LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Lecture Notes-1: Introduction of Logistics

Logistics management is the process of strategically managing the (a) procurement,
(b) movement and (c) storage of materials, parts and finished inventory, and the related
information flows through the organization and its marketing channels in such a way that
the current and future profitability are maximized through the cost effective fulfilment of
orders.

Logistics Concept:
Objectives: The objective of logistics is to link the market place, the distribution network,
the manufacturing process and procurement activity, so as to provide higher levels of
service to the consumers yet at a lower cost.

Materials Flow

Physical Manufacturing Supplier

Customer Procurement
Distribution Support s
s

Information Flow

Figure 1.1 Integrated Logistics Concept

Logistical competency is achieved by coordinating the following functional areas:

 Order Processing
 Inventory Management
 Warehousing

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  Transportation
 Material Handling & Storage
 Logistical Packaging and
 Information
The operational objectives are the primary determinants of logistical performance. These
include:
 Rapid response
 Minimum variance
 Minimum inventory
 Movement consolidation
 Quality
 Life cycle support

Scope: From the total systems viewpoint, scope of logistics management encompasses
management of raw materials and other inputs through the delivery of the final product.

Supply Chain:
The objective of every supply chain should be to maximize the overall value generated. The
value (also known as supply chain surplus) a supply chain generates is the difference
between what the value of the final product is to the customer and the costs the supply
chain incurs in filling the customer’s request.

Supply Chain Surplus = Customer Value – Supply Chain Cost

Value Chain of a Company:

 The value chain begins with new product development, which creates specifications
for the product.
 Using new product specifications, operations transforms inputs to outputs to create
the product.

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  Marketing and sales generate demand by publicizing the customer priorities that the
products and services will satisfy. Marketing also brings customer input back to new
product development.
 Distribution either takes the product to the customer or brings the customer to the
product.
 Service responds to customer requests during or after the sale. These are core
processes or functions that must be performed for a successful sale.
 Finance, accounting, information technology, and human resources support and
facilitate the functioning of the value chain.

Customer Value Delivery Chain:

The primary activities represent the functional areas like arranging inputs for transforming
then into output, and managing distribution, marketing, sales and services.
The support activities facilitate integration of all the functions across the entire organization.

Value Chain Activities

Primary Activities: Secondary Activities:

 Inbound Logistics  Infrastructure
 Operations  Human Resource
 Outbound Logistics Management
 Marketing & Sales  Technology Development
 Service  Procurement

Figure 1.2 Value Chain Activities (Michael Porter’s)

Logistics deliver value to the customer through three logistical phases:

 Inbound Logistics: Operations preceding manufacturing. This includes movement of
raw materials and components for processing from suppliers

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  Process Logistics: Operations directly related to processing. This includes storage and
movement of raw materials and components within the manufacturing premises as
per manufacturing schedules.
 Outbound Logistics: Operations following the production process. This includes the
warehousing, transportation and inventory management of finished products.

Competitive Advantage:
Competitive advantage can be explained as the ability of an organization to differentiate
itself in the eyes of customer, from its competition, and to operate at a lower cost and
hence greater profit.

Figure 1.3 Competitive Advantage (the ‘Three Cs’)

A central theme of this is that effective logistics and supply chain management can provide a
major source of competitive advantage – in other words a position of enduring superiority

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over competitors in terms of customer preference may be achieved through better
management of logistics and the supply chain.

The foundations for success in the marketplace are numerous, but a simple model is based
around the triangular linkage of the company, its customers and its competitors – the ‘Three
Cs’.

Competitive advantage helps organizations to achieve commercial successes which mainly

depends upon two factors:
 Productivity advantage
 Value advantage
Productivity advantage is in terms of lower cost profile, while value advantage is in terms of
a product offering a differential ‘plus’ over competitive offerings.

Productivity advantage is characterized by low cost of production due to greater sales

volume, economies of scale enabling fixed costs to be spread over a greater volume, and the
impact of the ‘experience curve’.

Value advantage is based on the marketing concept the ‘customers don’t buy products, they
buy benefits’. But benefits may be intangible, i.e. they may relate not to specific product
features but to things like image or reputation. Hence, alternatively, offerings must be
perceived to outperform its rivals in some functional aspects.

