KM BN205_UNIT_4

Introduction to Logistics and Supply chain Management

The term “Supply Chain Management” was coined in 1982 by Keith Oliver of Booz, Allen and
Hamilton Inc. But the discipline and practice has been in existence for centuries.
The terms Logistics and Supply Chain Management are used interchangeably these days, but
there is a subtle difference that exists between the two.
‘Logistics’ has a military origin, and used to be associated with the movement of troops and their supplies
in the battlefield. But like so many other technologies and terminologies, it entered into the business
lexicon gradually and has now become synonymous with the set of activities ranging from procurement
of raw materials, to the delivery of the final polished good to the end consumer.
In a typical business scenario, many organizations work in tandem (knowingly or unknowingly)
to get the final product in hand of the end consumer. The supply chain is a network of these organizations
that coalesce with each other (downstream or upstream) to make the final shipment successful.
A group of farmers, a cotton mill, a designer and a tailor is the least number of stakeholders you
can expect from a regular shirt you wear every day

Introduction to Logistics and Supply Chain Management (SCM)

 Logistics is generally seen as a differentiator in terms of the final bottom line of a typical “hard and
tangible goods” organization; enabling either a lower cost or providing higher value.
 While a lower cost is mostly a one-time feel good factor and has been the traditional focus area in
logistics, high value comes into the picture much later and may be tangible or intangible in a good’s
initial stages.
 Logistics is concerned with both materials flow and information flow. While the materials flow from
the supplier to consumer, the information flows the other way round. It is not only concerned with
inventory and resource utilization, customer response also falls under the ambit of logistics.
 In simple terms, logistics can be seen as a link between the manufacturing and marketing operations
of a company.
 The level of coordination required to minimize the overall cost for the end consumer gets tougher to
achieve as the number of participants in a supply chain increase, as an extremely efficient flow of
material and information is required for optimization.
 Logistics cover the following broad functional areas: network design, transportation and inventory
management.

Basic concepts of Logistics and SCM

Inventory Planning:- Organizations want to minimize the inventory levels due to its almost linear
relationship with the cost. Yet if the demand is forecasted accurately, there would ideally be no need for
inventory and the goods will move seamlessly from warehouses to customers.
 But In the real world, the forecasted numbers can only take you so far and some inventory has to
be maintained to satiate any surges in demand; the cost of unhappy consumers who are not
serviced is often huge, and is immeasurable in most cases.
 Yet overstocks lead to increase in working capital requirements, insurance costs and blocked
resources which could have been productive someplace else.
  Making a business forecast has been changing rapidly in the era of data-based decision making.
The forecast depends on the historical baseline for sales, seasonality (soft drinks have higher sales
volume in May), recent trends (Samsung is losing out to competitors when it comes to phones, a
declining trend), business cycles (economies go through expansion and contraction every few
years), promotional offers etc.

Transportation:- The kind of transportation employed by an organization is a strategic decision (it

usually accounts for around 1/3rdof the total logistics cost) based on the required level of risk exposure,
customer service profiles, geographic area covered etc. Truck shipments take more time for delivery
compared to air transport (customers with relaxed turnaround times); is cheaper but necessitates
maintenance of higher inventory levels.
 Transportation serves the purpose of not just product movement, but storage as well (not very
intuitive). Time spent for delivery means saved time for warehousing, and many times the cost to
offload and reload shipments can be greater than the cost of letting the goods stay in the
transportation vehicles itself.
 Two basic thumb rules apply for transportation decisions: truck load (TL) shipments are better
than less-than-truckload (LTL) shipments as storage space is a perishable commodity (just like a
commercial airline does not want to fly with empty seats), and the cost per kilometer decreases as
the distance increases (two 500 km shipments is usually more expensive than a single 1000 km
shipment).
 The factors which determine the economies of transportation decisions include but are not limited
to: distance between the starting and destination points, and density (higher density products take
less space — space constraints outweigh weight constraints by a huge margin), stow ability
(spherical packaging will lead to more empty spaces compared to cubical) and volume of the
goods. Different modes of transport serve different strategic ends (rail, road, air, water etc).
 FlipKart has eKart for its logistical operations and warehousing, whereas smaller e-commerce
players generally outsource their operations to specialized logistics players such BlueDart, DHL
and now Delhivery.

Packaging:- The end goals differ: can either be done for end consumers or for logistical considerations.
The packaging will then depend on the end goal; form factor plays the lead role when packaging goods
for the end consumers, while function plays the lead role in packaging for logistical operation.

Warehousing:- It is the back-end building for storing goods. Based on the needs of the organization, it
can be in-house or outsourced.
 Primary functions of a warehouse are product movement and storage. Activities such as
offloading of the goods coming from the suppliers, the intermediate packaging (if required), and
shipping to other destinations (retailers or end consumers) are handled in the warehouse.
Similarly, they can also serve as a storage house for handing peak consumer demand to avoid
stock out of items, and acts as a buffer between the starting point (usually manufacturing plant)
and ending point (think about a typical retail outlet).
Different distribution strategies can be adopted by an organization based on its needs and infrastructure in
place, namely:
 Cross-Docking: Relies on minimal processing at the warehouse level and facilitate seamless
connection between “incoming” and “outgoing” goods through technologies such as bar code
 scanners; becoming increasingly important due to established structured communication between
betw
retailers and manufacturers; best for high velocity goods with predictable demand patterns.
 Milk Runs: The delivery guy is out to deliver items from a single supplier to multiple retailers or
to pick up items from multiple suppliers for a single retail
retailer
er (An Indian Doodhwala can literally
teach a thing or two about this, hence the naming we think).
 Direct Shipping: A supplier directly ships to a particular retailer without any intermediaries.
Mostly happens with big-name
name stores with huge good volumes, aand
nd very frequent replenishments.
Big savings on time.
 Hub and Spoke Model: Hub serves as the central node for nearby places, and the spokes depend
on the hub for their needs (think of a metropolitan and various tier
tier-2
2 cities in its proximity).
 Pooled Distribution: Region is the most important factor driving this strategy. Delivers to every
destination point in a geographical area, smart for handling peak time loads and LTL shipments.
Plus one for the planet as a bonus!

Conceptual Model of SCM

Supply chain acts as a connecting chain of materials from the suppliers to the manufacturer to
the distributor to the retailer to the ultimate customers. In a supply chain the flow of demand information
is in a direction opposite to the flow of materials.
It may be noted that the supply chain is not a linear chain but takes the form of a network. It
consists of a network of facilities and ddistribution
istribution options that perform the functions of procurement of
materials, transformation of these materials into intermediate and finished products, and the distribution
of these finished products to customers in the right time and of the right quantity and quality.

The complete SCM has three sections at the macro level Supply Relationship Management: The segment
of the chain which is concerned with the supply of raw materials ,components and sub-assemblies
sub .This
segment is called the SRM which plays ththe role of supplier relations. The Conversion system within a
factory which is done by the production and operations management function. This macro system is often
called the Internal Supply Chain Management or ISCM.
CRM or customer relations management macro system. The CRM Sytem takes care of the
market, Selling, Call centre and order management. The management of the three macro level systems
have been very efficiently taken care by leading software corporations like the SAP. ,Oracle ,BAAN and
other Enterprise Resource Planning Systems. Since the Customer Relationship management is focused
towards the marketing ,Sales and service.
Supply chain management can be seen as the process of strategically managing the procurement,
movement and storage of materials, parts and finished inventory and related information flows through
the organization and its marketing channels in such a way that current and future profitability are
maximized through the cost effective fulfillment of orders.
Supply chain management (SCM), thus , is the process of trying to appropriately manage this
network of activities and flows. More formal definitions of SCM include the following points:
SCM coordinates and integrates all the supply chain activities into a seamless process and links
all of the partners in the chain, including departments within an organization as well as the external
suppliers, transporters, third-party companies, and information system providers.
SCM enables manufacturers to actively plan and collaborate across a distributed supply chain, to
ensure that all parties are aware of commitments and schedules. By actively collaborating as a virtual
corporation, manufacturers and their suppliers can source, produce, and deliver products with minimal
lead time and expense.

