Subject Name: OR & Supply Chain

Subject Code: ME-703(A)

Semester: 7th
 UNIT-2
SUPPLY CHAIN MANAGEMENT
Introduction to supply chain concepts
Firms can no longer effectively compete in isolation of their suppliers and other entities in the supply
chain. Interest in the concept of supply chain management has steadily increased since the 1980s
when companies saw the benefits of collaborative relationships within and beyond their own
organization. A number of definitions have been proposed concerning the concept of "the supply
chain" and its management. This paper defines the concept of the supply chain and discusses the
evolution of supply chain management. The term does not replace supplier partnerships, nor is it a
description of the logistics function. Industry groups are now working together to improve the integrative
processes of supply chain management and accelerate the benefits available through successful
implementation. The competitive importance of linking a firm's supply chain strategy to its overall
business strategy and some practical guidelines are offered for successful supply chain management.

Definition of supply chain

Various definitions of a supply chain have been offered in the past several years as the concept has
gained popularity. The APICS Dictionary describes the supply chain as:

 The processes from the initial raw materials to the ultimate consumption of the finished product
linking across supplier-user companies.
 The functions within and outside a company that enable the value chain to make products and
provide services to the customer (Cox et al., 1995).
Another source defines supply chain as, the network of entities through which material flows.
Those entities may include suppliers, carriers, manufacturing sites, distribution centers, retailers,
and customers (Lummus and Alber, 1997). The Supply Chain Council (1997) uses the definition:
"The supply chain - a term increasingly used by logistics professionals - encompasses every
effort involved in producing and delivering a final product, from the supplier's supplier to the
customer's customer. Four basic processes - plan, source, make, deliver - broadly define these
efforts, which include managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing and inventory tracking, order entry and order
management, distribution across all channels, and delivery to the customer."
Quinn (1997) defines the supply chain as "all of those activities associated with moving goods from the
raw- materials stage through to the end user. This includes sourcing and procurement, production
scheduling, order processing, inventory management, transportation, warehousing, and customer
service. Importantly, it also embodies the information systems so necessary to monitor all of those
activities."

In addition to defining the supply chain, several authors have further defined the concept of supply
chain management. As defined by Ellram and Cooper (1993), supply chain management is "an
integrating philosophy to manage the total flow of a distribution channel from supplier to ultimate
customer".

Monczka and Morgan (1997) state that "integrated supply chain management is about going from
the external customer and then managing all the processes that are needed to provide the customer
with value in a horizontal way". They believe that supply chains, not firms, compete and that those
who will be the strongest competitors are those that "can provide management and leadership to the
fully integrated supply chain including external customer as well as prime suppliers, their suppliers, and
their suppliers' suppliers".

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 IMPORTANCE:

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 SCM has a great impact on wider organizational strategies, mainly those associated with purchasing
and sourcing (Monczka et al. 2002), incorporating multiple organizations as chain participants. Monczka
et al. (2002) have divided the participants in three categories – the internal functions, upstream
suppliers and downstream customers. Two of the major internal functions of an organization are
order processing and production scheduling. Order processing involves extensive customer interaction
– starting from taking the order to aftermarket service while production scheduling involves actual plans
and schedules. The upstream suppliers manage the flow of the right materials, at the right time to
the right internal users. Downstream customers include the distribution channels, processes and
functions, which the product passes through in order to reach the ultimate customers. The logistics
managers are involved here in the form of managing transportation and distribution.
Monczka et al. (2002) observed that there are upward and downward flows of materials,
information and funds between the participants of the supply chain. Thus the management of
relationships among these players are imperative and offer and opportunity for competitive
advantage to the firm. Supply chain as a core competency presents the following advantages to a
company:
• Cost reduction or improvement;
• Improved material delivery;
• “horter cycle time, including product development cycle times;
• Access to product and process technology; and
• Quality improvement.

