1

UNIT Suggested time allotment: 8 hours

1 THE SUPPLY CHAIN MANAGEMENT AND THE

DISTRIBUTION MANAGEMENT ENVIRONMENT

TARGET GOALS FOR THE UNIT

 Make a case analysis of one of the logistics company in Davao City. (App)
 Make a report of how logistic companies are affected during the pandemic. (App)
 Present a video showing the flow of distribution. (C)

VALUES DESIRED: Respect, Fortitude, Accord

LESSON 1.1. SUPPLY CHAIN MANAGEMENT

I. LEARNING OUTCOMES

 Discuss logistics management (U)

 Point out the different functions of logistics management. (An)

II. INPUT

Defining Logistics and Supply Chain Management

From the beginnings of industrialized economies, businesses have been faced

with the twin problems of sourcing materials and dispersing their goods and services to
the marketplace. When suppliers and customers are in close proximity to the producer,
demand and supply signals are easily communicated, and materials and products can
quickly make their way through the supply chain. As the time and distance separating
production and the points of supply and consumption widen, however, the ability of
companies to easily access materials and deliver to markets correspondingly
diminishes. Bridging the distance gap between demand and supply requires companies
to perform two critical functions.

The first is the management of logistics. The role of logistics is to efficiently and
cost-effectively deploy inventory, warehousing, and transportation resources that enable
companies to satisfy the day-to-day product and service requirements of their supply
chains. The second function is supply chain management. The role of SCM is to
generate unique sources of customer value through the creation of collaborative
partnerships that leverage the resources, capabilities, and competencies of channel
members to increase the competitive advantage of the entire channel system.

Defining Logistics

Logistics management is the process whereby suppliers, manufacturers, and

distributors store and move products through the supply chain to their customers. The
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APICS Dictionary defines logistics as “the art and science of obtaining, producing, and
distributing material and product in the proper place and in proper quantities”.

The Council of Supply Chain Management Professionals (CSCMP) defines

logistics as “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”. These definitions imply that logistics creates
competitive value by optimizing logistics operations costs and productivity, high capacity
and resource utilization, and close integration with customers and suppliers.

The best way to define logistics is to divide it into three closely integrated sets of
management functions. The first is warehouse management. This function is
responsible for the storage and handling of inventories beginning with supplier receipt
and ending with dispersion to internal or external customers. Critical concerns are the
pursuit of lean philosophies, environmental sustainability, reduction of wastes, use of
third party logistics (3PL) partners, utilization of warehouse management systems
(WMS), integration with transportation, and pursuit of flow-through techniques for
storage and picking.

The second function of logistics is transportation management. This function is

defined as the movement of product from one node in the supply chain to another,
ending with delivery to the customer. Critical concerns are management of private fleets
and 3PL partners; audit, payment, and claims; transport routing, tracking, and
optimization; government regulation, security, and compliance; and the utilization of
transportation management systems (TMS).

The third and final function of logistics is performance measurement. Because of

the size of the capital invested in warehousing and transportation, managers must keep
a close accounting of the performance of these functions through the deployment of
logistics administration and analytic modeling techniques capable of providing full
visibility to logistics costs and operational performance.

Detailed Logistics Activities

Logistics management centers on the daily execution of several business activities.

The goal is to pursue the highest customer service at the lowest possible cost. These
functions are separated into the following operations areas:

 Order management. This activity is concerned with the navigation of the

customer order through the inventory allocation, picking, packing, shipping, and
backorder cycles. The fundamental performance target is ensuring product
shipment based on quoted lead times, order quantities, and quality
specifications.
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 Production and procurement. Providing information to production and purchasing

concerning the status of channel inventories is essential to high-performance
logistics. Logistics is also responsible for the inbound flow of materials into
production and the outbound flow of finished goods into the distribution channel.

 Freight cost and service management. These activities consist of managing

inbound/ outbound freight, third-party carrier management, total cost control,
operations outsourcing decisions, and execution of administrative services.
Superior logistics performance is achieved by optimizing inbound materials and
outbound product movement, warehousing, and administrative services that
utilize the most cost effective yet efficient transportation methods and
transportation service partners.

 Warehouse management. The effective management of inventory in the supply

chain requires efficient and well-managed warehousing techniques. Key activities
are inventory storage, material handling, equipment and labor utilization,
receiving, put away, and returns.

 Transportation routing and scheduling. The movement of product to its

destination is a primary function of logistics. Activities performed are optimization
of shipping capacity utilization, decreasing less-than-truckload shipments, and
applying postponement strategies. Another important function is selection of
third-party transportation providers. An often overlooked area is shipment
documentation and compliance. Accurate documentation is necessary to
effectively manage country quotas, tariffs, import/export regulations, product
classification, and letters of credit.

