama Canal has locks to raise and lower ships. The Panama Canal locks
is a lock system that lifts a ship up to the main elevation of the Panama
Canal and down again. It has a total of six steps (three up, three down for
a ship's passage). Dams hold back two artificial lakes, Gatun and Madden,
which supply water for the locks.

Panama Canal prevents a long detour around South America, thus sup­
porting the maritime flows of world trade. It is composed of three main
elements, the Gatun Locks (Atlantic Ocean access) the Gaillard Cut
(continental divide) and the Miraflores/ Pedro Miguel Locks (Pacific
Ocean access).

Although there are 12 sets of locks total, there are only six massive pairs
of locks that ships use for transit, each 1,000 feet long and 110 feet wide.
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Each may be filled or emptied in less than 10 minutes, and each pair of
lock gates takes two minutes to open. A 30,000-pound fender chain at the
end of each lock prevents ships from ramming the gates before they open.
Water is not pumped into and out of the locks, but flows from the artificial
lakes through culverts 18 feet in diameter. Electric towing locomotives,
Called “mules”, pull ships by cable through the locks. Most ships require
six of these mules, three on each sides.

Though traffic continues 1D increase 'through the canal, many oil

supertankers and military battleships and aircraft carriers cannot fit
through the canal. There’s even a class of ships known as “Panamax”,
those built to the maximum capacity of the Panama canal and its locks.

The largest ships that can pass through the Panama Canal are called
“Panamax” because many modern ships surpass the parameters of
Panamax. Post-Panamax or over-Panamax denotes ships larger than
Panamax that do not fit in the canal such as supertankers and the largest
modem container ships.

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The Suez Canal, is an artificial sea-level waterway running north to south

across the Isthmus of Suez in Egypt to connect the Mediterranean Sea and
the Red Sea. The canal separates the African continent from Asia, and it
provides the shortest maritime route between Europe and the lands lying
around the Indian and western Pacific oceans. It is one of the world's most
heavily used shipping lanes. With a ship breadth of 60 m and a draught
of 21 m, this ship size would be classified as a post-Suezmax ship, as the
cross-section of the ship is too big for the present Suez Canal.

8. OVERCOMING DISADVANTAGES:
As said earlier, these are apparent disadvantages which are over come
through proper planning and co-operative efforts of all connected with
trade:

a. Shipper
b. Shipping lines
c. Industry
d. Container-owners
They have managed to overcome these problems by establishing com­
mon cargo facilities like.

a. Container Freight Stations (CFS)

b. Inland Container Depots (ICD)
These cargo hubs provide common services on cost-sharing basis. These
hubs are centres where cargo and documents can be processed through
customs, cargo can be stored, stuffed into containers and de-stuffed from
containers, containers can be stored and rail lines are provided to move
the containers to/from ports. While CFS are established around ports, ICD
are set-up in inland areas where there are no sea-ports like Bangalore, Del­
hi, Tirupur etc. which are also centres of export.
CFS and ICDs provide the following common services on cost-sharing basis:

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a. Container services- storage, cleaning, transport.

b. Handling equipment for containers/cargo.
c. Common labour used by lines, exporters and importers etc.
d. Providing storage space and facilities for LCL cargo, thus
helping small traders to store their cargo till there is enough
cargo to fill a container.
CFS and ICDs also provide value- added services like

a. export packing and handling services for FCL and out of

guage cargo.
b. Customs clearance services in inland areas through Custom
House Agents.
c. provide safe and secure storage for loaded and empty
containers.
d. cleaning and repair services for containers
e. Office space for operators, forwarders, CHAs and maritime
service companies.
f. Exporters and importers in hinterland are provided common
services close to their location, instead of having to travel to
inland cities. Moreover, establishment of ICDs in hinterland
and CFS around ports relieves cargo congestion in ports, as
part of the exports and imports are customs-cleared or stored
away from ports, thereby making port functioning easier and
smoother.

The apparent disadvantages and high-costs are thus overcome with

container bases like CFS and ICD, making containerization
convenient and economical and hence an acceptable mode of
shipping.

9. SHIPPING LINE STRATEGIES:

Shipping lines extend certain facilities in order to make shipping an
affordable and reliable mode of service. The strategies they adopt
are:
a. Container Consortiums- it is an amalgamation of lines into a
separate legal and commercial entity. They share capital,

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effort and market-share on a specific route. The partners to

the consortium supply and man the vessel on time-sharing
basis.

a. Slot Charter Arrangement- lines come together without losing their

identity to share a slot capacity on a vessel. For each TEU/ Slot,
shipping line is paid a certain amount by the partners.

b. Joint-Sailing Schedule-The lines mutually agree to operate joint

sailing schedules and the revenue is shared.

c. Feeder Services - Feeder vessels are operated regularly to feed bigger

Mother Vessels at bigger ports. Each feeder vessel may carry around
300/400 TEUs per vessel. For example, there are Feeder Vessel
services between Chennai and Colombo, where Mother Vessels call
and are berthed.