Ross (2000) identified the complexities in defining SCM, recognizing that the concept involves a matrix
of applications and can be defined in various ways. He viewed SCM as a comprehensive, dynamic,
growth- oriented, competitive management approach that is nurtured by globalization, change and
uncertainty. He also stated that SCM is based on the following three dynamics:

• Operations management techniques where all the organizations’ functions – marketing, manufacturing
and finance – are optimally utilized and integrated to form the common business system. These
techniques offer competitive advantage by adding value to the day-to-day performance of regular
activities. The three sets of activities are inbound logistics, processing activities and support
activities.
• Integrated logistics management, which is extended to the inter channel logistics activities. The
objective at this level is to interface closely with, not merge, the identical functions performed by
logistics counterparts in outside supply channel partners. The main rationale of this dynamic process is
that an organization needs support from its internal as well as external supply chain partners to gain
competitive advantage and market leadership.

• “trategic dynamics that concentrate on reducing delivery times and costs, and adopting new
management techniques and management information system to achieve breakthroughs in products
and services that satisfy the ever-changing customer needs. This focus opens up a new dimension for
the organization and give sit a competitive edge through forming alliances with channel system partners
and offering relationship- based marketing to suppliers and customers.

Ross (2000, p. 9) summed up the above analysis with the following definition of SCM:
Supply chain management is a continuously evolving management philosophy that seeks to unify
the collective productive competencies and recourses of the business functions found both within the
enterprise and outside the firm’s allied business partners located along intersecting supply channels
into a highly competitive, customer-enriching supply system focused on developing innovative
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 solutions and synchronizing the flow of the marketplace products, services, and information to
create unique,

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 individualized sources of customer value. Some practitioners have underlined the importance of
customer as partners all along the chain, including Fredendall and Hill (2001) and Burt et al. (2003).
Fredendall and Hill (2001) examined the importance of including customers as participants in the supply
chain because of the advantages mentioned below:

• Integration of customers in the chain improves the flow of information so as to understand better
the needs of the customers. If the customers are not included, the purchaser (the focal firm
offering the goods or services) is uncertain about the customers’ needs and ends up complicating the
overall plan, with increased costs and lead times.

 It allows the firm to incorporate the product development function along with other
organizational functions, so that the communication, internal and external, between product
development staff and customers is strengthened. Concentrating on the internal customers makes all
employees aware of the chain and encourages their participation to accomplish the end goal of
satisfying the customers.

Ross (1998) also highlighted the importance of customers and argued that SCM strategies should
be completely customer driven. SCM plays a dual role of a communicator of customer demand from
point-of- sale all the way back to the supplier, and physical flow process that ensures the timely
and cost-effective flow of goods through the entire pipeline. This is crucial for the efficient
application of SCM because customers nowadays are increasingly accustomed to receiving
customized products, as the market responds to demand-pull product strategies rather than
traditional demand-push strategies.
Ross (1998) argued that SCM is a dynamic and open-ended approach to marketplace competitiveness
and a continuous process of determining intra-company and intercompany performance, information
system techniques, products and services, and organizational and personal competencies to utilize the
customer demands. The utilization of such internal and external participants ensures that the chain
achieves productivity, profit and growth. This again is related to the two-way flows of product,
service, funds and information, from raw material to end-user.
Burt et al. (2003) defined SCM as simply the linkage between the ultimate customers and Mother Earth.
They also highlighted the involvement of funds, which come in only when end users purchase a
product or a service. Otherwise transactions within the supply chain are the simple allocation of those
funds among the chain’s external and internal members. The Internet can be a valuable factor in
coordinating and synchronizing the activities of the members of a supply chain.
Based on this, Burt et al. (2003, p. 9) have defined SCM as a chain that includes all internal
functions plus external suppliers involved in the identification and fulfillment of needs for materials,
equipment, and services in an optimized fashion. The supply system plays a key role in helping
the firm satisfy its role in the supply chain.

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 Figure: The Supply Chain
LOGISTICS
According to the Council of Logistics Management (CLM) “Logistics is the process of planning,
implementing
and controlling the efficient and effective flow of goods, services and related information from point of
origin to point of consumption in order to meet customer requirements”.