 Fleet management. It is the responsibility of logistics to ensure the utilization of

company-owned transportation fleets. The goal is to determine the optimum use
of transportation assets, whether internal or through a third party supplier, without
compromising service levels.

 Load planning. Utilizing transportation assets to achieve maximum fulfillment

optimization requires detailed load planning. Critical activities are packaging and
labeling, load building and consolidation, and possible third party transfer point or
cross-docking functions.

 Special functions. Often logistics must manage a range of miscellaneous

functions. Managing service parts inventories and working with return goods are
examples. A function growing in importance is reverse logistics. This process
involves managing customer returns and the reclamation of packaging materials
and other wastes and backhaul to a central collection point for recycling. The
object is the coordination of both the forward and reverse processes necessary
to fully utilize products and materials during the different stages of their life
cycles.
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Figure 1. Logistics Management Components

1.

Detailed Logistics Performance Measurements

Logistics performance is composed of three important metrics. The first, logistics

productivity, provides information concerning productivity standards, level of logistics
cost optimization, integration of quality management processes, and broadening of
logistics service levels. The second metric, logistics service performance, tracks
customer service goals, such as product availability, order cycle time, logistics system
flexibility, depth of service information, utilization of technologies, and breadth of post-
sales service support. The final performance component, logistics performance
measurement systems, details the content of performance metrics, how performance
data are captured, and the systems used to track and report on performance.

Superior logistics performance pursues the following seven operating objectives:

 Service. High performance logistics functions possess the following customer

service attributes: high levels of service and inventory availability, self-service
order entry, order delivery status management, order configuration flexibility, and
short recovery time after a performance failure.

 Fast flow response. Rapid response requires highly agile and flexible logistics
resources capable of quickly adding or reducing capacities based on expected
demand. Besides accelerating the order-to-delivery cycle, this attribute also
means migrating away from a dependence on stagnant pools of buffer inventory
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driven by forecasts to a demand-pull model enabling rapid response to each

customer order on a shipment by shipment basis.

 Reduction of operating variances. Since logistics productivity increases when

variances are minimized, high performance logistics continuously pursues the
architecting of supply channels dedicated to the continuous elimination of all
forms of supply chain variance and waste.

 Minimum inventories. Maintaining the necessary levels of channel inventories is

an essential component of logistics’ commitment to customer service. High
performance logistics channels maintain the right levels of inventory demanded
by the marketplace while continuously searching to reduce stagnant pools of
excess, obsolete, and safety stock inventories. Achieving this goal means
pursuing high inventory turns velocity for the entire supply chain and not merely
one trading partner.

 Transportation reduction. Transportation cost reduction is achieved by close

inter- channel inventory planning and replenishment, assembling larger
shipments traversing longer distances to achieve movement economies of scale,
the effective use of third party service providers, and pursuit of sustainability
objectives.

 Quality management. The pursuit of total quality management (TQM) is essential

for effective logistics. It can be argued that the requirement for absolute quality is
even more essential for logistics than anywhere else in the company. Logistics
transactions often deal with transporting large quantities of inventories and
performing services spanning large geographical areas. Once set in motion, the
cost of a quality failure, ranging from incorrect inventories to damaged goods,
requires lengthy and costly processes to be reversed.

 Product life-cycle support. The movement to increase environmental

sustainability has mandated an increase in reverse logistics functions. Activities
include recalls and returns, remanufacturing, repair, and disposition. An
environmental sustainability strategy also provides companies with a wealth of
information on product performance, ease of use, defects, and consumer
expectation.

Defining Supply Chain Management

Companies have always known that by leveraging the capabilities and resources
of their supply chain partners they could enhance their own core competencies and
expand the footprint of their products and services. SCM began to gain traction when
companies came to recognize the competitive value arising from the integration of
logistics functions with those of other channel organizations. The concept of SCM
encompasses much more than simply the transfer of products and services through the
supply pipeline.
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SCM is about a company integrating its process capabilities and marketplace

objectives with those of its suppliers and customers on a strategic as well as tactical
level. Integrative supply chains consist of many trading partners participating
simultaneously in a collaborative network containing multiple levels of competencies
and various types of relationships. SCM enables companies to activate the synergy to
be found when a community of firms utilizes the strengths of each other to build
superlative supply and delivery processes that provide total customer value.

SCM can be viewed from several perspectives. Definitions of SCM take into
account a wide spectrum of applications incorporating both strategic and tactical
objectives. For example, the APICS Dictionary defines SCM as the design, planning,
execution, control, and monitoring of supply chain activities with the objective of creating
net value, building a competitive infrastructure, leveraging worldwide logistics,
synchronizing supply with demand, and measuring performance globally.

The collaborative, network-building attributes of SCM have revolutionized the role

of the supply chain and infused channel constituents with innovative ways of providing
total customer value. Instead of a focus on just logistics operations, SCM enables
supply chains to collectively work to activate an array of strategic competencies.

