inventory and logistics management

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So, what is logistics? Logistics is the process of moving and positioning inventory to meet customer requirements.

Think of it as to a process, factory or manufacturer to the customer, and on the reverse, vendor or supplier back to

the factory.

What are the crucial parameters it addresses? Time and place positioning, optimal total landed cost and asset

minimization. What does this process effectively do and deliver? It assists in the supply chain connectivity and provides

visibility, and assigns each of the points to the cluster centres.

Transcription

Inventory and Logistics Management


How is logistics structurally built then and what are the different interfaces it works with?

• One, facility and network, factory distribution centre, depots for example.

• Two, warehouse material handling. It could be manual labour, forklift, hand operated pallet trucks, automated

storage and retrieval systems as examples.

• Three, transportation which could be surface, road or rail. Waterways, sea or inland waterways and air.

• Inventory, make to order or make to stock. Safety stock and cycle stock are two examples that you already

know.

• Order management, which talks of forecast, demand and supply and all this is interlinked and called the

integrated process management.

Let us quickly look at the evolution of logistics. From the invention of two wheels to helping movement of material,

goods and troops in World War 1 and World War 2 to order fulfilment, positioning the product and to outsourcing to

the current day of demand forecast, order fulfilment, whether taking decisions of whether make to order or make to

serve just-in-time, lean and six sigma, cost to serve as a process, customer satisfaction, multi-model transportation, to

the future which we already have started seeing of digitization, blockchains, artificial intelligence and machine

learning, use of software as a service enabler, IOT in logistics. These are all things that are happening as we see from

the past to the present and straddling into the future.


This now brings us to distribution which relies on different principles of physical logistics. They are seven in number

and we'll talk about that in a slight detail.

1. You work backwards from endpoint to meet customer requirements.

2. You utilize assets to the maximum extent.

3. Avoid double-handling.

4. Reliability is critical.

5. Information can reduce cost and increase customer satisfaction.

6. You decide whether to purchase logistics services.

7. And finally, you provide incentives to achieve internal, external efficiencies and goals.

So, when you work backwards from the end point, what do you do?

o You aggregate customer deeds or demand, forecast the demand, run through a sales and operations planning

and do an allocation into the factory.

o Asset utilization is basically it talks on the machine capacity utilization and manufacturing, the truck utilization

while transporting, whether you use a full truck load or a part truck load, and space utilization in a warehouse.


o You avoid double or multiple handling. You decide whether to do a one step or a two-step distribution.

Examples, cement manufacturer supplying directly to builders versus trader, tire manufacturer supplying

directly to the original manufacturer or in the replacement market.

o Reliability being critical, be it for the equipment on the shop floor, transportation or in the warehouse and

even reliability of data, which is the new fuel like we talked of.

o Information as we all know is crucial because everything depends on the validity and the correctness of the

information. Transparency in the entire supply chain network. Everybody gets to see the same piece of

information right through the tube.

o Logistics services work on your core competencies. Would you want to manage logistics on your own or would

you want to outsource it using the 3 PL or a 4 PL.

o Provide incentives to achieve internal and external efficiencies. Like for instance, incentivize by having the 3

PL make cost-effective savings, incentivize a transport by having double transportation to reach the product

faster to a customer.

What are some of the practical considerations that help design the physical logistics or distribution system?

A. One, you understand the required results, where to position distribution centres, whether we should cross

stock, whether we should have depots.


B. What are the total system impact in terms of cost implications, time implication and service levels?

C. What are the analysis that need to be realistically done? Cost to serve, high-performance platforms and total

delivered cost.

Some of the typical implications of distribution decisions can be summed as under. They have impact on product

margins and profits, which therefore impact the marketing budgets. They have a consequence on the final retail

pricing, which in turn addresses sales management practices.

The distribution channels can include one or more of the following options. Retail, which are the stores selling to the

final buyers. Think of Shoppers Stop, Big Bazaar, Reliance retail, etc. Wholesalers, which are intermediary distribution

channels that sell to retail stores. Typically, in agri-based mundies that sell to the big customers who are retailers

which go to the final end users.

Direct mail, which are catalogue merchants selling directly to buyers at retail price with or without the shipping costs,

think of eCommerce platforms here. Salesforce, which are feet on the street like the pharma and FMCG products,

sellers, which are merchants selling directly to buyers at retail or on the phone.


Strategies one looks at while designing a physical distribution system are four mainly that we talk of, cross-docking,

milk run, direct shipping, and hub and spoke model.

In the cross-docking model, it helps in coordinating supply and demand. It saves on costs as there is no requirement

for storage, no significant cost therefore incurred in terms of inventory and material handling. Reduced product

damage because of lower handling, and as a consequence of very low product handling almost nil obsolescence.


Cross-docking, what does it do? Extremely in supply chain through replenishment, there are two types of cross-docking

mechanisms. One is the basic cross dock and the other is a pass through or flow through cross dock. Nothing moves

through the warehouse and stock typically is kept on wheels.

o The advantages of cross dock. It improves the speed of flow of material from supplier to warehouse. It reduces

the storage inventory and handling costs. It maintains zero safety stock as a result of practically nil stock that

you keep.

o The disadvantages or the challenges, if you want to call it the other way. It requires a strong IT-base to ensure

flow of material, cannot be used in every situation and can be used for products with large and predictable

demands. Tire sales to replacement markets are an example for cross dock. Cement sale to individual home

builders, which is called trade market is also an example for cross dock.