OPERATING OBJECTIVES OF LOGISTICS

1. Rapid Response: Rapid response is concerned with a firm’s ability to satisfy customer’s requirement in
a timely manner. Instead of stocking the goods and supplying on demand, orders are executed on
shipment- to-shipment basis. Here IT helps to postpone the logistical operations to the latest
possible time and then execute rapid delivery as when needed by customer.
2. Minimum Variance: Variance is any unexpected event that disrupts system. Logistical operations
are disrupted by events like delays in order receipt, disruption in manufacturing, goods damaged at
customer’s location and delivery to an incorrect location etc. Traditional solution to deal with
variance was to keep safety stock or use high cost transportation. Such practices were expensive and
risky and thus have been replaced by information technology to achieve positive logistics control.
3. Minimum Inventory: The objective of minimum inventory involves asset commitment and
inventory turnover. Asset commitment is the financial value of inventory developed throughout the
logical system and inventory turnover is the rate of inventory usage over time. The objective is to
reduce the inventory without sacrificing customer satisfaction.
4. Movement Consolidation: One of the most significant logistical costs is transportation. Transportation
cost depends on type of product, size of shipment and distance. Movement consolidation means
grouping small shipments together in order to reduce transportation cost.

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 5. Quality Improvement: Logistics is a prime part of developing and maintaining continuous TQM
improvement. If the quality of product fails, logistics will have to ship the product out of customer’s
premises and repeat the logistical function again. This adds to cost and customer dissatisfaction.
6. Life-Cycle Support: Life cycle support is also called cradle-to-cradle logistical support. It means going
beyond reverse logistics and recycling to include the possibility of after sale services, product recalls
and product disposal. This means that firms must consider how to make a product and its package
(cradle) and the how to remake and reuse them (to cradle). E.g. Cold drink industries use their
glass bottle again and again whereas the cans are reused in making of paper dishes.

TYPES OF LOGISTICS

REVERSE LOGISTICS: Reverse logistics is also known as Product Recall. It may be defined as a
process of moving goods from their place of use, back to their place of manufacture for re-processing,
refilling, repair, and recycling or waste disposal.

Reasons for Reverse Logistics

1. Rigid quality standards- it is critical in case of contaminated products, which can cause
environmental hazard.
2. Rigid laws prohibiting unscientific disposal of items
3. Rigid laws making recycling mandatory
4. Transit damage – e.g. leaking containers containing hazardous material.
5. Product expiration.
6. Erroneous order processing by supplier
7. Exchange of new product for the old ones.
8. Return for repair or refill.

DRIVERS IN REVERSE LOGISTICS

The success of reverse logistics depends upon the efficiency of following subsystems:

1. Product Location: For product recall it is necessary to identify the product location in the physical
distribution system of the firm. It is difficult in case of consumer goods but easier in case of
industrial goods.
2. Product Collection System: After the product location is identified, product collection is to be done
through
company’s field force or third party.
3. Recycling / Disposal Centers: This may be company’s plant, warehouse or any other location. Called back
products must be inspected before recycling or disposal etc.
4. Documentation System: Proper documents should be maintained at each level, this would help in
tracing the product location.

INBOUND LOGISTICS

Inbound side of logistics includes procurement or purchasing and the related materials
management activities.
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 It is important to note that the inbound and outbound logistics systems share common activities or
process, since both involve decisions related to transportation, warehousing, materials handling,
inventory management and control, and packaging, as well as some other activities.
 All the activities related to the material movement till the dispatch of the products out of the factory
gate are called as inbound logistics activities.
 Creation of value in the products depends upon availability of inputs on time. Making available these
inputs on time at minimum cost is the essence of Inbound Logistics.
 Activities of a procurement performance cycle come under the scope of Inbound Logistics. They
are transportation during procurement operation, storage, handling and overall management of
inventory of inputs.

