Logistics and the Out-bound Supply Chain

John Meredith Smith

• Publisher: Routledge
• Year: 2012
• Topic: Business
• eBook ISBN:
  9781136018817
• Subtopic: Business General
• Index: Business

The control and organisation of the flow of goods in the supply chain is of vital importance to industry and commerce, including manufacturing industrial enterprises, where the timely and efficient delivery of their output at an economic cost is of great concern. This book considers the out-bound supply chain and the associated out-bound logistics ie the flow of goods from the point of production or manufacture to the point of consumption. In doing so, it has to cover a range of management topics and techniques, including measures of performance, order management and forecasting, stock management and management of the supply chain. Written in clear and jargon-free language, this book, whilst intended primarily students of engineering and manufacturing, at 3rd year undergraduate and postgraduate level, would also be of interest to logistics and operations management students. Typical examination questions are included.

1

Objectives and Measures of Performance

1.1 Introduction

When we talk of the supply chain, we refer to the network of processes, resources and enterprises that provides for the supply of goods from raw materials through processing and production to the end consumer. Logistics is concerned with the organization, co-ordination and control of the flow of goods through the supply chain. Most enterprises are concerned with managing both their inbound and out-bound supply chains. The former comprise the flow of raw materials, components and products, which they purchase to manufacture and supply products to their customers and to support their business operations. The latter is the flow of their products from source through a distribution system to their end customers (Figure 1.1). The control and organization of the flow of goods in the in-bound supply chain is the concern of in-bound logistics and includes the procurement activity; the control and organization of the flow of goods within the company is the concern of internal logistics, the control and organization of the flow of goods in the out-bound supply chain is the concern of out-bound logistics.

Figure 1.1 The supply chain

In this book, we shall be concerned primarily with the out-bound supply chain and out-bound logistics; however, for companies trading business to business (that is to say not trading directly with end consumers), their out-bound supply chain is a part of their customer’s in-bound supply chain and vice versa.

The out-bound supply chain and its associated logistics, or product distribution system, is concerned with the flow of goods from the point of production or manufacture to the point of consumption. Some products, for instance high-value capital goods such as aircraft, may go direct from the factory to the end user; others such as food and consumer disposables may pass through many hands on their way to the end consumer; furthermore, some products like water and electricity have their own distribution systems unique to the product. The principle aims of product distribution are to get the product:

• to the right place;

• at the right time;

• in the right quantity;

• at the right quality;

• at the lowest cost.

1.2 Performance of the distribution system

The performance of a distribution system is measured by the customer in different ways.

1.2.1 Total delivery time

One measure is the total delivery time measured from when the customer places an order to when the product is received. In practice, this is made up of a number of components (Figure 1.2).

1. The time it takes to transmit the order from the customer to the supplier; this may be in part a function of the selling process if contracts have to be agreed and signed, but for many products today electronic communication systems have brought this time down to the infinitesimally small.

2. The time it takes the supplier to process the order on receipt; this may involve checking customer credit worthiness, checking product availability, making delivery arrangements and, in the case of orders to be delivered to foreign countries, raising the appropriate export paperwork.

3. The time it takes to identify the items to be despatched in the supplier’s stores, collect them together and pack and label them ready for delivery. Some, but not all, of these activities may be undertaken in parallel with those of (2) above.

4. The time it takes to physically transport the product from the supplier to the customer.

Figure 1.2 Total delivery time

In many instances, where a product does not pass direct from its manufacturing source to the end consumer but passes through other hands, many of these processes are repeated at each stage of the product distribution process.

1.2.2 Delivery reliability

Another measure of performance of a distribution system is delivery time reliability. This is an indicator of whether the supplier delivers when they say they will. Although when a consumer buys goods from a retailer they expect immediate availability, for most otherproducts there is a delay between the placing of an order and the receipt of product. In some cases, the shortest delivery time is considered the best but frequently customers want and need to plan other activities in conjunction with the receipt of product from suppliers and having reliable delivery promises is important. Half a century ago, most factories planned deliveries on the basis of the month of delivery: the customer would be quoted a delivery date of, say, March. In practice, the customer had an expectation, not often met, that the product would be delivered in the first week at least, if not, 1st March; the factory, needless to say, felt it had met its obligations if the product was despatched on 31st March, arriving with the customer a day or so later. Progressively, delivery dates have been expressed more precisely as customers have become more demanding. Although week of delivery is still quoted in some instances, many markets now demand delivery dates set in days or even hours. A consumer ordering products on the Internet for delivery at home does not want to wait in all day for a delivery; shopping on the Internet is supposed to be a convenience and specifying and satisfying the time of delivery to an hour’s precision is becoming a market necessity. On-time delivery, meeting delivery promises certainly to the day, more often to the hour or minute is an increasingly important measure of distribution system performance (Figure 1.3). Delivery reliability can be measured as the proportion of orders delivered within a given time-frame around the promised delivered date/time or by the variance or standard deviation of delivery time.