10. CONCLUSION:

Containerization is actually a boon to the trade and it has indeed

changed the way cargo is carried by sea.

Today one cannot imagine a port without containers, ICD and CFS. On
ac­ count of introduction of containers, Multimodal Transport and
Door-to­ door Transport have become a reality and an accepted and
legal modes of transport.

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8. MULTIMODAL TRANSPORT
1. INTRODUCTION:
Invention of Containers and their widespread usage in ocean freight
made possible three important developments:

i. Multimodal Transport became a possibility

ii. Door-to-door deliver of cargo became feasible.
iii. Groupage services of LCL cargo became a viable
commercial venture.
Of these, Multimodal Transport occupies a place of importance, as a
novel method of transporting cargo. That is, a single consignment
could be car­ ried on various modes of transport. Road, rail, ocean and
waterways on a Single Document of Carriage known as Multimodal
Transport Document.

Government of India legalized Multimodal Transport through

Multimodal Transportation of Goods Act 1993 dealing with regulation
of Multimodal Transport in India and it is practiced all over the world.

In order to make possible this mode of transport, the most important

feature in sea containers is the fact that they are designed and built
uniformly throughout the world according to dimensions and thickness
and set specifications accepted all over the world. The dimensions of a
20'container and 40'container make it possible to carry them on trucks,
rail, ships and barges. They can be transferred from one mode to
another, one carrier to another with relative ease and much effort.

2. MODE OF OPERATION:
The operation of Multimodal Transport is organized and carried out
by a single Multimodal Transport operator, who a) co-ordinates the
various modes, b) organizes transport on different modes at various
points, c) is­ sues a single Document of Carriage and d) accepts
liability for the cargo from the point of origin to the point of destination.

The container can be transported by road or rail to the shipper's or

con­ signee's premises for stuffing and de-stuffing of cargo. They can
be
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transported to or stored in Container Freight Stations or Inland

Container De­ pots for processing and handling of cargo. In such
cases, the container itself becomes the vessel. The liability of the
carrier starts from that moment, once the Transport Document is
issued.

The operator of the Multimodal Transport is called Multimodal

Transport Operator (MT0). The Document of Transport issued by him
is called The Multimodal Transport Document (MTD) and the mode of
transport is called Multimodal Transport.
The concept of Multimodal Transport is that the consignor entrusts
the goods to a single body, who
a. Undertakes Multimodal Transport
b. Makes all the intermediate arrangements for through
transport to destination
c. Delivers the cargo to the consignee at the Port of Discharge
or consignee's premises, depending on the terms of the MTD.

3. BASIS OF MULTIMODAL TRANSPORT:

The basis of Multimodal Transport lies in carriage of goods from one
country to another by more than one mode of transport.
ONTHE BASIS OF A SINGLE CONTRACT, Multimodal System is based on
the principle that the maximum efficiency is achieved if goods are
transported from door-to-door on the basis of a
a. SINGLE OPERATOR
b. SINGLE DOCUMENT
c. SINGLE RATE, and
d.SINGLE LIABILITY
To explain further, there is a single Agreement between the Operator
and the Consignor based on a single contract or Transport Document.
Trans­ port Document does not vary according to changing modes of
transport. Therefore the task of transporting the cargo from origin to
destination be­ comes simple and the responsibility of the operator,
who issues the MTD. In case of loss or damage, the consignor has to
contact the MTO and no other agency.
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4. ADVANTAGES:
This has several advantages for the consignor and consignee:

a. Since there is a single point of contact, the client needs to deal

with one operator only. He does not need to deal with various
operators depending on mode of transport used.
b. A lot of time and labour is saved because, there is no re-working
and multiple handling of cargo normally associated with each
mode of transport. The container is transferred as it is from one
mode to another.
c. There is more security to cargo, as there is no re-working and it is
stored in a steel containers throughout the transport.
d. Less documentation is involved as there is a single MTD covering
all modes. If each mode required a different Transport Document,
then there would be more paper work and forms to be filled.
e. There are less chances of loss or damage en route, as there is no
re-working of containers anywhere.
f. Door-to-door transport is made possible on a single document,
thereby making it unnecessary to contact various transport
agencies to track and trace the shipments.

5. CONCLUSION:
Multimodal Transport is indeed a unique form of transport made possible
with the introduction of containers only because of their unique feature,
that is, they are designed to suit all modes of transport and therefore can
be transferred without much effort from one mode to another.
This mode of transport has gained popularity with the setting up of
Container Freight Stations and Inland Container Depots. They act as
hubs where cargo can be stuffed, containers can be transferred from one
mode to another. They provide the space, handling equipment and labour
required to achieve this. Multimodal Transport has now come to stay as
an accepted and reliable mode of transport.