INBOUND LOGISTICS ALONG THE SUPPLY CHAIN

The differences that exist among the inbound systems of different companies have important
implications for the design and management of logistics supply chains. A supply chain is made up of a
series of individual companies.

MINING FIRM
The start of a supply chain could very well be a mining operation involving the extraction of coal or
some ore commodity. In this case, the inbound logistics system is essentially a part of the
extractive or production process. Therefore, inbound logistics would be very difficult to separate
out for analysis from the mining operation except to the extent that the extractive company purchases
supplies for use in the mining process that must be stored and transported prior to the extractive
process. Extractive companies would be most concerned about their outbound system, which
would be involved in delivering appropriate quantities of their commodity at the right time and
place to the next firm in the supply chain. The inbound system of the extractive company would
probably not receive as much separate attention as would the inbound system at the next firm in the
supply chain.

STEEL FIRM
As we move along this hypothetical supply chain, the next company could be a steel manufacturer. The
coal would be an important raw material for this firm, and it would probably transform the coal to
coking coal in its coke plant. However, it could also buy coking coal from an intermediary company
that buys coal and specializes in producing coking coal. (Obviously, if the latter were true, we would
have another company in our supply chain.) In addition to the coking coal, the steel company would
utilize several raw materials from a variety of vendor sources to produce the steel. These materials
would have to be procured in appropriate quantities, transported, stored, and their arrivals
coordinated via the production planning process in advance of the manufacturing process for
producing the steel. Therefore, the steel company would be very much aware of its inbound logistics
system and the need to coordinate inbound logistics activities.

CONTRAST BETWEEN THE INBOUND AND OUTBOUND SYSTEMS

On the inbound side, the nature of the raw materials, coking coal, iron ore, and so on, are such
that they can be shipped in bulk in railcars and barges and stored outside in piles. On the other
hand, the finished steel would need more sophisticated transportation, warehouse, inventory control,

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 materials handling, and so on.

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 Therefore, the inbound and outbound logistics systems could have some unique network
design requirements.

CONTAINER FIRM
Once the steel is produced, it would be ready to move along the supply chain to the next firm,
which could be another manufacturer such as an auto or a container manufacturer. Assuming that the
supply chain we are concerned about will ultimately result in food products in a store, the next point
would be the container company that produces cans of various sizes for the food processors. It is
important to note that the steel company would usually be a part of several supply chains. That is, the
steel company may also be selling to auto manufacturers, office supply producers, and other types
of manufacturers.

FOOD FIRM
The next step in our supply chain would be the food manufacturing plant, where processed food
would be added to the cans of various sizes. Food processing companies frequently add labels later,
since the different company labels. By storing the cans and adding the labels when orders are received,
the level of inventory can be reduced because of the reduction of uncertainty. That is, it is much
easier to forecast the total demand for a certain size of canned peas than it is to forecast the
demand for each company’s labeled cans of peas, since individual market shares change.

RETAIL STORE
Once an order for the peas has been received from a retailer, the labels can be added and the peas
shipped to the retailer’s warehouse or store. When the peas finally end up in the store for sale, we have
reached the last point in our supply chain, although you could argue that the cycle is not complete
until the can of peas end up in a consumer’s home. In fact, in today’s environment, that may be recycled
after the peas are consumed and the materials may start back through part of the supply chain
again – a reverse logistics system.

OUTBOUND LOGISTICS
 All the activities in which the value added goods are to be made available in the market for
customers are called as outbound logistics activities.
 Success of the firm depends upon the supply of products to the customer on time. Supplying the
products of firm at marketplace at minimum cost is the essence of Outbound Logistics.
 Activities of distribution performance cycle come under the scope of Outbound Logistics. They are
order management, transportation, warehousing, packaging, handling etc.

THIRD-PARTY LOGISTICS (3PL)

In order to keep the costs of inbound and outbound logistics activities under control, an outside
agency
appointed to perform these logistics functions is called “Third Party Logistics”.