Figure 2. Supply Chain Management Competencies

A detailed discussion of each of the six competencies is as follows:

 Customer management. Managing the customer has taken on added

significance in the era of supply chain management and is termed customer
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relationship management (CRM). CRM is founded on the recognition that as

customers demand to be more involved in product/service design, pricing, and
order configuration, companies must focus their efforts beyond brand and
marketing-based strategies to establish enriching customer relationships. The
goal of CRM is to provide complete visibility to all aspects of the customer, from
facilitating the service process and collecting data concerning customer buying
history to optimizing the buying experience.

CRM enables supply networks to respond to three critical customer requirements:

1. Superior service. The goal of CRM is to provide the customer with an unbeatable
buying experience that exceeds price, product availability, delivery, and service
expectations. Creating high service levels requires two critical value chain
attributes: speed of response and attention to reliability.

2. Convenient solutions. Today’s customers are searching for supply chains

capable of providing them not just with products and services but solutions to
their business needs. In addition, customers want to search, configure, create,
and review their orders in as convenient a manner as possible. Visibility to
customer requirements in turn provides each channel partner with the opportunity
to use core competencies that ensure each customer can make individualized
choice of product and service solutions.

3. Customization. Today’s customers are no longer content to purchase

standardized goods and services, but instead require the ability to configure
solutions that meet their own individual needs. To realize these objectives,
suppliers can deploy strategies that postpone and place actual product
differentiation at the channel delivery point that actually touch the end-customer.
Another strategy is to utilize Internet-enabled ordering that permits customers to
place orders and receive delivery from multichannel sources. Channel
synchronization is crucial: customization requires direct linkage of demand and
supply at all points in the channel with the goal of minimizing cost and
accelerating total channel throughput.

 Supplier management. Businesses have always known that the relationship

between buyer and seller, and not just product price and quality, determines the
real value-add component of purchasing. This viewpoint has spawned a new
concept and set of business practices termed supplier relationship management
(SRM). The mission of SRM is to activate the real-time synchronization of the
requirements of buyers with channel supplier capabilities. The goal is a
customized, unique buying experience while simultaneously pursuing cost
reduction and superior quality. SRM seeks to fuse supplier management
functions into an efficient, seamless process driven by relationships founded on
trust, shared risk, and mutual benefit. The key components of SRM include:
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 Strategic sourcing. Strategic sourcing not only provides for technology-

enabled sourcing from a universe of suppliers, but also reveals the depth of
supplier competencies, availability of value-added services, level of desired
quality, capacity for innovative thinking, and willingness to collaborate on new
product development.

 SRM technology toolsets. Use - of technologies that facilitate the

communication of purchasing requirements; negotiation of quality, pricing,
and delivery objectives; product sustainability; and financial settlement. The
Internet has enabled purchasers to activate new forms of procurement, such
as on-line catalogs, interactive auction sites, spend analytics, and trading
exchanges. These integrative technologies provide purchasers with tools for
the real-time, simultaneous synchronization of demand and supply from
anywhere, anytime across a global network of suppliers.

 Integrated procurement infrastructures. A goal of SRM is the establishment of

organizational infrastructures that link channel capabilities and performance
objectives directly with the customer. A SRM-driven organization is capable of
expanding traditional purchasing functions to include new players, such as
trading exchanges, consortiums, and other e-commerce service support
partners providing payment, logistics, credit, shipping, and other
procurement-related processes.

 Channel alignment. The structure of a supply chain is composed of its supply and
delivery nodes and the links connecting them. In the past this network was
characterized as a series of trading dyads. In this model, channel partners
created trading relationships one partner at a time without consideration of the
actual extended chain of customers and suppliers constituting the entire supply
chain ecosystem.

 Integrative technologies. The convergence of integrative information technologies

and SCM constitutes a key theme in the evolution of SCM. Earlier, it was pointed
out that it is virtually impossible to think of SCM without the power of the enabling
technologies that have shaped and driven its development into a powerful
management science. In today’s highly competitive global marketplace having
the best product or service is simply not enough: now, having the best
information has become the decisive differentiator between market leaders and
followers. Supply channel transparency consists of a single view of the supply
chain and requires information technologies that facilitate the collection,
processing, access, and manipulation of robust repositories of data necessary for
determining optimal supply chain design configurations.
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PRACTICE EXERCISE:

1. What is logistics management? (10 points)

2. Enumerate the functions of logistics management and discuss briefly. (20 points)
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Suggested time allotment: 6 hours

Lesson 1.2 The Distribution Management Environment

I. LEARNING OUTCOMES

 Explain the role of distribution channel. (U)

 Evaluate the other functions of distribution channel. (E)

II. INPUT

The Role of Distribution Channels (Group 1)

Distribution channels are formed to solve three critical distribution problems:

functional performance, reduced complexity, and specialization. The problem of
increasing the efficiency of time, place, and delivery utilities is the central focus of
channel functional performance.