Conceptual Model of SCM

In sum, we can say that SCM works in a demand driven situation, encourages flow-type
production with small batches, reduces idle inventory and idle time in any business by improving overall
customer- centric approach.
The conceptual model of SCM is based on the five basic elements called Pillars of SCM. It includes:
 Customization philosophy
 Outsourcing of items in which the supplier has competency
 Multi-tier supplier partnership
 Third or Fourth party logistics
 Use of modern IT systems

Supply Chain Drivers

Supply Chain Capabilities are guided by the decisions you make regarding the five supply chain
drivers. Each of these drivers can be developed and managed to emphasize responsiveness or efficiency
depending on changing business requirements. As you investigate how a supply chain works, you learn
about the demands it faces and the capabilities it needs to be successful. Adjust the supply chain drivers
as needed to get those capabilities.
The five drivers provide a useful framework for thinking about supply chain capabilities. Decisions made
about how each driver operates will determine the blend of responsiveness and efficiency a supply chain
is capable of achieving. The five drivers are illustrated in the diagram below:
1. PRODUCTION: This driver can be made very responsive by building factories that have a lot of
excess capacity and use flexible manufacturing techniques to produce a wide range of items. To
be even more responsive, a company could do their production in many smaller plants that are
close to major groups of customers so delivery times would be shorter. If efficiency is desirable,
then a company can build factories with very little excess capacity and have those factories
optimized for producing a limited range of items. Further efficiency can also be gained by
centralizing production in large central plants to get better economies of scale, even though
delivery times might be longer.
2. INVENTORY: Responsiveness can be had by stocking high levels of inventory for a wide range
of products. Additional responsiveness can be gained by stocking products at many locations so
as to have the inventory close to customers and available to them immediately. Efficiency in
inventory management would call for reducing inventory levels of all items and especially of
items that do not sell as frequently. Also, economies of scale and cost savings can be gotten by
stocking inventory in only a few central locations such as regional distribution centers (DCs).
3. LOCATION: A location decision that emphasizes responsiveness would be one where a
company establishes many locations that are close to its customer base. For example, fast-food
chains use location to be very responsive to their customers by opening up lots of stores in high
volume markets. Efficiency can be achieved by operating from only a few locations and
centralizing activities in common locations. An example of this is the way e-commerce retailers
serve large geographical markets from only a few central locations that perform a wide range of
activities.
4. TRANSPORTATION: Responsiveness can be achieved by a transportation mode that is fast and
flexible such as trucks and airplanes. Many companies that sell products through catalogs or on
the Internet are able to provide high levels of responsiveness by using transportation to deliver
their products often within 48 hours or less. FedEx and UPS are two companies that can provide
very responsive transportation services. And now Amazon is expanding and operating its own
transportation services in high volume markets to be more responsive to customer
desires. Efficiency can be emphasized by transporting products in larger batches and doing it less
often. The use of transportation modes such as ship, railroad, and pipelines can be very efficient.
 Transportation can also be made more efficient if it is originated out of a central hub facility or
distribution center (DC) instead of from many separate branch locations.
5. INFORMATION: The power of this driver grows stronger every year as the technology for
collecting and sharing information becomes more wide spread, easier to use, and less expensive.
Information, much like money, is a very useful commodity because it can be applied directly to
enhance the performance of the other four supply chain drivers. High levels of responsiveness can
be achieved when companies collect and share accurate and timely data generated by the
operations of the other four drivers. An example of this is the supply chains that serve the
electronics market; they are some of the most responsive in the world. Companies in these
supply chains, the manufacturers, distributors, and the big retailers all collect and share data about
customer demand, production schedules, and inventory levels. This enables companies in these
supply chains to respond quickly to situations and new market demands in the high-change and
unpredictable world of electronic devices (smartphones, sensors, home entertainment and video
game equipment, etc.).

Supply Chain Performance Measurement

Supply chain performance measure can be defined as an approach to judge the performance of supply
chain system. Supply chain performance measures can broadly be classified into two categories:
1. Qualitative Measures:- For example, customer satisfaction and product quality.
2. Quantitative Measures:- For example, order-to-delivery lead time, supply chain response time,
flexibility, resource utilization, delivery performance.
Here, we will be considering the quantitative performance measures only. The performance of a
supply chain can be improvised by using a multi-dimensional strategy, which addresses how the company
needs to provide services to diverse customer demands.

QUANTITATIVE MEASURES.
Quantitative measures is the assessments used to measure the performance, and compare or track
the performance or products. We can further divide the quantitative measures of supply chain
performance into two types. They are −
 (i) Non-financial measures
(ii) Financial measures

(i) Non – Financials Measures

The metrics of non-financial measures comprise cycle time, customer service level, inventory
levels, resource utilization ability to perform, flexibility, and quality. In this section, we will
discuss the first four dimensions of the metrics −
(a) Cycle Time
Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a
business process. For supply chains, cycle time can be defined as the business processes of interest,
supply chain process and the order-to-delivery process. In the cycle time, we should learn about two
types of lead times. They are as follows −
 Supply chain lead time
 Order-to-delivery lead time
The order-to-delivery lead time can be defined as the time of delay in the middle of the placement of
order by a customer and the delivery of products to the customer. In case the item is in stock, it would be
similar to the distribution lead time and order management time. If the ordered item needs to be produced,
it would be the summation of supplier lead time, manufacturing lead time, distribution lead time and order
management time.
The supply chain process lead time can be defined as the time taken by the supply chain to transform
the raw materials into final products along with the time required to reach the products to the customer’s
destination address.
Hence it comprises supplier lead time, manufacturing lead time, distribution lead time and the
logistics lead time for transport of raw materials from suppliers to plants and for shipment of semi-
finished/finished products in and out of intermediate storage points.
Lead time in supply chains is governed by the halts in the interface because of the interfaces between
suppliers and manufacturing plants, between plants and warehouses, between distributors and retailers
and many more.
Lead time compression is a crucial topic to discuss due to the time based competition and the
collaboration of lead time with inventory levels, costs, and customer service levels.
(b) Customer Service Level
The customer service level in a supply chain is marked as an operation of multiple unique performance
indices. Here we have three measures to gauge performance. They are as follows −
 Order fill rate − The order fill rate is the portion of customer demands that can be easily
satisfied from the stock available. For this portion of customer demands, there is no need to
consider the supplier lead time and the manufacturing lead time. The order fill rate could be with
respect to a central warehouse or a field warehouse or stock at any level in the system.
 Stockout rate − It is the reverse of order fill rate and marks the portion of orders lost because of
a stockout.
 Backorder level − This is yet another measure, which is the gauge of total number of orders
waiting to be filled.
 Probability of on-time delivery − It is the portion of customer orders that are completed on-
time, i.e., within the agreed-upon due date.
In order to maximize the customer service level, it is important to maximize order fill rate, minimize
stockout rate, and minimize backorder levels.
(c) Inventory Levels
As the inventory-carrying costs increase the total costs significantly, it is essential to carry sufficient
inventory to meet the customer demands. In a supply chain system, inventories can be further divided into
four categories.
 Raw materials
 Work-in-process, i.e., unfinished and semi-finished sections
 Finished goods inventory
 Spare parts
Every inventory is held for a different reason. It’s a must to maintain optimal levels of each type of
inventory. Hence gauging the actual inventory levels will supply a better scenario of system efficiency.
(d) Resource Utilization
In a supply chain network, huge variety of resources is used. These different types of resources available
for different applications are mentioned below.
 Manufacturing resources − Include the machines, material handlers, tools, etc.
 Storage resources − Comprise warehouses, automated storage and retrieval systems.
 Logistics resources − Engage trucks, rail transport, air-cargo carriers, etc.
 Human resources − Consist of labor, scientific and technical personnel.
 Financial resources − Include working capital, stocks, etc.
In the resource utilization paradigm, the main motto is to utilize all the assets or resources efficiently in
order to maximize customer service levels, reduce lead times and optimize inventory levels.
(ii) Finanacial Measures
The measures taken for gauging different fixed and operational costs related to a supply chain are
considered the financial measures. Finally, the key objective to be achieved is to maximize the revenue by
maintaining low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities, operations, technology,
materials, and labor. Generally, the financial performance of a supply chain is assessed by considering the
following items −
 Cost of raw materials.
 Revenue from goods sold.
 Activity-based costs like the material handling, manufacturing, assembling rates etc.
 Inventory holding costs.
 Transportation costs.
 Cost of expired perishable goods.
 Penalties for incorrectly filled or late orders delivered to customers.
 Credits for incorrectly filled or late deliveries from suppliers.
 Cost of goods returned by customers.
 Credits for goods returned to suppliers.
 In short, we can say that the financial performance indices can be merged as one by using key
modules such as activity based costing, inventory costing, transportation costing, and inter-company
financial transactions.