Forth-Party Logistics (4PL)

Forth Party Logistics is a complete outsourcing of manufacturing and logistics functions including
selection of Third Party service provider.

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 Need for 4PL:
1. Ever-increasing customer requirements.
2. Competitive and complex market scenario.
3. Rising globalization, liberalization and privatization.
4. Rising accessibility of supply chain technology.
5. Inclination of companies to enter into higher margin business.

Services provided by 4PL

1. Procurement and storage of materials.
2. Manufacturing of products.
3. Selection of 3PL companies
4. Transportation and warehousing management.
5. Collection of payment and cash flow management.
6. Risk management and insurance.
7. Sharing of information, IT solution.

FORCES DRIVING GLOBALIZATION OF LOGISTICS

1. Economic Growth: After WWII there was a growth in industrial sector of developed countries and
their manufacturing and logistics productivity increased. This forces the firm to expand their
marketing into developing nations. Such expansion requires the integration of global manufacturing
with marketing through logistics.
2. Supply Chain Perspective: Firms traditionally sought logistical control as many essential activities as
possible internally, which resulted in private warehouses and transportation. Such privatization
increased the capital and assets to support logistics operations resulting in decline of Return on
Investment and hence the concept of outsourcing and supply chain emerged during 1980s.
3. Regionalization: Traditionally trade and transportation across the political borders of countries requires
political formalities, which adds to the logistics cost without any value addition to the consumer.
Regionalization in the form of trade associations such as EU, NAFTA and SAARC etc. removed such
barriers and facilitates global logistics.
4. Technology: Mass communication and information technology exposed international consumers to
foreign products, thus stimulating convergence of global needs and preferences. This promotes global
marketing and global logistics.
5. Transportation Deregulation: Initially there have been restrictions for international transportation
ownership and operating rights e.g. foreign carriers could not operate domestically, steamship lines
could not own land based transport like motor or rail carriers etc. but such restrictions have been
removed in most of the countries.

BARRIERS TO GLOBAL LOGISTICS

1. Marketing Barriers: This includes (i) entry restrictions by placing legal or physical barriers on importing
(ii) poor information regarding market size, demographics and competition (iii) pricing fluctuation
and tariff barriers.

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 2. Competition: Different rules in different countries concerning competitive governance also serve as
global
logistics barriers.
3. Financial Barriers: This includes (i) difficulties in forecasting in the global environment (ii)
institutional infrastructure barriers result from differences in services offered by banks, insurance firms,
legal counselors etc.
4. Distribution Channels: Lack of infrastructural standardization such as differences in transportation
and material handling equipment, warehouse and port facilities, communication system etc. also serves
as global logistics barriers.

MATERIAL, INFORMATION AND MONEY FLOWS

The part of the supply chain that is close to the customer is called downstream supply chain.
Downstream supply chain includes retailers and stores. The other part that is close to the suppliers is
called the upstream supply chain. Downstream and upstream are relative terms; A DC is downstream
with respect to a plant but it is upstream with respect to a retailer. Materials in a SC, like water, often
flow from upstream to downstream. “ince the material flow is visible, most of us are already familiar with
the concept of interaction among facilities via material flow.
What many people are not familiar with is the information flow in “Cs. Efficient SCM requires access to
accurate information, for information is the input for all managerial decisions. Our concept of information
is very broad to the extent that it includes indicators (e.g. on-off machines and stock out situation),
quantities (e.g. inventory levels, production capacities and all cost figures), it includes expectation about
the future events such as demand forecasts, and it also includes mechanisms governing future
events such as commitments to suppliers, sales contracts and promotions. The information flow
both from upstream to downstream and vice versa. For example, consider Texas Instruments (supplier),
Nokia (Manufacturer) and Wal-Mart (retailer) supply chain, and
• Upstream to downstream information flow: Nokia informs Wal-Mart about the wholesale price of a
cell phone.
• Downstream to upstream information flow: Nokia informs Texas Instruments about its telecommunication
chip purchase plans.
Finally, there also is the money flow in “Cs. “ince typically downstream partner buys materials from the
upstream partner, the money flow is the reverse of the material flow. In “Cs, money flow is usually from
downstream to upstream.
Clearly the amount of information needed to run “Cs is ”enormous”. By enormous we do not mean to say
that it is impossible to store or retrieve the information. Rather we want to emphasize that the
information is so enormous that we do not know how to utilize it efficiently. For example, a
warehouse manager does not need to know that a particular machine at a given plant is off at a
particular time because that information does not impact his decisions. Thus it may be helpful to
check if a given piece of information is relevant, i.e. whether it makes a substantial impact on a
particular decision. It is conceivable that information about broken down machines would be kept
local at plants and warehouses would not be bothered with it. We will revisit the issue of the
relevance of the information, but for now it is sufficient to realize that information flow among the
physical entities of SCs is a very important issue in SCM.