When product availability and delivery is immediate, the functions of exchange

and fulfillment can be performed directly by the producer. As the number of producers
and the size and geographical dispersion of the customer base grows, however, so
does the need for internal and external intermediaries who can facilitate the flow of
products, services, and information through the distribution process.

Supply chain intermediaries also increase functional performance by facilitating

channel product and service search. Depending on the nature of the product and the
location of the producer, buyers as well as sellers can be uncertain about goods and
services search. If distributors did not exist, producers without an established brand
would be unknown to buyers; similarly buyers might find it hard to locate specialized
sellers or to trust the nature and quality of their products and services. Instead of
searching the marketplace, buyers can go to a recognized distributor and rest assured
of their purchases.

Distribution channels decrease channel complexity in other areas. Channel

intermediaries assist in the routinization of business functions and product sorting.
Routinization refers to the establishment of policies and procedures that provide
channel members with common goals, channel arrangements, and expectations that
enable supply network exchange mechanisms to facilitate transactional efficiencies.

Sorting is defined as a group of activities associated with transforming products

and product quantities acquired from producers into the assortments and lot sizes
demanded by the marketplace. The “sorting” process can be broken down into four
primary functions:
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 Sorting out. This process is defined as separating a heterogeneous group of

products, often acquired from multiple suppliers, into homogeneous subgroups.
An example would be a poultry distributor that sorts eggs by grade and size and
then assigns them to inventory lots.

 Accumulation. In this form of sorting, the channel intermediary combines

homogeneous stocks of products into larger groups of supply. An example is a
home electronics distributor who combines the televisions of different
manufacturers into a single product line.

 Allocation. This form of sorting breaks down large lots of products into smaller
lots for sale. A hardware distributor may, for example, purchase fasteners in kegs
and then repackage them into a variety of small lot quantities.

 Assorting. In this form of sorting, distributors mix similar or functionally related

items into assortments to meet customer demand. For example, an automotive
distributor may package the components necessary for brake repair into a kit.

The final reason why distribution channels are formed is to solve the problem of
specialization. As the supply chain grows more complex, costs and inefficiencies tend to
grow in the channel. To overcome this deficiency, many channels contain intermediaries
that specialize in one or more of the elements of distribution, such as cross-docking or
transportation. The net effect of specialization is to increase the velocity of goods and
value-added services that flow through the distribution pipeline by reducing costs
associated with selling, sorting, transporting, carrying inventory, warehousing, order
processing, and credit.

Sometimes a dominant channel member, such as the manufacturer, may seek to

eliminate a specialist partner by absorbing the function into its own operations. Vertical
integration can be beneficial if it seeks to facilitate the flow of product, decrease cycle
times, decrease costs, and eliminate redundancies.

Channel Service Outputs (group 2)

Proposed by Louis P. Bucklin as a basis for determining channel structures

distribution channels exist because they perform four critical service outputs. The
argument is that the higher the level of service outputs, the more readily buyers will
purchase from that supply chain. Bucklin identified four generic service outputs: (1)
bulk-breaking, (2) spatial convenience, (3) length of waiting and delivery time, and (4)
product variety (assortment).

 Bulk-breaking. This service output is one of the fundamental reasons for the
existence of distributors. The term refers to the fact that whereas manufacturers
normally produce large quantities of a limited number of products, channel
intermediaries, like retailers, normally require only a small quantity of a large
number of diverse products. Take, for instance, a candy manufacturer who must
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produce large lots of product due to cooking and ingredients requirements. The
retailer, however, needs only a fraction of this lot, thereby forcing channel
aggregators to perform bulk-breaking and repackaging activities designed to fit
their customers’ stocking requirements. In addition, by combining confectionery-
type products from several manufacturers, aggregators can offer a wider
assortment to the retailer in the desired quantities than can a single
manufacturer.

 Spatial convenience. A fundamental service output of distribution is to shrink time

and geographical distance between producer and buyer. By locating products
and services close to the customer, channel intermediaries, such as retail stores,
neighborhood supermarkets, and convenience stores, satisfy customers’
requirements for reduced search time and transportation cost.

 Product variety (assortment). This function is extremely important to retailers.

Unless they are a highly specialized business selling products made by only one
or a few manufacturers, most retailers prefer to deal with suppliers that provide a
wide assortment of products that closely fit their merchandizing strategy.

Other Functions of Distribution Channels (Group 2)

While comprehensive, the four service outputs do not exhaust the range of
functions performed by channel distributors. The following additional service outputs
also need to be discussed.

 Selling and promoting. This function is extremely important to manufacturers.

Whereas retailers develop complex place and promotion strategies to reach the
marketplace, manufacturers have only a limited number of delivery locations and
have great difficulty in executing sales, promotions, and fulfillment to customers
located at a geographical distance from the home factory.