Supply Chain efficiency, Core and Reverse Supply Chain

Supply chain efficiency is related to whether a company’s processes are harnessing resources in
the best way possible, whether those resources are financial, human, technological or physical. Notice that
the definition of efficiency says nothing about improving customer service. You might have a very
efficient supply chain that minimizes costs for materials and packaging but leaves your customers fuming
when the product they receive is not up to their specifications. The term efficiency is also a very abstract
one. People have different definitions, and again…what may be deemed “efficient” in one part of your
supply chain may adversely affect another area of your business.
Five WAYS TO IMPROVE SUPPLY CHAIN EFFICIENCY
1. Communicate Efficiently:- Making a commitment to weekly big picture meetings and daily task
force meetings gives your team an opportunity address upcoming logistics situations in advance.
We suggest face-to-face meetings whenever possible to avoid miscommunications and vague
overviews.
2. Train Your Workforce Comprehensively:- A training program should teach your professionals
more than where the break room is and what daily tasks they should perform. Take the
opportunity to share your company’s comprehensive plan to increase productivity while reducing
costs. Teach them about the importance of internal and external customer service.
Give your workforce an incentive to act in accordance with your business’ vision,
mission and values. Sharing this and training will drive a successful organization by creating
aligned goals while improving supply chain productivity.
3. Increase Information Sharing and Visibility:- Make your logistics processes more transparent
to your workforce and your clients. Eliminate slow, unreliable spreadsheets to provide
information. Share the most up-to-date information through current technology solutions.
Other ways to increase information sharing include taking advantage of big data analytics
available to you, measuring supply chain metrics regularly and involving employees in finding
inefficiencies in the system. By informing your workforce and your clients, you create
opportunities for innovation.
4. Analyze Information to Meet Customer Needs:- Extend the belief that supply chains begin at
the warehouse and end in a store because all products sent through your supply chain
eventually reach an end user. Analyze transportation data to better inform your customer of
trends and opportunities.
5. Nurture Innovation in Partnerships:- Supply chain managers should evaluate which suppliers
possess capabilities they can tap into to help produce innovations in products, services or go-to-
market strategies. They should play a key role by becoming less of a process executer and more
of a process enabler. Looking for opportunities to improve current processes by leveraging
supplier capabilities empowers both parties while benefiting the ultimate consumer.

Reverse Supply Chain

Reverse Supply Chain stands for all operations related to the reuse of products and materials. It is
“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. More precisely, reverse logistics is the
process of moving goods from theirr typical final destination for the purpose of capturing value, or proper
disposal. Remanufacturing and refurbishing activities also may be included in the definition of reverse
logistics.” The reverse logistics process includes the management and the sale of surplus as well as
returned equipment and machines from the hardware leasing business. Normally, logistics deal with
events that bring the product towards the customer. In the case of reverse logistics, the resource goes at
least one step back in the supply
upply chain. For instance, goods move from the customer to the distributor or
to the manufacturer.
When a manufacturer’s product normally moves through the supply chain network, it is to reach the
distributor or customer. Any process or management after th thee sale of the product involves reverse
logistics. If the product is defective, the customer would return the product. The manufacturing firm
would then have to organise shipping of the defective product, testing the product, dismantling, repairing,
recycling
ng or disposing the product. The product would travel in reverse through the supply chain network
in order to retain any use from the defective product. The logistics for such matters is reverse logistics.

International Supply Chain

International Supply Chain is defined as the distribution of goods and services throughout a
trans-national
national companies’ global network to maximize profit and minimize waste. Essentially, global
supply chain-management
management is the same as supply
supply-chain
chain management, but it focuses on companies
c and
organizations that are trans-national.
national. Global supply
supply-chain
chain management has six main areas of
concentration: logistics management, competitor orientation, customer orientation, supply-chain
supply
coordination, supply management, and operations managem
management. These six areas of concentration can
be divided into four main areas: marketing, logistics, supply management, and operations management.
Successful management of a global supply chain also requires complying with various international
regulations set by a variety of non-governmental
governmental organizations (e.g. The United Nations).
Global supply chain management can be impacted by several actors who impose policies
that regulate certain aspects of supply chains. Governmental and non non-governmental
governmental organizations play a
key role in the field as they create and enforce laws or regulations which companies must abide by. These
regulatory policies often regulate social issues that pertain to the implementation and operation of a global
supply chain (e.g. labour, environmental,
nmental, etc.). These regulatory policies force companies to obey the
regulations set in place which often impact a company’s profit.
Operating and managing a global supply chain comes with several risks. These risks can be
divided into two main categories:: supply
supply-side risk and demand side risk. Supply-side
side risk is a category
that includes risks accompanied by the availability of raw materials which effects the ability of the
company to satisfy customer demands. Demand
Demand-side risk is a category that includes risks that pertain to
the availability of the finished product. Depending on the supply chain, a manager may choose to
minimize or take on these risks. Successful global supply
supply-chain
chain management occurs after implementing
the appropriate framework of concentration, complying with international regulations set by governments
and non-governmental organizations, and recognizing and appropriately handling the risks involved while
maximizing profit and minimizing waste.

Inbound and Outbound SCM

 Inbound logistics refers to the transport, storage and delivery of goods coming into a business.
 Outbound logistics refers to the same for goods going out of a business. Inbound and outbound
logistics combine within the field of supply-chain management, as managers seek to maximize
the reliability and efficiency of distribution networks while minimizing transport and storage
costs. Understanding the differences and correlation between inbound and outbound logistics
can provide insight for developing a comprehensive supply-chain management strategy.
Supply-Chain Partners
Companies work with different supply-chain partners on the inbound and outbound side of
logistics. The inbound side concerns the relationship between companies and their suppliers, while the
outbound side deals with how companies get products to their customers. Regardless of the source or
destination, companies may work directly with third-party distributors on either side as well. A
wholesaler, for example, might work with a distributor to receive products from an international supplier,
while using their own fleet to deliver goods to their domestic customers.
Damage and Liability:- Transport agreements between suppliers and customers specify which party is
financially responsible for the cost of any damage occurring in transit at different points, according to
specific terms. For example, Free on Board (FOB) shipping terms specify that the recipient — the one on
the inbound side of logistics — is responsible for shipping costs after the shipment is loaded onto a
transport carrier, or when it reaches a specified location. The International Chamber of Commerce
defines several alternative terms, such as “Delivered Duty Paid,” which specifies that international
suppliers deliver goods to buyers after providing for all import costs and requirements.
Tools and Materials:- Inbound logistics cover anything that your company orders from suppliers, which
can include tools, raw materials and office equipment in addition to inventory. Outbound logistics, on
the other hand, deals almost exclusively with your end products. Tools, materials and equipment only
fall into the outbound category if your company sells them as a main line of business. Inbound logistics
for a furniture manufacturer, for example, can include wood, cloth materials, glue, nails and safety
glasses, while the manufacturer’s outbound logistics would likely only cover finished furniture products.
Supply Chain Integration:- Vertical integration occurs when one company acquires or merges with its
own suppliers or customers. A vertical integration strategy can greatly increase supply-chain efficiency
and produce competitive cost advantages, due to the single source of strategic control over multiple
players in the supply chain. A fully integrated supply chain can synchronize both inbound and outbound
logistics with automatic ordering and order-fulfillment systems, shared fleet vehicles and drivers, and
close cooperation between managers at different child companies on pricing agreements, volume
contracts, delivery terms and even custom product design.