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 Figure: Flow of material, money and information in Supply
Chain

BENEFITS OF SUPPLY CHAIN MANAGEMENT

1. Inventory reduction
2. Personnel reduction
3. Productivity improvement
4. Order management improvement
5. Financial-close cycle improvements
6. IT cost reduction
7. Procurement cost reduction
8. Cash management improvements
9. Transportation logistics cost reduction
10. Maintenance reduction
11. On-time delivery improvement

BULLWHIP EFFECT

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 The concept of the bullwhip effect was first mentioned by Procter & Gamble to explain increasing
order behavior of Pamper diapers between customer and supplier (Lee et al., 1997). Although
customer demand is almost stable, Procter & Gamble realized that there is a significant variance at
wholesale orders. They also realized that the variance of orders placed to the raw material suppliers is
greater than the variance of orders placed to wholesalers. There are also other firms that realized the
“bullwhip effect” with respect to their companies’ order fluctuations such as Hewlett-Packard, 3M, Eli-
Lilly, DRAM market. The bullwhip effect causes inefficiency and this returns as costs to firms.
The “bullwhip effect” phenomenon is also known in different names such as “whiplash effect”, “whipsaw
effect” and “acceleration principle”.

What happens when a supply chain is plagued with a bullwhip effect that distorts its demand
information as it is transmitted up the chain? In the past, without being able to see the sales of its
products at the distribution channel stage, HP had to rely on the sales orders from the resellers to
make product forecasts, plan capacity, control inventory, and schedule production. Big variations in
demand were a major problem for HP's management. The common symptoms of such variations could
be excessive inventory, poor product forecasts, insufficient or excessive capacities, poor customer
service due to unavailable products or long backlogs, uncertain production planning (i.e., excessive
revisions), and high costs for corrections, such as for expedited shipments and overtime. HP's product
division was a victim of order swings that were exaggerated by the resellers relative to their sales; it,
in turn, created additional exaggerations of order swings to suppliers.

Figure: Bullwhip Effect

THE BULLWHIP EFFECT AND THE BEER GAME

First studies on the bullwhip effect belong to Jay Forrester. He developed a computer simulation model
using the DYNAMO simulator that represents traditional supply chain. The supply chain consists of
three echelons, namely factory, distributor and retailer. He demonstrated the amplification of
demand in his model but did

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 not call the phenomenon as “bullwhip effect”. Forrester believed that irrational decision making is the
main cause of the bullwhip effect which he proved through his model. He also showed that time
delays, random fluctuation of demand and limited capacity can lead to the bullwhip effect.