 Postponement. Distributors today are increasingly involved in transforming semi-

finished goods derived from the producer into their final form through the
processes of sorting, labeling, blending, kitting, packaging, and light final
assembly. Stocking and transportation cost savings are attained by keeping
semi-finished product at the highest level possible in the pipeline and by moving
them through the supply channel in large, generic quantities that are customized
into their final form as close as possible to the actual sale.

Postponement provides the following advantages:

 Reduced Channel Costs. As products move from the producer into the
distribution pipeline, value is often added by channel partners who perform
sorting, packaging, or other activities. The problem is that at each value-
added node, the cost of processing is added to the product.
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 Lead-Time Reduction. As finished goods no longer have to proceed

through costly and time consuming processes as they pass from one
channel level to the next, delivery time to the customer from the originating
producer is significantly reduced.

 Inventory Reduction. Because products are stored in the channel in a

semi-finished state until final differentiation by the customer order, there
are much less finished goods in the supply pipeline. Besides reducing
channel carrying costs, reduced inventories enable better control of
product obsolescence and spoilage.

 Customer Response and Flexibility. Because downstream channel

network nodes can receive products in bulk or in an unassembled state,
their ability to respond to customer requests increases. By moving semi-
finished goods to downstream distribution facilities, customer response
flexibility is expanded without increasing inventory investment.

 Material Handling. Postponement targeted at unitization helps reduce

labor and material handling costs while accelerating product movement.
Unitization is defined as the consolidation of product into units of measure
that facilitate warehouse and transportation handling. An example is
palletizing many small units to reduce the number of pieces handled.

 Transportation. The movement of goods in the supply chain is one of the most
important functions performed by the distributor. The ability to move goods from
one node in the supply channel to another is fundamental in achieving time and
place utilities. Simply, no matter how sophisticated the marketing and
warehousing system, if a product is not available at the time and place wanted by
the customer; the result will be a lost sale, faltering customer confidence, and
possible increased costs resulting from order expediting.

 Warehousing. The purpose of warehousing is to ensure that the supply channel

possesses sufficient stock to satisfy customer requirements and to act as a buffer
guarding against uncertainties in supply and demand. Warehousing exists
because demand for products are often geographically located far from the place
where they are produced.

 Sequencing. As finished goods move closer to the customer, some distributors

perform product sequencing. Sequencing consists in sorting goods into unique
configurations necessary to fit customer requirements. The goal is to reduce
customer receiving, sorting, and put-away activities by combining a mix of
products into single lots or arranging components in the sequence in which they
are to be used by the customer.

 Merchandizing. In some cases, product available from the producer is not ready
to be delivered directly to channel intermediaries without additional handling and
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modification. Some of this value-added service involves bulk breaking quantities

into smaller lots that are easily digested through the supply chain. In other
instances, product is placed into special packaging or assembled in a display unit
determined by marketing and sales campaigns.

 Marketing information. A severe problem encountered by the producer without a

strong supply channel is the quality and timeliness of product availability and
quality feedback from the customer base. Producers who depend on
intermediaries to sell to a geographically dispersed marketplace often must rely
on the scant information arising from customer complaints and voluntary product
assurance cards. In contrast, producers with close linkages with downstream
distribution points receive information regarding product, marketplace issues, and
competitors’ activities directly from the channel.

PRACTICE EXERCISE:

1. What do you think is the role of distribution in this time of pandemic? (10 points)

2. In your point of view, how can you improve the different functions of distribution
channel? (20 points)
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Suggested time allotment: 9 hours

LESSON 1.3 Distribution Channel Transaction Flows (Group 3)

I. LEARNING OUTCOMES

 Explain the concept of reverse logistics. (U)

 Illustrate the flow of inventory channel. (An)

II. INPUT

Supply chain intermediaries participate in the performance of transaction flows

linked to products and information as they move through the channel network.
Executing channel transaction flows not only produces a valued service output but also
is associated with a cost.

Channel distributors, on the other hand, exist because of their ability to perform
transaction efficiencies and economies of scale better than other channel members.
Often these intermediaries are used because of their expertise in managing marketing,
sales, logistics, and finance activities for their channel partners. Surrendering parts of
the channel transaction flow enables companies to remain focused on their core
competencies instead of expanding their organization’s resources and shifting their
business focus, organization, and available resources to performing non-value added
functions.

Regardless of who performs them, the following transaction functions must be

performed by one or multiple supply channel entities.

 Product possession. This transaction flow refers to channel activities associated

with product warehousing and transportation. The goal of product possession is
to provide targeted levels of customer service at the lowest carrying cost at all
channel echelons.

 Selling and Promoting. Distribution channels provide an expanded opportunity for

sales and promotion. By providing national and localized marketing and sales
forces, channel intermediaries can sell to a global marketplace as well as target
specific local market segments.