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9. CONSOLIDATION OF AIR CARGO

1. INTRODUCTION:
Air Consolidation may be defined as a shipment consisting of
consignments originating from one or more shippers via one Consolidation
Agent at Origin, which is destined to one or more ultimate consignees
through one Break-bulk Agent at Destination shown on the Master Airway
Bill.

2. DEFINITION:
In airfreight parlance, Consolidation would mean combining of
consignments intended for despatch from a point of origin taking
advantage of lower rates available for higher weight consignments as
airline rates are based on weight structure: HIGHER THE WEIGHT, LOWER
THE RATE. The freight advantage thus obtained is passed on to the
customer.

3. RATE STRUCTURE:
To understand the above concept better, let us look at the following
illustration:

For example: Air Freight Rates from New York to Chennai :

Minimum USD 100.00/ shipment

-45kgs 3.50/kg

+45kgs 3.25/kg

+100kgs 3.00/kg

+S00kgs 2.75/kg

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From the above illustration it is seen that as the weight of the

consignment goes up, the per unit rate keeps coming down. That is,
the rate per kg decreases as the weight increases.
The crux of Consolidation, therefore, is to consolidate several
consignments and achieve a higher weight and book the consignment
under a single Airway Bill. The per kg rate in such cases would be
lower than the rate applicable for individual shipment separately. The
Consolidator there­ fore puts together many consignments from
various shippers or a single shipper meant for several consignees or a
single consignee at a single air­ port and get a rate advantage from the
airline. The benefit of lower rate is passed on to all the customers in
the Consolidation.

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4. PARTICIPANTS:
a. Consolidation Agent: This is a freight forwarder who undertakes
to put together several consignments. He enjoys a low freight
rate from the airlines because of volumes.
b. Break-bulk Agent: This is the counterpart of the Consolidation
Agent in the destination country. He undertakes to segregate the
individual consignments and delivers the shipments to individual
consignees.
c. Shippers: This is the exporter of cargo. He uses the services of a
Consolidator to ship his goods.
d. Consignees: This is the ultimate Buyer of the export goods in the
destination country.
e. Airlines: They undertake the job of carrying the goods from origin
to destination. They negotiate freight rates with the Consolidator
based on volume of business assured.

5. DOCUMENTATION:

a) MAWB - Master Airway Bill

It is the airline Document of Carriage in which the Consolidator is shown
as SHIPPER and the Break-bulk Agent as CONSIGNEE. It also contains the
total number of pieces and total weight/volume of all the consignments
put together under the MAWB. The MAWB therefore covers the whole
Consolidation.

b) HAWB - House Airway Bill

Hence, the shipper here is the ACTUAL Shipper (exporter) and the Con­
signee is the ACTUAL Consignee (importer). The details of number of
pieces, weight/volume pertains to that individual consignment.

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c) Consolidation Manifest
The Consolidator prepares a list of consignments in a Consolidation
with all details : MAWB number, HAWB number, flight details, origin,
destination, shipper and consignee as per each shipment , individual
weight and number of pieces as per each HAWB etc., In other words, it
is a complete list of details of every shipment in a Consolidation.
All these documents are put into a Consolidation Pouch and handed
over to the airline at the time of booking the consolidation. The airline
carries the pouch along with the cargo on the same flight and delivers
it to the Break-Bulk agent, to whom it is addressed.

4. MODE OF OPERATION:
a. The Consolidation Agent consolidates several shipments
each under a HAWB meant for the same destination airport
under the same MAWB.
b. The Agent books the consolidated shipment with the airline,
completes the customs formalities and gets confirmed flight
details.
c. Having done that, a pre-alert advice is sent by the Consolidator
to the Break-Bulk Agent. A copy of the Consolidation Manifest
may be emailed/faxed, as it contains all the details of the
individual shipments.
d. On receipt of Pre-alert, the consignees are kept advised of
the arrival details in advance, so that they can be prepared for
customs clearance, duty etc.
e. The Break-Bulk Agent keeps in touch with the airline, arranges
to pick-up the consolidation pouch from the airline.
f. He segregates the documents as per each HAWB and
prepares/ issue a Cargo Arrival Notice(CAN) cum Bill to each
consignee on the HAWBs. The CAN contains details of the
shipment, flight details, freight and other charges to be
collected etc.
g. On collection of payment from the consignee, Delivery order
is issued by the Break-Bulk Agent. This document authorizes
the consignee to complete the customs formalities and take
delivery of the cargo from the airport
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7. ADVANTAGES:
There are advantages to all the participants in this mode of operation:

To Shipper:
a. Savings in freight costs because the consolidation rates are
cheaper than airline rates.
b. The security and identity of each consignment is maintained
because a HAWB is issued for every consignment.
c. Efficient and safe handling of cargo is ensured at both ends
as there is a Consolidator at origin and a Break-Bulk Agent
at destination.
d. Shipments are monitored till arrival at destination because
the consolidator sends a Pre-alert advice and the Break-Bulk
agent keeps monitoring the shipments with the airline.
e. The shipper gets confirmed space allocation on a flight as
the Consolidator has negotiated periodic departures for his
cargo.
f. The shipper gets pick-up service provided by the
consolidators so as to reach the Gateway airport in time for
pre-planned departures.
g. The shipper gets free consultancy service from the
consolidator on rates, flights, destination, country's
regulations, best routing etc.

To Consignee:
a. Progress chasing of consignments is done by the Break-
Bulk agent from origin to destination.
b. Pre-alert Advice on arrival of shipments is given by the
Consolidator.
c. Safe handling and transportation is ensured from both ends.
d. There are savings in freight and other costs wherever these
are payable by the consignees.
e. The Agents closely monitor the shipments till arrival.
f. The Break-Bulk agent keeps the consignee advised on the
status

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of supply from the time they are nominated to handle the

cargo.
a. There is no delay in advising the consignee about the arrival
of the shipments by the Break-Bulk Agent.

To Consolidation Agent:
The Consolidator makes a margin of profit between the rate obtained
from the airline (Net Rate) and the rate sold to the consignor/consignee
(Selling Rat e). Apart from this, there may be commission payable by
airlines to freight forwarders.

To Break-Bulk Agent:
The Break-Bulk Agents gets a share of profit from the Consolidation
Agent. Besides, he also has remuneration by way of Break-Bulk fee,
Delivery Order Fee and Charges Collect Fee etc.

To Airline:
a. The airline is assured of pre-booked cargo on a definite,
periodic manner, as this is the basis of agreement between
airline and consolidator.
b. Multiple handling and documentation is avoided because the
Consolidation Agent prepares the cargo and the documents
for each HAWS.
c. Several Shipments are carried under a single Document of
Carriage, the MAWS. The airline has to deal with one
Consolidator and one Break-Bulk agent instead of individual
shippers/consignees.
d. There are less claims as element of risk of loss/damage to
packages of consolidated shipments is remote because they
are taken care of at both ends.

5. CONCLUSION:
As seen in the above discussion, consolidation of air cargo provides
definite advantages to all participants. Hence, more and more cargo
is now airlifted in Consolidation service.

Cii institute of Logistics pg. 94

 About us
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the
development of India, partnering industry, Government, and civil society, through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive
role in India's development process. Founded in 1895 and celebrating 125 years in 2020, India's premier
business association has more than 9100 members, from the private as well as public sectors, including
SMEs and MNCs, and an indirect membership of over 300,000 enterprises from 291 national and regional
sectoral industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and
enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized
services and strategic global linkages. It also provides a platform for consensus-building and networking on
key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship
programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated
and inclusive development across diverse domains including affirmative action, healthcare, education,
livelihood, diversity management, skill development, empowerment of women, and water, to name a few.
India is now set to become a US$ 5 trillion economy in the next five years and Indian industry will remain the
principal growth engine for achieving this target. With the theme for 2019-20 as 'Competitiveness of India Inc -
India@75: Forging Ahead', CII will focus on five priority areas which would enable the country to stay on a
solid growth track. These are - employment generation, rural-urban connect, energy security, environmental
sustainability and governance.
With 68 offices, including 9 Centres of Excellence, in India, and 11 overseas offices in Australia, China,
Egypt, France, Germany, Indonesia, Singapore, South Africa, UAE, UK, and USA, as well as institutional
partnerships with 394 counterpart organizations in 133 countries, CII serves as a reference point for Indian
industry and the international business community.
To address the need of sharpening India Inc’s competitive edge through better Logistics and Supply Chain
practices, CII Institute of Logistics (CIL) was established in 2004 by the confederation of Indian Industry as a
center of Excellence in Logistics and Supply Chain. With a relentless aspiration to enhance logistics
competitiveness in the industry, CIL provides a complete range of services such as:
 Supply Chain Consultancy
 Corporate Training
 Research
 Warehouse Certification
 Supply Chain Transformation

Confederation of Indian Industry

Phase II, “B” Block, 9th Floor, IITM Madras Research Park , Kanagam Road , Taramani.
Chennai -600 113, Tamil Nadu , India
Phone : +91-44-66360300 Website : www.ciiscmconnect.com / www.cii.in
email : scm@cii.in