EMERGENCE OF THE BEER GAME

Beer Distribution Game is one of the exercises that illustrate the dynamics of a supply chain (Jacobs,
2000). The game was developed at the Massachusetts Institute of Technology’s “loan “chool of
Management by System Dynamics Group (Sterman, 1989). The Beer Distribution Game consists of four
echelons which are customer, retailer, distributor and factory. Each echelon is managed by a single
player and communication between echelons is not allowed. In the game, the customer requests beer
from the retailer and, in turn, the retailer orders to the distributor. Similarly, the distributor gives
orders to the factory and then the beer is produced. Only the retailer knows the actual customer
demand and the other players base their decisions according to the ordering patterns of their
immediate downstream echelon. The time that is required for ordering, process and delivering the
beer are represented by ordering and shipping delays. The main objective of the game is minimizing
total cost, which is the combination of inventory holding and backlogging costs. Sterman (1989)
inferred three consequences from the game:

 Large oscillations appear in orders and inventories.

 Demand amplification increases as one goes to upstream.
 Order rate tends to peak from retailer to factory.

The following figures show the results of a beer game played by a diverse population of industrial
engineering and management science undergraduate students in Istanbul, Turkey. The figures I and II
in appendix part display the ordering patterns of 2 teams representing the supply chain of Brand 1
and Brand 2. Having observed outcomes of the beer game, Sterman (1989) claims that the
bullwhip effect occurs due to the irrational behavior of managers or feedback misperception.

Lee et al. (1997) identify the underlying causes of the bullwhip effect by developing a
mathematical model of serial supply chain. In contrast to Forrester (1961) and Sterman (1989), they
model the manager of each echelon as being rational and optimizing.

Lee et al. (2004) demonstrate that the bullwhip effect is a result of strategic interactions among
rational supply chain members. Lee et al. (1997) demonstrate four reasons of the bullwhip effect:

 Demand Signal Processing

 Order Batching
 Price Fluctuations
 Shortage Gaming
 We will shortly point out these four reasons because this model constitutes the backbone of the
bullwhip effect studies.

DEMAND SIGNAL PROCESSING

Most companies use forecasting to determine capacity planning, production scheduling, material
requirement and inventory control. Forecasts are often based on historical data gathered from
sales information of the company. When a downstream echelon places an order, its immediate
upstream firm considers this order as a signal about expected future product demand. Subsequently,
upstream firm adjusts its forecasts based on this signal. For instance, if a retailer places an order to
a distributor, the distributor adjusts its forecasts and places an order to wholesaler. Similar relation
occurs between the wholesaler and the factory. In this case, orders have larger variance due to the
updated forecasts. Moreover, safety stock is required as a result of forecasted demand and the longer
lead time results in the need of more safety stock. This situation causes higher order variance than the
actual demand, therefore the bullwhip effect occurs.

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 CROSSDOCKING AND DISTRIBUTUION
Cross docking is a supply chain strategy that can accomplish significant reductions in total costs and in
lead times in a supply chain. In this strategy, cross dock facilities act as transfer points where
inbound product flow is synchronized with outbound product flow to essentially eliminate storage
of inventory. Two other strategies applied in distribution of products are the following:

 Traditional distribution with warehouses, where warehouses serve as intermediate stage inventory points

 Direct shipment, also named “warehouse bypass”, where products are shipped directly from suppliers to
demand points, bypassing the warehouse/cross dock facility.

In today’s business and logistics environment, which often requires frequent deliveries and small orders,
cross docking can serve as one of the logistics concepts that contribute to the achievement of
timeliness and economical supply. Cross docking is defined as a logistic concept used to
consolidate shipments from inbound trailers to outbound trailers in the warehouse/distribution
facilities, known as cross docks. Inbound trailer (transportation vehicles) typically arrives from a
different origin points, carrying shipments for different destinations. The shipments are then
unloaded, sorted, consolidated and reloaded into outbound trailers (transportation vehicles). It is
common that all shipments handling is completed with minimal retention and no holding of stock in
the cross dock.
Cross docking can contribute to achieving significant benefits. Instead of shipping small orders, that do
not occupy the entire cargo area, directly on the trailers (Less-Than-Truckload, i.e. LTL), cross
docking consolidates small orders into one big shipment, in order to fulfill the entire cargo area (Truck-
Load, i.e. TL). Thus, with the help of a cross docking, more frequent and more economical
deliveries could be made, because, with every other delivery, orders meet the entire cargo area in
trailers. With these just-in-time deliveries, inbound shipments are transferred directly to outbound
shipments with little, if any, warehousing.