 Ownership. Ownership of goods in the supply chain must be assumed by one or

multiple channel supply points. It is important to note that ownership is not
necessarily the same as possession.

 Risk. Companies in the supply chain taking ownership of goods incur risk. As
channel entities expand stocks of product, the possibility of financial loss caused
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by shifts in demand, customer tastes, carrying costs, obsolescence, and spoilage

grow proportionally.
 Negotiations. The transfer of ownership of goods from one business in the supply
chain to another usually involves attaining agreement on price and other sales
terms. The costs involved are mostly composed of the cost of personnel
performing the negotiations. Sometimes the negotiations are performed by a
channel member specializing in this transaction function. Negotiation should
always be supportive of the overall competitiveness of the channel system.

 Ordering Flow. The placement of customer and channel replenishment orders as

well as the gathering of information concerning marketplace trends occurs at all
echelons levels in the supply chain. With the dawning of the Internet Age,
channel members have expanded their order management capabilities by
enabling customers to place and maintain their own orders through the use of
personal computers, tablets, and mobile devices. The transaction functions
involved in channel stock replenishment have similarly been streamlined by the
use of point-of-sale (POS) and automated replenishment systems.

 Payment Flow. The flow of payment proceeds through the distribution channel
from the customer back to the producer. While many channel companies perform
financial settlement functions, often banks and other financial institutions are
used to facilitate channel payment flows. Many companies have also
implemented financial management software that allows direct electronic
payment from buyer to seller, thereby eliminating slower methods, such as bank
drafts and checks.

 Financing. Supply chain members are often involved in financing the distribution
process by purchasing inventories, providing for transportation, managing
accounts receivables, and extending credit to their channel customers.

 Information services. The explosion in information technologies has required

some channel companies to contract with channel specialists who possess the
necessary equipment and technical skills to manage multiple facets of channel
information management.

 Management Services and Consulting. In some instances, companies assist their

channel partners rationalize transaction processes by providing expert advice to
enhance their operations or provide important services.

Channel transaction functions, such as physical possession, ownership, sales, and

promotion, are usually characterized as forward flows, describing the movement of
goods and services from the supplier to the end-customer. Inventory, for example, flows
“down” through the distribution network until it reaches the end-customer. On the other
hand, functions, such as ordering and payment, are backward flows moving from
customer to supply source. Finally, marketing information, negotiating, finance, and risk
taking move in both directions up and down the channel. In addition, negotiation and
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ordering are grouped under the term exchange flows because they facilitate the buying
and selling of goods. Inventory possession is described as a logistics flow because the
activities of transportation and storage occur with the transfer of the ownership of
goods.

Distribution Channel Inventory Flows (Group 4)

An important role of supply chains is managing the flow of inventory. The

decision to stock inventory at any particular channel echelon is a serious management
decision that must be carefully considered by cost and service trade-off analysis.
Decisions will be different by supply chain and are affected by the use of management
methods such as lean, make-to order production, structure of the channel warehouse
system, outsourcing of operations, and other factors.

Figure 1. Channel inventory flows

Figure 1, displays the flow of inventory as it moves through the internal

organization. The diagram consists of three major areas: the customer demand flow, the
five possible process stages that inventory passes through, and the type of item found
at each process stage in the inventory flow. The demand flow is normally initiated with a
customer order. If stock is available, the product is picked and packed and shipping
documents authorize the delivery. If inventory is not available, the customer order
continues its backward flow and initiates a replenishment order.

This backward flow is always the case in a make-to-order (MTO) production

environment where no finished goods are inventoried. For a make-to-stock (MTS)
production environment, as demand consumes stock, a planned replenishment order is
created when stocking levels in individual finished goods reach a predetermined reorder
level. Once planners examine the replenishment order, they release it as a production
order to be built in the plant. For a distributor, a finished goods shortage would trigger a
resupply order that would in turn trigger the generation of a move order to be shipped
from supplying warehouses upstream in the supply channel to the linked satellite
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warehouse. When the order is ready for shipment, shipping documents authorize the
movement of finished goods into in-transit/delivery as they move to the satellite
warehouse.

The final inventory flow is managing obsolete and damaged inventories. For
products that are to be repaired, a rework order is generated authorizing product
teardown and rebuilding. These products are then returned to finished goods inventory.
For items that are damaged or obsolete, inventory management would generate a
disposal order indicating that the products are salvaged.

Inventory is found in various organizational processes. For a typical production

company, inventory is located in stores (where production inventories received through
a purchase order are kept), production (where the product is made), finished goods
(where the finished goods are staged waiting for customer orders), in-transit/delivery
(orders moving to the customer or to downstream channel warehouses), and
obsolete/damaged/rework (inventory waiting for disposition).