Bullwhip Effect in SCM

The bullwhip effect on the supply chain occurs when changes in consumer demand causes the
companies in a supply chain to order more goods to meet the new demand. The bullwhip effect is a
distribution channel phenomenon, rather problem, in which demand forecasts yield supply chain
inefficiencies. This mostly happens when retailers become highly reactive to consumer demand, and in
turn, intensify expectations around it. This results into inefficient asset allocations and high inventory
fluctuations, moving down in the supply chain.
  The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials supplier.
 This effect can be observed through most supply chains across several industries; it occurs
because the demand for goods is based on demand forecasts from companies, rather than actual
consumer demand.
 The bullwhip effect can be explained as an occurrence detected by the supply chain where orders
sent to the manufacturer and supplier create larger variance then the sales to the end customer.
 These irregular orders in the lower part of the supply chain develop to be more distinct higher up
in the supply chain.

How Do we minimize the bullwhip effect?

Every industry has its own unique supply chain, inventory placements, and complexities. However,
after analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to
30 percent can be reduced and 15 to 35 percent reduction in instances of stock out situations and missed
customer orders can be achieved. Below are some of the methods to minimize the bullwhip effect.
1. Accept and understand the bullwhip effect:- The first and the most important step towards
improvement is the recognition of the presence of the bullwhip effect. Many companies fail to
acknowledge that high buffer inventories exist throughout their supply chain. A detailed stock
analysis of the inventory points from stores to raw material suppliers will help uncover idle
excess inventories. Supply chain managers can further analyze the reasons for excess
inventories, take corrective action and set norms.
2. Improve the inventory planning process:- Inventory planning is a careful mix of historical
trends for seasonal demand, forward-looking demand, new product launches and
discontinuation of older products. Safety stock settings and min-max stock range of each
inventory point need to be reviewed and periodically adjusted. Inventories lying in the entire
network need to be balanced based on regional demands. Regular reporting and early warning
system need to be implemented for major deviations from the set inventory norms.
3. Improve the raw material planning process:- Purchase managers generally tend to order in
advance and keep high buffers of raw material to avoid disruption in production. Raw material
planning needs to be directly linked to the production plan. Production plan needs to be
released sufficiently in advance to respect the general purchasing lead times. Consolidation to a
smaller vendor base from a larger vendor base, for similar raw material, will improve the
 flexibility and reliability of the supplies. This, in turn, will result in lower raw material
inventories.
4. Collaboration and information sharing between managers:- There might be some inter-
conflicting targets between purchasing managers, production managers, logistics managers and
sales managers. Giving more weight to common company objectives in performance evaluation
will improve collaboration between different departments. Also providing regular and
structured inter-departmental meetings will improve information sharing and decision-making
process.
5. Optimize the minimum order quantity and offer stable pricing:- Certain products have high
minimum order quantity for end customers resulting in overall high gaps between subsequent
orders. Lowering the minimum order quantity to an optimal level will help provide create
smoother order patterns. Stable pricing throughout the year instead of frequent promotional
offers and discounts may also create stable and predictable demand.

Push and pull Systems in SCM

 Push: Control information flow is in the same direction of goods flow
 Semi push or Push-pull: Succeeding node makes order request for preceding node. Preceding
node reacts by replenishing from stock that is rebuilt every fixed period.
 Pull: Succeeding node makes order request for preceding node. Preceding node reacts by
producing the order, which involves all internal operations, and replenishes when finished.
 Semi-pull or pull-push: Succeeding node makes order request for preceding node. Preceding
node reacts by replenishing from stock that is rebuilt immediately. There are several levels of
semi-pull systems as a node can have stock at several layers in an organization.
Push-based supply chain
Push-based supply chain, products are pushed through the channel from production up to the retailers.
This means that production happens based on demand forecast.
Under the push supply chain, the logistics are driven by long-term projections of customer demand. For
example, at the end of the summer season, clothing brands start to manufacture more warm clothes. This
type of planning becomes valuable to companies as it helps plan them for events in the future and be
prepared when winter comes. This gives the companies time to meet their needs in time and also gives
them time to figure out other logistics like where to store the inventory.
But instead of responding to actual demand, a push strategy relies on predictions that are often wrong.
High variable expenses, divestments, discounting, missed sales, stock shortages, high levels of debt, and
rescheduled production cycles are other drawbacks of this approach.
A push-model supply chain is one where projected demand determines what enters the process. For
example, warm jackets get pushed to clothing retailers as summer ends and the fall and winter seasons
start. Under a push system, companies have predictability in their supply chains since they know what
will come when long before it actually arrives. This also allows them to plan production to meet their
needs and gives them time to prepare a place to store the stock they receive.

Pull-based supply chain

Pull-based supply chain, procurement, production, and distribution are demand-driven rather than based
on predictions. Goods are produced in the amount and time needed.
Under the pull supply chain, the process of manufacturing and supplying is driven by actual customer
demand. In this type of supply chain logistics, inventory is acquired on a need-basis. The benefits of this
type of planning include less wastage in the case of lower demand. The problem, however, is that the
company might not have enough inventory to meet rising demands due to unforeseen factors. For
example, an auto repair shop that only orders parts that it needs. In this case, the business waits until it
gets an order to procure the parts required for the repair.
A pull strategy is related to the just-in-time school of inventory management that minimizes stock on
hand, focusing on last-second deliveries. Under these strategies, products enter the supply chain when
customer demand justifies it. One example of an industry that operates under this strategy is a direct
computer seller that waits until it receives an order to actually build a custom computer for the consumer.
With a pull strategy, companies avoid the cost of carrying inventory that may not sell. The risk is that
they might not have enough inventory to meet demand if they cannot ramp up production quickly enough.
Pull System: Dependent on Demand and limitations to WIP
The Pull System is a lean manufacturing method that uses the Just-in-Time strategy of not producing
goods until an order is received. Instead of forecasting demand, the pull system produces ‘as needed’.
This is particularly useful for companies that deal with high demand uncertainty, low product mix, and
low importance of economies of scale.
Push System: No dependency on Demand nor limits on WIP
A company using the push system will forecast demand and employ the Material Requirements Planning
(MRP) process to produce goods and services ahead of time. This is related to the Just-in-Case concept.
This forecast may not always be accurate and will require inventory stockpiling, but it remains a useful
strategy for products that tend to have a lot of work in progress (WIP) or long lead times.
The push system is particularly useful for products with low demand uncertainty or with high importance
of economies of scale in reducing costs.