Figure 1.3 On-time delivery performance

1.2.3 Order completeness

Orders frequently comprise more than a single item; this may be because the product ordered is made up of a single item or because the customer has ordered a quantity of a given product or a number of different products. In each case, the customer expects to receive the total order in a single delivery.

In the first instance, consider an order for a mobile telephone. So far as the customer is concerned this is probably a single product, but in practice they will expect to receive, in addition to the phone itself, a battery, a battery charger, connections from the battery charger to both the mains electricity supply and a car supply, earpiece and microphone, both with connectors to the main device, instructions manual, etc. If any one of these items is not available the product cannot be shipped, or, if it is, the customer will be dissatisfied as the product may well be unworkable or at least less than satisfactory.

If a manufacturer orders a quantity of 300 items but only 250 are delivered, or if they order 20 different items in varying quantities but only 18 of them are delivered, then production schedules may be held up and the manufacturer is not satisfied with the supply.

Where an order is not complete and is not and/or cannot be delivered in its entirety, not only is the customer let down but if a second delivery has to be made the costs to the supplier are increased. Order completeness is another measure of the performance of a distribution system measured by the proportion of orders delivered complete.

1.3 Customer service level

The speed of delivery, the reliability of delivery and order completeness are simple measures of delivery performance often used by customers to assess their suppliers. Suppliers frequently set and claim to meet a customer service level often quoted as a percentage; however, on its own it is insufficient; being told that a 98% customer service level is offered tells one very little; 98% of what? To be of use, a customer service level needs to be defined as the proportion of orders of given size delivered within a given time-frame. A claim that 98% of orders of less than 100 items will be delivered within 24 hours is a meaningful measure and the customer can plan accordingly. It provides an indication of product availability.

Customer service may vary depending on the product (capital item, disposable, consumable, perishable) and the customer (consumer, distributor).

Delivery time can be enhanced by the use of fast transport such as air freight, couriers, etc., but, as we shall explore in Chapter 4, these tend to increase costs over standard surface freight services. Similarly, the deployment of inventory and the processing of orders physically close to the customer will reduce the total delivery time perceived by the customer, but holding stocks close to the customer, as we shall discover in Chapter 3, also increases the cost.

Delivery reliability can be improved by the use of a single and dedicated means of transport between source and customer. If goods are despatched from source to an intermediate point, where they are then unloaded and transferred to a different form of transport, there is a risk of delay and breakdown. The more intermediate points in the network of distribution, the less reliable any delivery may be. If products being delivered share transport facilities with other items, there is a risk of delay due to problems with the other items (Figure 1.4). Using public transport facilities and different forms of transport is often more cost-effective and the use of dedicated transport frequently incurs a significant cost penalty. As with delivery speed, the deployment of inventory and the processing of orders local to the customer will reduce the total delivery time perceived by the customer, but also at an increased cost.

Figure 1.4 Direct and indirect delivery

Order completeness is more likely to be achieved by supplying product from large stocks and from having high-quality information systems providing accurate and timely data on availability and for stock planning purposes, all of which tend to add to cost.

The factors that lead to high perceived levels of customer service, delivery time and reliability and order completeness, are just those that simultaneously tend to increase costs. Likewise, those factors that may lead to reduced costs are those that mitigate against the measures improving customer service (Figure 1.5).

Figure 1.5 Factors affecting performance and cost

1.4 Cost

To the distributor, cost is an important measure of performance and, to the extent that it is reflected in the price, the customer will also be a judge through this measure. The main cost drivers in a distribution system are the cost of order processing and order handling, the cost of inventory carrying and control and the cost of transport and packaging. The lower the costs, the less the outlay for the supplier and ultimately, probably the lower the price to the customer. However, as we shall see, most of the other performance measures of a product distribution system incu...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Introduction
• 1. Objectives and Measures of Performance
• 2. Order Management and Forecasting
• 3. Stock Management
• 4. Transport
• 5. Managing the Supply Chain
• 6. International Distribution and e-Business
• Appendix. Typical Examination Questions
• Bibliography
• Background and Rationale of the Series
• Index