For a distributor, stores and production stages are eliminated unless

postponement processing occurs. Finished goods inventories are purchased and
staged in the distribution pipeline. The inventories located in these various processes
are considered as inventory at rest: no movement occurs unless activated by the
demand pull.

Figure 2. Supply chain inventories and demand flows

Figure 2, displays the flow of inventory outside the organization as it moves

across the various companies found in its supply and delivery channels. In the past, the
management of channel inventories stopped at the shipping dock. Today, the ability to
link the inventory of channel partners back through the supply chain to the raw materials
supplier is one of the central objectives of the science of supply chain management.

As illustrated in Figure 2, the supply channel is divided into three segments

based on the type of inventory and demand flow. The key to understanding the
management of supply chain inventories is recognizing that inventory demand assumes
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very different characteristics depending on where in the channel it occurs. All channel
demand has one point of origin and that is independent demand for finished goods
coming from the end-use customer positioned at the end of the supply chain. While
classically a retailer, the purchase point could be a distributor, catalog sales, Internet
sales, or a producer. In all cases the end-use customer determines the true demand for
the inventory. The channel entity that serves the end-use customer directly experiences
this independent demand.

Substituting Information for Inventory

A fundamental postulate of channel management is that as demand and supply

uncertainty grows, so do pipeline inventories. The roots of channel uncertainty are
found in such conditions as unreliable suppliers, poorly developed and communicated
forecasts, ineffective scheduling, poor quality, process variability, long cycle times,
inaccurate performance metrics, and others. These problems cascade through each
level of the supply network, adding buffer stocks at each channel node, the infamous
bull whip effect.

Viewing supply chain inventories as if they were a single integrated supply function
is the foremost challenge of channel inventory management. Realizing this challenge
requires meaningful responses to the following issues:

 Supply chain integration. Not just point-of-sale nodes, but the strategies and
processes of channel intermediaries and producers, must be integrated and
made responsive to the demands of the marketplace. Achieving strategic and
tactical integration is, by far, the most difficult of the challenges facing channel
constituents.

 Increased flexibility. The effective management of inventories requires flexible

and agile processes that accelerate and add value to materials as they flow
through the channel network. Flexibility goals are achieved by reducing the size
of the channel pipeline, eliminating bottlenecks, shrinking production and
distribution lot sizes, building to customer order, and enhancing postponement
strategies.

 Lower costs. By considering all channel inventories as belonging to a single

supply pipeline, unnecessary supply chain buffers that add carrying costs and
risk obsolescence are removed. Supply chain planning and event management
technologies assist in matching channel supply exactly with demand and
reducing finished goods overstocks and distribution point stocking imbalances
while increasing product variety.

 Telescoping the supply pipeline. Competitive supply chains are concerned about
the length of the supply pipeline. As channel networks grow in length, so
inevitably do transit times and buffer inventories. Today’s best supply chains
seek to continuously shrink channel pipeline size and shave time and inventory
 20

from the channel network through the use of lean, supplier management, and
information technology techniques.

 Channel performance measurements. Metrics that document independently the

performance of each channel supply node yield little information about the
performance of the channel as a whole. Customer service metrics should
primarily be based on how responsive and cost effective the entire channel is
from raw materials acquisition to customer delivery.

Reverse Logistics (group 5)

The return of products and disposable wastes has become a critical part of
supply chain management as issues surrounding lean processes and sustainability
grow in importance on a global basis. This channel function is termed reverse logistics
and it is defined in the APICS Dictionary as “a complete supply chain dedicated to the
reverse flow of products and materials for the purpose of returns, repair, remanufacture,
and/or recycling.”

Reverse logistics can be visualized by reversing the forward distribution channel

flow as illustrated on Figure 3. Reverse logistics processes consist of customer service
(marketing in reverse); the movement of products back through channel warehousing
and transportation; and unpackaging, disassembly, and recycling (a return to raw
materials). Products are returned for many reasons including: poor quality; damaged or
defective products; surplus, seasonal, or out-of-date inventories; and product
remanufacturing and refurbishing.

Figure 3. Reverse logistics flows (Group 5)

There are a number of motivating factors driving companies to construct reverse

logistics core competencies.

 Aftermarket savings. Returned products can be “mined” to recover precious

metals, such as gold, cooper, and zinc. Products can be repaired for continued
 21

use, refurbished for resale, and disassembled for their usable components, as
well as conscientiously recycled.

 Competitive edge. Ease of return, repair, and recycling may add to a product’s
value and provide a competitive advantage. In addition, a growing “green”
consciousness among customers adds to a supplier’s promise of good service
and environmental stewardship.

 Pressure. Consumer and shareholder groups, governmental legislation, and

requirements of foreign trade are pressuring companies to make their products,
processes, and distribution channels more sustainable. Savvy companies have
sensed an opportunity to turn such sentiments into sources of increased
customer loyalty and sales.