Productivity & Value Advantage Matrix:

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 Service Leader Cost and Service
Leader
Value Advantage: (3) (4)
Customized services
Reliability
Responsiveness Commodity Cost Leader
Market
(1) (2)

Productivity Advantage:
Capacity utilization
Asset utilization
Inventory reduction
Integration with suppliers
Figure 1.4 Productivity and Value Advantage Matrix

Commodity Market: For companies in quadrant (1), the market is an uncomfortable place as
their products cannot be differentiated from their competitors’ offerings and they do not
have any cost advantage. These are commodity markets.
Cost Leader: Companies in quadrant (2), adopt cost leadership strategies. Traditionally,
these are based on economies of scale gained through volume. Also, a significant route to
achieving cost advantage is through logistics management. In many industries logistics
constitutes a major proportion of total costs, hence by reengineering logistics processes
substantial cost reduction can be achieved.
Service Leader: For companies in quadrant (3), seek differentiation through service
excellence since markets are becoming more and more service sensitive. Customers expect
greater responsiveness and reliability from suppliers, reduced lead times, just-in-time
delivery, and value-added services. Service strategies can be developed through enhanced
logistics management.

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Cost and Service Leader: Companies in quadrant (4), are distinctive in the value they deliver
and are not cost competitive. Thus, competitors find it extremely hard to attack these
companies which try to excel in the value chain activities.

Achieving Value Differentiation:

Adding value through differentiation is extremely powerful means of achieving competitive
advantage in the market. Another method of adding value is service. Service relates to the
process of developing relationship with the customers through provision of an augmented
offer. Augmentation takes many forms such as delivery services, after-sales services,
financial packages, technical support and so forth.

Achievement of value differentiation strategy is based upon added value which in turn
requires segmented approach to the market. This is because segmentation helps in
identifying opportunities for creating differentiated appeals for specific segments.

Customer Service Phases:

Table 1.1 Customer Service Phases

Pre-transaction Phases Transaction Phases Post-transaction Phases

Customer service Order cycle time Availability of spares

policy Inventory availability Call-out time
Accessibility Order fill rate Product tracing/warranty
Organization structure Order status Customer complaints,
System flexibility information claims and returns

Pre-transaction elements:
 Written customer service policy
(Is it communicated internally and externally? Is it understood? Is it specific and
quantified where possible?)

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  Accessibility
(Are we easy to contact/do business with? Is there a single point of contact?)
 Organisation structure
(Is there a customer service management structure in place? What level of control do they
have over their service process?)
 System flexibility
(Can we adapt our service delivery systems to meet particular customer needs?)

Transaction elements:
 Order cycle time
(What is the elapsed time from order to delivery? What is the reliability/variation?)
 Inventory availability
(What percentage of demand for each item can be met from stock?)
 Order fill rate
(What proportion of orders are completely filled within the stated lead time?)
 Order status information
(How long does it take us to respond to a query with the required information? Do
we inform the customer of problems or do they contact us?)

Post-transaction elements:
 Availability of spares
(What are the in-stock levels of service parts?)
 Call-out time
(How long does it take for the engineer to arrive and what is the ‘first call fix rate’?)
 Product tracing/warranty
(Can we identify the location of individual products once purchased? Can we
maintain/extend the warranty to customers’ expected levels?)
 Customer complaints, claims, etc.

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(How promptly do we deal with complaints and returns? Do we measure customer
satisfaction with our response?)

Value added Logistical Services:

 Customised transportation
 Payment collection on delivery
 Price marking and labelling
 Product mixing and packaging (for co-promotional schemes of two products from
two different companies)
 Cross-docking (product storage for not more than 48 hours in the warehouse)
 Inventory management
 Web based consignment tracking and tracing
 Frequent deliveries in small lots
 Reverse logistics
 Load cobbling

Exercise Questions:

1) ‘Logistics is the key to the success of the supply chain of a business firm’- Explain with the
various key functions of logistics management for a supply chain of imported furniture
items to support this statement.

2) What are the operating objectives of the integrated logistics? Discuss in detail the
integrated logistic concept for automobile industries with schematic diagram.