Push and Pull Strategies in Practice

In real life, no businesses rely entirely on either push or pull logistics, but instead employ a mixture of
the two to make the best use of them. Modern-day supply chain operations are very complex and consist
of some steps from getting the raw materials to the delivery of the final product to the end consumer. The
process roughly consists of the following steps:
 Determining the availability of raw materials. Even before the product can begin to be made, it is
important to plan where and how the raw materials can be acquired cheaply.
 Processing the raw materials in a factory to yield the final products. This step varies from
company to company like food-based products, cloth-based products, etc.
 Then the finished product is taken to a storage facility or a distribution facility.
 The packaged product is taken to a retail store or shipped directly to the customer as needed.
 Most supply chains in the world resembles this basic outline. Now, push and pull strategies can
be employed by planners by taking into account the expected demand and other factors. The most
successful shipping companies like Walmart and Amazon conduct a lot of research into the
various factors that determine demand and incorporate that knowledge into their supply chain.
Use of pull, push, and hybrid push-pull strategy
 A push-based supply chain strategy is usually suggested for products with low demand
uncertainty, as the forecast will provide a good indication of what to produce and keep in
inventory, and also for products with high importance of economies of scale in reducing costs.
  A pull-based supply chain strategy, usually suggested for products with high demand uncertainty
and with low importance of economies of scales, which means, aggregation does not reduce cost,
and hence, the firm would be willing to manage the supply chain based on realized demand.
 A hybrid push–pull strategy, usually suggested for products which uncertainty in demand is high,
while economies of scale are important in reducing production and delivery costs. An example of
this strategy is the furniture industry, where production strategy has to follow a pull-based
strategy, since it is impossible to make production decisions based on long-term forecasts.
However, the distribution strategy needs to take advantage of economies of scale in order to
reduce transportation cost, using a push-based strategy.

Latest Trends in Production and Operation Lean Manufacturing, Agile Manufacturing

There are a number of recent trends in productions and operations management, as the discipline is
evolving and the world of business is changing.

1. Sustainability:- Consumers are growing ever more aware of the impact that companies have
on the environment and they are able to use their purchasing power to incentivize companies to
reduce the negative impact on the environment. This leads to greater adoption of operations
management practices like Lean Production and Just-In-Time, whereby products are made to order
rather than large amounts of raw materials and inventory being stocked and wasted. It is also in
the interest of companies to implement these practices as it enables faster incrementally changes
to their product to better suit customer needs – which can be a source of competitive advantage.

Total Quality Management (TQM) also reduces the amount of waste in the production process
and is a continual commitment to improving the quality of products. This also means products are
more durable and have a longer life-time, which means there is less consumer-end waste.
2. Ethics:- Similarly, globalization has made consumers very aware of the impact that companies
have on society and the world. With some companies more economically powerful than a lot of
countries (World Bank, 2016 The world’s top 100 economies: 31 countries; 69 corporations),
they have the power to positively impact the world, and consumers are beginning to expect that
from them. This is putting pressure on companies to audit their supply chains to maintain good
and ethical standards and practices. Nike and Primark were both negatively affected by poor
supply chain management when their suppliers’ workers were seen to be treated poorly.
3. Servitization:- Manufacturing organizations are now looking to servitize their offerings. In other
words, companies are giving away their goods as a means to sell a service. Rolls-Royce is a good
example of this: they give their airplane engines away for free by charging a fee for the
maintenance. In fact, Rolls-Royce actually charge airlines “Power by the Hour”, which means
that the airlines only pay whilst the airplane is in the sky. Rolls-Royce has sufficient confidence in
the quality of their engines that it absorbs the maintenance costs.

In brief, the recent trends of operations management are:

(1) Lean and agile production methods with Total Quality Management to react to changes in customer
needs and increasing quality expectations, whilst also satisfying the customers’ environmental concerns.
(2) A greater focus on supply chain management to maintain high ethical standards all around the world,
due to globalization.
(3) The servitization of goods, whereby, manufacturers are using products to sell services.
Lean Manufacturing
Sometimes called “lean production,” lean manufacturing is a series of methods designed to
minimize the waste of material and labor while maintaining or increasing levels of production. This
results in a net improvement in total productivity.
Lean manufacturing’s roots lie in Japanese manufacturing with the Toyota Production System.
Lean principles pioneered by Toyota include “just-in-time” manufacturing, where inventory is kept at low
“as-needed” levels; automation supervised by human workers to maintain quality control (known
as jidoka); minimization of downtime and transportation, and others.
Ultimately, lean manufacuring is about eliminating that which does not add value, and delivering
the best possible product to the customer as quickly and with as few barriers as possible.
Benefits of Lean Manufacturing
Lean manufacturing improves efficiency, reduces waste, and increases productivity. The benefits,
therefore, are manifold:
 Increased product quality: Improved efficiency frees up employees and resources for
innovation and quality control that would have previously been wasted.
 Improved lead times: As manufacturing processes are streamlined, businesses can better respond
to fluctuations in demand and other market variables, resulting in fewer delays and better lead
times.
 Sustainability: Less waste and better adaptability makes for a business that’s better equipped to
thrive well into the future.
 Employee satisfaction: Workers know when their daily routine is bloated or packed with
unnecessary work, and it negatively affects morale. Lean manufacturing boosts not only
productivity, but employee satisfaction.
 Increased profits: And, of course, more productivity with less waste and better quality ultimately
makes for a more profitable company.

Agile Manufacturing
Agile manufacturing is a term applied to an organization that has created the processes, tools, and
training to enable it to respond quickly to customer needs and market changes while still controlling costs
and quality.
An enabling factor in becoming an agile manufacturer has been the development of
manufacturing support technology that allows the marketers, the designers and the production personnel
to share a common database of parts and products, to share data on production capacities and problems
particularly where small initial problems may have larger downstream effects. It is a general proposition
of manufacturing that the cost of correcting quality issues increases as the problem moves downstream, so
that it is cheaper to correct quality problems at the earliest possible point in the process.
Agile manufacturing is seen as the next step after lean manufacturing in the evolution of
production methodology. The key difference between the two is like between a thin and an athletic
person, agile being the latter. One can be neither, one or both. In manufacturing theory, being both is
often referred to as leagile. According to Martin Christopher, when companies have to decide what to be,
they have to look at the customer order cycle (COC) (the time the customers are willing to wait) and the
leadtime for getting supplies. If the supplier has a short lead time, lean production is possible. If the COC
is short, agile production is beneficial.

Advantages
 Companies can respond quickly to change. This is done by retaining some mass production
properties while remaining flexible. This is called mass customization.
 New designs are based on the customers’ needs which mean that the customer will have a wider
variety to choose from.
 Since the company is constantly changing according to the customers’ needs, their customers may
be more satisfied.
Disadvantages
 Highly skilled personnel are required to operate an agile manufacturing company.
 Shortages will occur if there is a sudden grows in demand both with respect to volume or variety.
 Maintenance cost is expensive.
 On the other hand, if the demand suddenly drops during a high production rate, the products
could not be sold.
 Installation costs are high because of interchangeability.
 Management of these systems is hard and intensive planning and management is required.
 Due to short life-cycles, machinery and workers need to keep up-to-date because of new
technologies.
 The complex machinery could add to the cost if there is a breakdown, which will increase the
production down time.