WHAT TYPES OF CROSSDOCKING ARE AVAILABLE?

Napolitano classifies cross-docking systems to the following three types:
1. Pre-allocated supplier consolidation.
2. Pre-allocated cross-docking operator (CDO) consolidation.
3. Post-allocated CDO consolidation.
When the product is pre-allocated, its destination is determined at the supplier; when the product
is post- allocated, its destination is determined at the cross-dock facility. When supplier consolidation
takes place, the supplier builds the final (possibly multi-SKU) pallets that will be shipped to the final
destinations. When CDO consolidation takes place, the final pallets are built by the CDO at the
cross-dock facility.

PREREQUISITES OF CROSSDOCKING
The prerequisites of cross-docking can be listed as follows:

Partnership requirement: Cross-docking requires total commitment and continuous monitoring at all
times by all the parties involved in the cross-docking initiative.

Effective communication between parties: For cross-docking to operate smoothly information flow
has to take place smoothly. This almost always requires investment into information systems
technology, and into people that will keep the information systems technology and complex operations
working. For example, “Wal-Mart operates a private satellite communication system that sends point-of-
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 sale (POS) data directly to Wal-Mart’s 4,000 vendors”.

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 Complexity in managing operations: The absence of inventories makes it crucial to have a
perfect coordination of material flows. Many interrelated decisions at the supply chain and facility
level have to be made under numerous resource and time constraints. This is where mathematical
models can be of great use.

Sharing the costs and benefits of cross-docking: Cross-docking may result in savings for some parties
and costs or risks for others involved in the supply chain. For example, in a successful cross-
docking implementation, the CDO benefits from decreased inventories, labor, and storage space
requirements. However, the suppliers involved may have to make significant investment into technology
and the retailers may end up with higher inventory levels due to increase lead times. There should
be a complete prior agreement between all the parties on how the costs, savings, and risks resulting
from cross-docking will be shared. Another example is the following: The CDO would prefer that the
outbound trucks can wait for longtime periods such that flexibility is achieved in scheduling the
unloading of incoming trucks and the loading of the outbound trucks. However if the trucks are
operated by a trucking company, that company would not accept to absorb the cost related with
the waiting time of its trucks. Some incentive payment has to be made by the CDO to the trucking
company in this case.

VENDOR RATING
Vendor rating is a process of assessment of the performance provided and of the compliance
with the legislation and contractual terms and conditions by a supplier on the basis of defined fair
evaluation criteria and the evaluation method.
Vendor evaluation is a system for recording and ranking the performance of a supplier in terms of
a variety of issues, which may include delivery performance and the quality of the items. A
process of vendor rating is essential to effective purchasing. Vendor selection is crucial because of its
strategic importance especially when it comes to Government Supplies where money & quantities
involved are generally very large. Usually, the most important measure of a supplier's service is his
record of past performance. Vendor rating is the result of a formal vendor evaluation system.
Vendors or suppliers are given standing, status, or title according to their attainment of some level
of performance, such as delivery, lead time, quality, price, or some combination of variables. The
ratings shall be used to:
 Assess and monitor supplier performance with a view to rewarding suppliers who meet expectations
with on-going and future supply relationships.
 Provide accurate feedback to suppliers to highlight their strengths as well as their weaknesses (through
the eyes of the customer) which can be used as an effective continuous improvement tool.
 Provide benchmark data, which will allow suppliers to establish where they are placed in relation to the
best performers in their industry and hence improve overall competitiveness in the market. Helping
minimize subjectivity in judgment and make it possible to consider all relevant criteria in assessing
suppliers.
 Providing feedback from all areas in one package and hence specific action could be taken to
correct identified performance weaknesses.
 Establishing continuous review standards for vendors, thus ensuring continuous improvement of vendor
performance.
 To select vendors for further development.

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