3) ‘Value added service is an innovative approach adopted for gaining a competitive edge in
supply chain’; (a) Cite a few examples to support this statement, and (b) how value
advantage and productivity can be achieved through logistics service for a successful
business?

4) Value advantage is based on the marketing concept that ‘customers don’t buy products;
they buy benefits’; how value advantage and productivity can be achieved through
logistics service for a successful business?

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5)What are the functions of logistics related to Indian postal service operations? Discuss in
detail the integrated logistics concept for manufacturing industries with schematic
diagram.

Zara: Apparel Manufacturing and Retail [Supply Chain Performance]

Zara is a Spanish apparel retailer based in Arteixo in Galicia. The company specializes in fast
fashion, and products include clothing, accessories, shoes, swimwear, beauty, and
perfumes. It is the largest company in the Inditex group, the world's largest apparel retailer

Amancio Ortega opened the first Zara store in 1975 in central A Coruña, Galicia, Spain.
Ortega initially named the store Zorba after the classic film Zorba the Greek, but after
learning there was a bar with the same name two blocks away, they rearranged the letters
molded for the sign to "Zara". It is believed extra "a" came from an additional set of letters
that had been made for the company. The first store featured low-priced lookalike products
of popular, higher-end clothing fashions. Ortega opened additional stores throughout Spain.

During the 1980s, Ortega changed the design, manufacturing, and distribution process to
reduce lead times and react to new trends in a quicker way, which he called "instant
fashions". The improvements included the use of information technologies and using groups
of designers instead of individuals.

Zara set up its own factory in La Coruña (a city known for its textile industry) in 1980 and
upgraded to reverse milk-run-type production and distribution facilities in 1990. This
approach, designed by Toyota Motor Corp., was called the just-in-time (JIT) system. It
enabled the company to establish a business model that allows self-containment
throughout the stages of materials, manufacture, product completion, and distribution to
stores worldwide within just a few days.

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In 2009, Inditex reported sales of about 11 billion euros from more than 4,700 retail outlets
in about 76 countries. In an industry in which customer demand is fickle, Zara has grown
rapidly with a strategy to be highly responsive to changing trends with affordable prices.
Whereas design-to-sales cycle times in the apparel industry have traditionally averaged
more than six months, Zara has achieved cycle times of four to five weeks. This speed allows
Zara to introduce new designs every week and to change 75 percent of its merchandise
display every three to four weeks. Zara makes roughly 40,000 designs of which around
12,000 new designs are carefully selected and produced each year. Thus, Zara’s products on
display match customer preferences much more closely than the competition. The result is
that Zara sells most of its products at full price and has about half the markdowns in its
stores compared to the competition.

Most of the products Zara sells are manufactured in proximity countries like Spain, Portugal,
Turkey and Morocco. Zara manufactures its most fashionable items – half of all its
merchandise – at a dozen company-owned factories in Spain and Portugal and Turkey,
particularly in Galicia and northern Portugal and Turkey. Clothes with a longer shelf life,
such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia. This contrasts
with most apparel manufacturers, who have moved most of their manufacturing to Asia.
About 40 percent of the manufacturing capacity is owned by Inditex, with the rest
outsourced. Products with highly uncertain demand are sourced out of Europe, whereas
products that are more predictable are sourced from its Asian locations. More than 40
percent of its finished-goods purchases and most of its in-house production occur after the
sales season starts. This compares with less than 20 percent production after the start of a
sales season for a typical retailer. This responsiveness and the postponement of decisions
until after trends are known allow Zara to reduce inventories and forecast error. Zara has
also invested heavily in information technology to ensure that the latest sales data are
available to drive replenishment and production decisions.

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The company can design a new product and have finished goods in its stores in four to five
weeks; it can modify existing items in as little as two weeks. Shortening the product life
cycle means greater success in meeting consumer preferences. If a design does not sell well
within a week, it is withdrawn from shops, further orders are cancelled and a new design is
pursued. Zara monitors customers' fashion changes. Zara has a range of basic designs that
are carried over from year to year, but some fashion-forward designs can stay on the
shelves less than four weeks, which encourages Zara fans to make repeat visits. An average
high-street store in Spain expects customers to visit three times a year. That goes up to 17
times for Zara. However, the company sells primarily small- and medium-sized clothing.
Their women's jeans are available only up to a US size 10.