 Growing market for environmentally safe products. Today’s consumer is

increasingly demanding products that are simple, clean, and less threatening to
the environment. Some customers will pay a premium for products that promise
to protect their health and their world.

 Environmental awareness. Today’s logistics function must develop strategies that

capture a growing sense of environmental awareness, love of nature, and desire
to preserve the health of the nonhuman world.

Reverse logistics functions can be considered as a hierarchy consisting of five

possible options. Figure 4 illustrates the reverse logistics hierarchy in the form of a
pyramid with the most desirable actions for managing returned and damaged products
at the top and the least desirable at the base of the pyramid.

Figure 4. Reverse logistics hierarchy (group 5)

 Reduce. Reducing the use of resources is considered the most responsible

option in the reverse logistics hierarchy. Reducing resources is accomplished
through such actions as redesigning products and packaging that use physical
 22

resources more efficiently; reducing the amount of energy needed to run

productive processes; and increasing the efficiency of resources and energy
needed to run channel warehouses and transportation.

 Reuse. This strategy looks to the design of products so materials and

components are more easily separated for reuse. In addition, intelligently
designed product upgrades can extend the life of durable products if they are
easy to install.
 Recycle. Similar to reuse, recycling seeks to capture wastes in the form of
packaging materials, containers (bottles, barrels, drums, etc.), scrap materials,
and so on, and to reprocess them into other products. Recycling reduces
disposal costs.

 Recover energy. “Trash to energy” refers to the harvesting of forms of energy

contained in products that are no longer usable in their physical form.

 Responsible landfill. Some products and wastes must go to the incinerator or

landfill, but this is the least desirable option. A responsible landfill that prevents
degrading items from leaching into a water source or polluting the air is
preferable.

To monitor progress in using the reverse logistics hierarchy, companies need

measurements that track the financial impact of returns management. Key metrics are:
amount of product reclaimed and resold, percent of material recycled, amount of waste
recycled, percentage of cost recovered, energy used in handling returns, and total cost
of ownership.

Some of the benefits of a carefully designed reverse logistics channel are:

 potential for highly lucrative customer service contracts and extended warranties
to manage end-of-lifecycle products

 mitigation of the unprofitable effects of high-volume returns

 enhanced customer loyalty and corporate reputation

 extraction of valuable raw materials for other industrial users

 development of more efficient products and logistical tactics

 profits from resale of refurbished products and parts that would otherwise go into
 landfills at a cost to the company

 creation of new types of jobs

 more efficient use of energy

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 conservation of resources for future generations

 reduced emission of many greenhouse gases and water pollutants

 development of “greener” technologies

 reduced need for new landfills and incinerators

PRACTICE EXERCISE

1. What is reverse logistic? Why is it important? (15 points)

2. Illustrate the flow of inventory channel of a department store inside the box. (20
points)
 24

ASSESSMENT # 1
INTERNATIONAL BUSINESS

Name:______________________________ Program/Year:____________________
Subject: MM2 Distribution Management Student’s Contact #_________
Name of the Instructor: Van Anthony Quiamco

A. Search on the internet one of Logistics Company in Davao City. Make a case
analysis about the company. (50 points)

 Problems encountered by the company

 Your possible solutions (at least three)
 Your recommendation based on your possible solutions (one
recommendation only).

B. Make a summary report of how logistic companies are affected during the time of
pandemic. (30 points).

C. Make a video showing the flow of distribution of a manufacturing company. (50

points)
 25

RUBRIC

Research Report : Essay/Report

Teacher Name: Van Anthony Quiamco

Student Name: ________________________________________

CATEGORY 4 3 2 1
Paragraph All paragraphs Most paragraphs Paragraphs Paragraphing
Construction include include included related structure was not
introductory introductory information but clear and
sentence, sentence, were typically not sentences were
explanations or explanations or constructed well. not typically
details, and details, and related within the
concluding concluding paragraphs.
sentence. sentence.
Organization Information is very Information is Information is The information
organized with organized with organized, but appears to be
well-constructed well-constructed paragraphs are not disorganized. 8)
paragraphs and paragraphs. well-constructed.
subheadings.
Amount of All topics are All topics are All topics are One or more topics
Information addressed and all addressed and addressed, and were not
questions most questions most questions addressed.
answered with at answered with at answered with 1
least 2 sentences least 2 sentences sentence about
about each. about each. each.
Quality of Information clearly Information clearly Information clearly Information has
Information relates to the main relates to the main relates to the main little or nothing to
topic. It includes topic. It provides 1- topic. No details do with the main
several supporting 2 supporting and/or examples topic.
details and/or details and/or are given.
examples. examples.
Mechanics No grammatical, Almost no A few grammatical Many grammatical,
spelling or grammatical, spelling, or spelling, or
punctuation errors. spelling or punctuation errors. punctuation errors.
punctuation errors
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