SCM Technologies
Elements of a new business and technical architecture for SCM software have been emerging over the
course of the past five years. This emerging architecture, shown in Figure 4 and summarized in Figure 5,
is based on business and technical concepts that are enumerated and described below. The architecture
and its various elements offer great promise in addressing the issues previously discussed.
1. Convergence: The emerging business and technical architecture for SCM solutions is based on
convergence of business processes and time. What does this mean? To draw an analogy, when
Steve Jobs introduced the first iPhone in 2007, he started by saying he was introducing three
devices: 1) a music player; 2) an Internet-connection device; and 3) a phone. (He could have
added a fourth device—the camera.) And, he said, the three are incorporated into a single device
based on a single architecture. This is known as convergence, and it immediately disrupted the
individual markets for music players, Internet-connection devices, phones, and cameras.
Likewise, the business architecture of tomorrow will see increasing process convergence and
collapsing of time boundaries between planning and execution.
These concepts are not far-fetched; leading companies such as Procter & Gamble are already
collapsing their demand, supply, sales and operations planning (S&OP), and channel management
processes into a single process executed by a single team and supported by a single technology.
This was first reported by the website Logistics Viewpoints in 2015. The days of having to buy
separate software solutions for demand, supply, S&OP, and channel management are numbered.
2. Digital twin: Supply chain management software operates by first creating a computer data
model of the real world. Logic and algorithms are then run against the model to arrive at answers
and decisions. These answers are then operationalized into the real world. The quality of answers
or decisions generated by the software depends heavily on the quality of the data model, or how
well the model represents reality at the point in time at which the answers are generated. This is
true across the decision-making landscape of SCM—manufacturing, distribution, transportation,
and warehousing.
In today’s digital world, it has become common to refer to these data models as “digital twins.” In
other words, the data model needs to be an identical twin of the real world at all points in time.
This can only happen when the model is very robust—that is, it is flexible enough to represent all
real-world entities and scenarios—and it can be brought up-to-date instantaneously. This second
point is a core tenet of the digital enterprise and a key promise of the Internet of Things.
Previously, there was a lag, or latency, between what was going on in the real world and what
was represented by the model, such that suboptimal answers were often generated by the
software. Because supply chain resources—things and people—can now transmit their status
instantaneously, computer models will increasingly be synchronized with the real world, thereby
enabling the digital twin.
In-memory computing (IMC) is one of the core enabling technologies behind the digital twin.
IMC allows data models to be stored in memory, versus on a physical hard drive. This provides
the speed necessary for enabling the digital twin. While IMC has been used for supply chain
software for a couple of decades now, recent advances allow it to be scaled to handle much larger
problems, including those that require the processing of a large number of digital signals from the
Internet of Things.
3. Extensible data model: Future SCM software will have general-purpose data models with
extensibility across functional domains, meaning the data model can represent manufacturing,
distribution, and warehousing, for example. At the dawn of packaged SCM software in the 1990s,
pioneers set this as a key objective. For a number of technical and business reasons, this objective
was not achieved. Instead, SCM software evolved toward built-for-purpose, proprietary data
models. For each new problem space in SCM, a new data model and new set of software was
developed. This contributed to the “bingo board” problem described in Figure 2.
Supply chain software requires robust data models that can precisely represent myriad
relationships and use cases across diverse environments. Precision has become more important as
supply chains increasingly have to deliver products when, where, and how consumers desire
them. The combination of the digital twin and an extensible data model provides the means to
deliver much more precision when synchronizing operations across, for example, retail,
distribution, and manufacturing.
4. Artificial intelligence: Future SCM software will be characterized by its ability to “self-learn.”
This means it will adapt and make decisions by itself, without human intervention. This will be
made possible by artificial intelligence (AI) and, more specifically, machine learning, which is
software that can learn from data versus being completely driven by rules configured by humans.
AI allows software to take on more of the decision-making load associated with managing supply
chains. This is most prominent in fields such as robots and self-driving trucks, where actions are
self-directed based on the software’s ability to learn. In SCM software, AI will start by providing
suggestions to humans, and then eventually be used to automate decisions.
The state of the art of learning in SCM software today is manual trial-and-error. When new
situations arise that the software currently does not cover, the software is either reconfigured or
the code itself is modified to accommodate the new situation. Either way is expensive and time
consuming. Those responses are also ineffective given that supply chains and supply chain
problems are highly dynamic and changing all the time. Machine learning will be critical to
providing increasingly sophisticated response algorithms as part of the control engineering loop
shown in Figure 6. For example, as part of today’s S&OP process, software provides decision
options that can be applied when demand and supply do not match. These options—change a
price, run overtime, or increase supply, to name a few examples—are rigidly defined. By contrast,
machine learning promises to learn and come up with new response options, including
sophisticated multivariate options.
5. Streaming architecture: Streaming architecture has emerged in the past five years to help solve
problems requiring real-time processing of large amounts of data. This architecture will be
increasingly important to SCM software, as solutions need to enable the digital twin in order to
support supply chains’ precise synchronization across time and function. There are two major
areas in streaming architecture: streaming and stream processing. Streaming is the ability to
reliably send large numbers of messages (for example, digital signals from IoT devices),
while stream processing is the ability to accept the data, apply logic to it, and derive insights from
it. The digital twin discussed earlier is the processing part of the streaming architecture.
6. Control engineering logic: Control engineering is an engineering discipline that processes data
about an environment and then applies algorithms to drive the behavior of the environment to a
desired state. For example, manufacturing continuously processes data about the state of
machines, inbound materials, and progress against the order backlog, and then runs algorithms
that direct the release of materials to achieve production goals. This is known as a control loop.
The key concepts are shown in Figure 6, with a “control” loop executing continuously, and a
“learning” loop adjusting the control algorithms based on results from each pass of the control
loop.
This concept is embedded in just about all functions related to supply chain management. S&OP,
for example, has an objective function: a financial goal; resources and people must be mobilized
to achieve that objective function. When there is a deviation (in control engineering this is known
as the “error”) between the objective function and what is actually happening, corrective action
must be taken. This corrective action could be something like reducing prices, increasing
inventory, or working overtime. In the future, these corrective actions will be increasingly aided
by artificial intelligence. Whether it’s in supply, manufacturing, distribution, warehousing, or
order management, much of the work involved in SCM is focused on reducing the “error”
between what the objective is and what is actually happening in the real world.
7. Workflow and analytics: Workflow defines the steps a worker carries out to accomplish a
particular activity, task, or unit of work. In regard to software, this often means the sequence of
screens, clicks, and other interactions a user executes. In most cases today, these steps are rigid
and predefined; changing them requires configuration or even software code changes, which
could take weeks or months.
 Having a common, flexible workflow engine across SCM functional domains is critical to
achieving convergence in supply chain software. This provides the ability to support many
different use cases and interactions with the software, not just within functional domains but also
across domains.
Integrated into each workflow are both logic and analytics. These analytics help predict things
like demand, the impact of a promotion, or the precise arrival of an inbound ship, to name just a
few possibilities. Analytics are now headed in the direction of prescribing answers to problems.
For example, predicting demand is important, but it’s equally important to know what to do when
the prediction does not match the plan. This is where prescriptive analytics can help—providing
insights into what to do when reality does not match the operational plan. Artificial intelligence
can also enable prescriptive analytics by continuously learning from past decisions.
Analytics used to be an offline, after-the-fact activity to determine what had happened. In other
words, it had its own workflow that was separate from operational workflows. While this is
helpful for looking in the rear view mirror, it is limited in its ability to help with what is currently
happening. Analytics that are built in-line to operational workflows provide a dynamic, up-to-the
minute view, versus the offline model, which might provide a week-old or even a month-old
view.
8. Edge computing: Cloud computing, a centralized form of computing often accessed over the
Internet, is now being augmented with localized computing, also known as “edge computing.”
(The term refers to being “out on the edge” of the cloud, close to where “smart” machinery is
located.) Edge computing has rapidly evolved to address issues associated with processing data
from the billions of microprocessor-equipped devices that are being connected to the Internet of
Things.
The growth of edge computing is necessary for a number of reasons:
1. Network latency is a real concern. Latency refers to the turnaround time for sending a message
and receiving a response. The turnaround time for sending and receiving information to and from
the cloud may take 100-200 milliseconds. With localized, or edge, computing, the turnaround
time may be 2-5 milliseconds. In real-time production or warehousing environments, this is a
critical requirement. Furthermore, the variability in response times in cloud computing is much
higher than with localized computing.
2. Machines, inventory, and connected “things” generate millions of digital signals per minute.
Sending all of these to the cloud is impractical. Thus, edge computers play a critical role in
determining what needs to be sent to the cloud, and what can be filtered or thrown out. For
example, a machine might report on its capacity every second. If the reported information has not
changed, or changed only within a small band, there may be no need to send it along to the cloud.
3. Some machines, inventory, and things operate in environments with no Internet connection or
with Internet connections that are unstable. For example, ships at sea may not have Internet
connections until they are close to port, while warehouses in emerging markets may have
unreliable network connections. In situations like these, an edge computer can be used to process
the signals locally; these signals are then forwarded to the cloud when a connection is available.
SCM technical architectures will increasingly be a mix of edge and cloud computing. For example, in
Figure 4, the area labeled “Edge Computing” will be local to where the devices are located, and the rest of
the diagram will be run in the cloud.
9. Domain-specific “apps”: While a certain set of capabilities can be abstracted into a domain-
independent infrastructure there is still the need for unique use cases in different domains such as
manufacturing, transportation, and warehousing. Often, though, companies encounter new use
cases that cannot be handled by existing software. Rather than engage in costly and time-
consuming configuration or reprogramming, they increasingly are taking a cue from the
consumer world, where an entire “app economy” has been built on common smartphone
 infrastructures. This type of thinking has started to find its way into enterprise software, so that
leading end user companies as well as packaged-software companies are currently migrating their
infrastructures to this type of structure.
For example, many companies want to “own” the data associated with their customers because the
decisions they make based on that data are increasingly the battleground of competitive differentiation.
These companies are creating environments where internal staff and external software providers can
develop “value-add” apps that are useful in mining and making decisions against customer data. An
example is an inventory-replenishment app that looks at customer data for a given category and augments
inventory-deployment decisions with an algorithm that provides new insights based on a unique
combination of weather, local events, holidays, and chatter in social media.
10. Business strategy orchestration: One of the persistent challenges in supply chain management
is how to achieve continual synchronization between function-based operational areas and the
overall business goals of the enterprise. This includes synchronization both within and across
functional areas. For example, at the enterprise level, the goal could be high growth and low
margin, low growth and high margin, or all points in between. Furthermore, these goals may
differ by business unit, product line, and even by product and customer. These goals must be
translated into operational policies, which then must be configured into SCM software.
As time goes on, SCM software will increasingly have an orchestration layer that creates and maintains
alignment of the policies that govern each functional area. This will happen through two key constructs:
the strategy dashboard, which maintains business goals and translates them to operational policies; and
the control tower, which provides cross-functional visibility for the entire supply chain as well as control
mechanisms to steer supply chain decisions. Over the past five years, control towers have captured the
imagination of SCM professionals and C-level executives, with many companies attempting to create
control room-type environments, even in boardrooms.