In 2009, Inditex distributed to stores all over the world from eight distribution centers
located in Spain. The group claimed an average delivery time of 24 hours for European
stores and up to a maximum of 48 hours for stores in America or Asia from the time the
order was received in the distribution center (DC) to the time it was delivered to the stores.
Shipments from the DCs to stores were made several times a week. This allowed store
inventory to closely match customer demand.

As a result of increasing competitive pressures from the online shopping market, Zara is
shifting its focus onto online as well, and will consequently open fewer but larger stores in
the future. On September 2010, Zara launched its online boutique. The website began in
Spain, the UK, Portugal, Italy, Germany and France. In November that same year, Zara
Online extended the service to five more countries: Austria, Ireland, the Netherlands,
Belgium and Luxembourg. Online stores began operating in the United States in 2011,
Russia and Canada in 2013, and Mexico, Romania and South Korea in [Link] in 4
October 2017.

Zara introduced the use of RFID technology in its stores in 2014. The RFID chips are located
in the security tags which are removed from clothing when it is purchased and can be

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reused. The chip allows the company to quickly take an inventory by detecting radio signals
from the RFID tags. When an item is sold, the stockroom is immediately notified so that the
item can be replaced. An item that is not on the shelf can easily be found with the RFID tag.

The following questions raise supply chain issues that are central to Zara’s strategy and
success:
 What advantage does Zara gain against the competition by having a very responsive
supply chain?
 Do you think Zara’s responsive replenishment infrastructure is better suited for
online sales or retail sales? Explain

Case Analysis: MCQ Questions:

1) All of the following are the major factors affecting fashion design competitive
strategy except:
(a) Product quality and variety
(b) Product cost
(c) Delivery time
(d) All of these

2) Zara, time-based strategies focus on reducing the time required to accomplish

certain activities, such as new product development or delivery to the customer.
(a) True
(b) False

Processes in a supply chain are divided into two categories depending on whether they
are executed in response to a customer order or in anticipation of a customer order, is
which type of supply chain view
e) Supply chain macro processes
f) Push & Pull view
g) Cycle View
3) Zara’s products with highly uncertain demand are sourced within ______, whereas
products that are more predictable are sourced from its _____ locations.
(a) Asia, European
(b) America, Asian

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 (c) Europe, Asian
(d) None of these

4) Processes in a supply chain are divided into two categories depending on whether
they are executed in response to a customer order or in anticipation of a customer
order, is which type of supply chain view
(a) Supply chain macro processes
(b) Push and Pull view
(c) Cycle View
(d) Value Chain

a) Logistic network which moves materials from suppliers to manufacturing unit is

classified as
b) e) inbound distribution
c) f) outbound distribution
d) g) forward distribution
e) h) reverse distributio
5) Companies who aim to have efficient supply chains select their suppliers based on
their speed, flexibility and quality
(a) True
(b) False

6) Zara introduced the use of RFID technology in its stores. The RFID chip allows the
company to quickly __________ by detecting radio signals from the RFID tags. When
an item is sold, the stockroom is immediately notified so that the item can be
replaced.
(a) Know the price
(b) take an inventory
(c) find fashion design
(d) understand customer needs

7) Capacity planning involves answering all of the following questions except

(a) What kind of capacity is needed?
(b) How much is needed?
(c) When is it needed?
(d) Who is going to decide?

8) Zara claimed an average delivery time of ____ hours for European stores and up to a
maximum of ____ hours for stores in America or Asia from the time the order was
received in the distribution center (DC) to the time it was delivered to the stores.
(a) 12, 24
(b) 24, 48

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 (c) 36, 72
(d) 14, 38

9) Which one of the following descriptions best defines the Zara’s cycle-service level as
a measure of customer service?
(a) The preferred proportion of annual demand instantaneously filled from stock
(b) The number of stock-outs tolerated per year
(c) The preferred proportion of days in the year when an item is in stock
(d) The desired probability of not running out of stock in any one inventory cycle

10) Zara has also invested heavily in ___________ to ensure that the latest sales data are
available to drive replenishment and production decisions.
(a) Warehouse
(b) Production facility
(c) Information Technology
(d) Manpower

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