Information and Communication Technology in Logistics Management

Information Technology, or IT, is the study, design, creation, utilization, support, and management of
computer-based information systems, especially software applications and computer hardware.
IT is not limited solely to computers though. With technologies quickly developing in the fields of cell
phones, PDAs and other handheld devices, the field of IT is quickly moving from compartmentalized
computer-focused areas to other forms of mobile technology.
Supply chain management (SCM) is concerned with the flow of products and information between supply
chain members’ organizations. Recent development in technologies enables the organization to avail
information easily in their premises. These technologies are helpful to coordinates the activities to
manage the supply chain. The cost of information is decreased due to the increasing rate of technologies.
In an integrated supply chain where materials and information flow in a bi-directional, Manager needs to
understand that information technology is more than just computers.
At the earliest stage of Supply Chain (the late80s) the information flow between functional areas within
an organization and between supply chain member organizations were paper based. The paper based
transaction and communication was slow. During this period, information was often over looked as a
critical competitive resource because its value to supply chain members was not clearly understood. An
IT infrastructure capability provides a competitive positioning of business initiatives like cycle time
reduction, implementation, implementing redesigned cross-functional processes. Several well know
organizations that are involved in supply chain relationship through information technology have ripe
huge gain through integration. Three factors have strongly impacted this change in the importance of
information. First, satisfying and pleasing customer has become something of a corporate obsession.
Serving the customer in the best, most efficient and effective manner has become critical. Second
information is a crucial factor in the managers’ abilities to reduce inventory and human resource
requirement to a competitive level and finally, information flows plays a crucial role in strategic planning.

Information and Technology: Application in Supply Chain Management

In the development and maintenance of Supply chain’s information systems both software and hardware
must be addressed. Hardware includes computer’s input/output devices and storage media. Software
includes the entire system and application programme used for processing transactions management
control, decision-making and strategic planning.
Recent development in Supply chain management software
1. Base Rate, Carrier select & match pay (version 2.0) developed by Distribution Sciences Inc.
which is useful for computing freight costs, compares transportation mode rates, analyze cost and
service effectiveness of carrier.
2. A new software programme developed by Ross systems Inc. called Supply Chain planning which
is used for demand forecasting, replenishment & manufacturing tools for accurate planning and
scheduling of activities.
3. P&G distributing company and Saber decision Technologies resulted in a software system called
Transportation Network optimization for streamlining the bidding and award process.
4. Logitility planning solution was recently introduced to provide a programme capable managing
the entire supply chain.

How IT can be applied in Supply Chain Management?

1. Electronic Commerce:- It is the term used to describe the wide range of tools and techniques
utilized to conduct business in a paperless environment. Electronic commerce therefore
includes electronic data interchange, e-mail, electronic fund transfers, electronic publishing,
image processing, electronic bulletin boards, shared databases and magnetic/optical data
capture. Companies are able to automate the process of moving documents electronically
between suppliers and customers.
2. Electronic Data Interchange:- Electronic Data Interchange (EDI) refers to computer-to-
computer exchange of business documents in a standard format. EDI describe both the
capability and practice of communicating information between two organizations electronically
instead of traditional form of mail, courier, & fax. The benefits of EDI are:
1. Quick process to information.
2. Better customer service.
3. Reduced paper work.
4. Increased productivity.
5. Improved tracing and expediting.
6. Cost efficiency.
7. Competitive advantage.
8. Improved billing.
 Though the use of EDI supply chain partners can overcome the distortions and exaggeration in
supply and demand information by improving technologies to facilitate real time sharing of actual
demand and supply information.
3. Bar coding and Scanner:- Bar code scanners are most visible in the check out counter of super
market. This code specifies name of product and its manufacturer. Other applications are
tracking the moving items such as components in PC assembly operations, automobiles in
assembly plants.
4. Data warehouse:- Data warehouse is a consolidated database maintained separately from an
organization’s production system database. Many organizations have multiple databases. A data
warehouse is organized around informational subjects rather than specific business processes.
Data held in data warehouses are time dependent, historical data may also be aggregated.
5. Enterprise Resource planning (ERP) tools:- Many companies now view ERP system (eg. Baan,
SAP, People soft, etc.) as the core of their IT infrastructure. ERP system have become enterprise
wide transaction processing tools which capture the data and reduce the manual activities and
task associated with processing financial, inventory and customer order information. ERP system
achieve a high level of integration by utilizing a single data model, developing a common
understanding of what the shared data represents and establishing a set of rules for accessing
data.
Benefits of IT application in Supply Chain Management
1. Streamlining:- Communicate and collaborate more effectively with suppliers worldwide.
2. Connecting:- Make the connection between what your customers want and what you produce.
3. Analyzing:- Analyze your supply chain and manufacturing options and choose the plan that
makes best use of your assets.
4. Synchronizing:- Synchronize the flow of your batch production by managing the capacity of
vessels, tanks, and lines-and the flow between them.
5. Communicating:- Improve your communication and collaboration with suppliers worldwide.
6. Designing:- Create the optimal supply chain network and adapt the network to keep pace with
changes in your business.
7. Transforming:- Transform processes inside the warehouse and across the supply chain to meet
demands for new efficiencies.
8. Understanding:- Get a better understanding of your warehouse labor activities and implement
the changes you need to optimize worker performance.
9. Maximizing:- Maximize warehouse profits by using advanced costing, billing, and invoicing
capabilities.
10. Optimizing:- Optimize your day-to-day fleet performance to reduce costs and improve
customer satisfaction.

Demand Forecasting in Supply Chain, Simple Moving Average, Weighted Moving

Average, Exponential Smoothening Method
Demand Forecasting facilitates critical business activities like budgeting, financial planning, sales and
marketing plans, raw material planning, production planning, risk assessment and formulating mitigation
plans. Outlined below are the impacts of Demand Forecasting on Supply Chain Management:
(i) Improved supplier relations and purchasing terms: Demand Forecasting drives the raw material
planning process which facilities the Purchasing Managers to release timely purchase plan to suppliers.
Visibility and transparency of raw material demand improve supplier relations and empowers Purchasing
Managers to negotiate favorable terms for their companies.
(ii) Better capacity utilization and allocation of resources: Based on the current inventory levels, raw
material availability and expected customer orders, production can be scheduled effectively. This leads to
improved capacity utilization and judicious allocation of manufacturing resources.
(iii) Optimization of inventory levels: A proper Demand Forecast provides vital information for driving
the desired raw material, WIP and finished goods inventory levels. This reduces the Bullwhip effect
across the Supply Chain, leading to optimization of inventory levels and reduction in stock-out or over-
stocking situations.
(iv) Improved distribution planning and logistics: Apart from small businesses, this is particularly
evident in businesses dealing with multiple SKUs and wide distribution networks. Distribution and
Logistics Managers are enabled to balance inventory across the network and negotiate favorable terms
with Transporters.
(v) Increase in customer service levels: With optimized inventory levels and improved Distribution
Planning and Logistics, customer service metrics like on-time delivery (OTD), on-time in-full (OTIF),
case-fill/fill-rate, etc. are improved due to right sizing and right positioning of inventory.
(vi) Better product lifecycle management: Medium to long range Demand Forecasts provide better
visibility of new product launches and old product discontinuations. This drives synchronized raw
material, manufacturing and inventory planning to support new product launches and most importantly,
reducing the risk of obsolescence of discontinued products.
(vii) Facilitates performance management: Management can set KPIs and targets for various functions
like Sales, Finance, Purchase, Manufacturing, Logistics, etc. based on the medium to long range plans
derived from the Demand Forecasting process. Organizational efficiency, effectiveness, and improvement
initiatives can be designed for key areas of the company.

Moving Averages Method of Sales Forecasting

In this method the sales forecasting is obtained by taking average of past sales over a desired number
of past periods (may be years, months or weeks). Extending the moving average to include more periods
may increase the smoothening effect but decreases the sensitivity of forecast.
1. Simple Moving Average
A simple moving average is formed by computing the average price of a security over a specific number
of periods. Most moving averages are based on closing prices.
The simple moving average (SMA) calculates an average of the last n prices, where n represents the
number of periods for which you want the average:
Simple moving average = (P1 + P2 + P3 + P4 + … + Pn) / n
For example, a four-period SMA with prices of 1.2640, 1.2641, 1.2642, and 1.2641 gives a moving
average of 1.2641 using the calculation [(1.2640 + 1.2641 + 1.2642 + 1.2641) / 4 = 1.2641].
2. Weighted Moving Averages
The moving averages as calculated in the preceding part are known as un-weighted because the same
weight is assigned to each of the numbers whose average is being ascertained. Some enterprises base their
forecast on a weighted moving average.
Let us assume that the number of customers who visit during two weeks interval provides a sound
basis for third week forecast and let us further assume that first week is less important than second and
consequently we assign weights of 0.4 to first week and 0.6 to second week. The weighted average for 9th
week would be
0.4 X 549 + 0.6(474) = 220 + 284 = 504
Similarly the weighted moving averages for other weeks are enlisted in the following table:
A forecast based on weighted moving averages for number of customers.

Advantages of the Moving Average Method

(i) This technique is simpler than the method of least squares.
(ii) This method is not affected by personal prejudice of the people using it.
(iii) It the period of moving average is equivalent to the period of the cycle. The cyclic variations are
eliminated.
(iv) If the trend in the data if any is linear the moving average gives a good picture of long term
movement in data.
(v) The moving average technique has the merit of flexibility i.e., if a few years are added the entire
calculations are not changed due to adoption of new conditions.
Limitations of the Moving Average Method
(i) It does not result in mathematical relations which may be used for sales forecasting.
(ii) There is a tendency to cut corners which results in the loss of data at the ends
(iii) A great deal of care is needed for the selection of the period of moving average since the wrong
periods selected would not give the correct picture of the trend.
(iv) In case of the sharp turns in the original graph, the moving average would reduce the curvature.
(v) It is very sensitive even to small movement in the data.

3. Exponential Smoothing and Moving Average Method

This method of sales forecasting is a modification of the moving average method or in better
words it IS an improvement over the moving average method of forecasting. This method tries to
eliminate the limitations of moving averages and removes the necessity of keeping extensive past data it
also tries to remove the irregularities in demand pattern.
This method represents a weightage average of the past observations. In this case most recent
observations is assigned the highest weightage which decreases in geometric progression as we move
towards the older observations.
 Since the most recent observations which are likely to reflect more up- to-date information or
average of the series are given more weightage so it becomes one of the most accurate statistical method
of sales forecasting. This method keeps a running average of demand and adjusts it for each period in
proportion to the difference between the latest actual demand figure and the latest value of the average.
When there is no trend in the demand for a product or service, sales are forecasted for the next period, by
means of the exponential smoothing method by using the expression
Forecast for the next period = a (latest actual demand) + (1 – α) old estimate of latest actual demand
where a represents the value of a weighting factor which is referred to as a smoothing factor.
This method follows the equation
Fn= Fn -1 + α (D n-1 – F n-1)
where Fn= forecast for the next period
Fn-1 = forecast for previous period
D n-1 = demand in previous period.
If a is equal to 1. then the latest forecast would be equal to previous period actual demand In
practice, the value of a is generally chosen between 0.1 and 0.3. The application of technique is
demonstrated by using data of moving averages method of sales forecasting on page 78. In the application
of the method, we would use the value of a as 0.10.
If the actual demand for 3rd week is 487, the forecast for the 4th week will be
0.10(487) + (1.00 – 0.10)550 = 544
Similarly, if the actual demand for 4th week is 528 customers, the forecast for the 5th week will be
0.10 (528) + (1.00 – 0.10) (544) = 542
If this procedure had been applied during the entire 8 week period the results are shown in the following
table. The unadjusted forecast error is also indicated under column D = B – C. If the value of a is not
given; it can be determined by an approximate relation of a.
α = 2/ Number of periods in moving average + 1

The weight factors a is concerned, it can assume a minimum value 0 and a maximum value of 1.
The greater the value of a, the greater is the weight placed on recent data. When the value of a is 1, the
forecast will be equal to the demand experienced during the last period.
Although the value of a varies from product to product but most organization have found that a
value between 0 06 to 0.20 usually proves to be satisfactory.
 When attempting to find out what value of a should be used for a product or service the
organization/enterprise can select various values, examine the past forecasts with the use of these values
and adopt for future use the one which would have minimized forecast errors in the past.
In this way we go close of the description of exponential smoothing as it is applied when a trend
in sales/service is available. In case trend exist, a trend adjustment can be made with this technique but its
application becomes bit difficult.