Milk Runs, they are typically delivery methods in which the truck either delivers the product from a single supplier to

multiple retailers or on the other hand collects material from multiple suppliers to a single retailer. Routing of a milk

run is a very, very important activity here.


o What are the advantages in a milk run? Cost reduction through consolidation of shipments and better

utilization of trucks. Proximity to suppliers which ensure frequent and small deliveries. They reduce inventory

by eliminating or keeping to the barest minimum the safety stock.

o Disadvantages that can be thought of immediately. They require an extremely high degree of coordination

and synchronization between logistics teams. They could be issues in coordination between logistics teams

which could therefore result in higher costs. Examples that come to mind, soft drink companies selling to

customers or retailers and auto companies that use Kaizen and just in time inventory getting their different

parts from the vendors.

Direct shipping are movements of goods from supplier to customer or vice versa. The simplest mode requires two

decision points, quantity to ship and trucks to use. There is no intermediate facilities that are required. Typical

examples, perishables, high volume goods and specialty products. E-commerce, once the product gets aggregated at

a central warehouse, also use the mode of direct shipment.


o The advantages, it eliminates intermediate storage. It saves time, less damage to the product because of

practically nil handling, improved accuracy in dissemination of product.

o Disadvantage, it cannot be used to service smaller retail stores or warehouses. They might incur high freight

costs as opposed to multiple smaller movements.

Finally, we come to the hub and spoke or pool distribution model. The hub holds the inventory for a large region with

each spoke leading to a smaller location, which is based within a certain vicinity or a radius of the region's requirement.

The main driver for hub and spoke model is its proximity to the customers. The objective is to supply products to the

maximum number of customers in the least amount of time.


The hub and spoke model is used as a cost effective alternate to less than container load or truckload shipment. They

allow for quick replenishment. They usually singly handled for large part of shipment journey till the shipment is split.

Customer requirements are usually met efficiently and quickly.

Let's now talk of the network that needs to be designed for a good effective distribution system. We saw that

distribution is a physical process that a company undertakes in order to move and store material from the supplier in

its raw and packing form, straight from the supplier stage to the customer stage as finished goods. It could entail a

one step or two step distribution process in the bargain.

The factors that impact distribution network design are mainly two. One being that of meeting customer requirements

such as timeliness, two from a customer perspective again, the sale has to be at an optimal cost.

The components that affect customer service and generation network can be summed up in the following five points.

• One, response time, the time it takes for an order to be served.

• Two, the product variety or the number of SKUs. I want a 100 ml bottle of Coke, but you only have a one litre

bottle of Coke. So, the customer goes back dissatisfied. So, product variety also plays a key role.

• Product availability on the other hand plays a key role. I would like to have a thumbs up. I don't want a coke.

Do you stock Thumbs Up? If it's a no, I might go somewhere else.


• Order visibility and customer returns. How many times does a customer come back with a dissatisfied product?

Designing a distribution network talks of two things particularly, one being that of the influencer and two, the basic

framework that entails the design of a distribution network. The influencers for designing a distribution network would

practically look at some, and this is not an exhaustive list, some things like will the delivery be X warehouse, will it be

FOB, will it be CIF, will the customer send his truck to pick up the truck, etc. Will the material be shipped directly or

through intermediate storage locations?

The basic framework can be designed using any of these following points that we talk about now. It could be a

manufacturer storage with direct shipment. It could be a manufacturer storage with direct shipment and in transit

storage, which is similar to the cross dock that we talked about.

There is a distributor storage with transporter delivery. So, the manufacturer sells to a distributor who uses his

transport equipment to do either a last mile delivery or go and deliver to the dealers.

There is a distributor storage with last mile delivery. So, there is a separate one where a distributor does a last mile

delivery also. There is a manufacturer storage or a distributor storage with customer pickup. I only store, I only do one

leg of transportation as a manufacturer. The customer comes and picks up with their own nominated transporters.

And finally, there is a retail storage. I ship it directly to retail with customer pickup. So, I give it directly to the end user

as close as possible to the end user and it gets picked up. An example could be again selling to different dealers in a

city for replacement tires. The customer comes and picks up. The tires to the retailer are shipped directly by the retail

storage or the manufacturer, that the manufacturer has.


A good network design should be able to decide on the following:

1. The location of facilities.

2. The capacity of facilities and the facilities here being the manufacturing or production facilities. The regional

distribution centres or the main distribution centre and the warehouses.

3. The transportation. An effective network design should also address the roles played by facilities and the

processes performed by each of these facilities. The geographical location of the facilities, the markets it aims

to serve either directly from the manufacturing or production facility, or from the distribution or storage

facilities and the capacities planned for each of these facilities because capacities are not going to remain

static. As the markets grow, the capacities need to take that into consideration to be built up and grow also.

That is how one would get consistent performance.

There are ten factors in all that effectively decide a network design and distribution. The location of sources and supply

end the customer basis. These are based on customer locations. You may want to look at the customer locations first

before doing your one step up as the distribution centres or the warehouses, and then position or place your

manufacturing or production facility.

The location of potential facilities that you need to put in place so that you have adequate storage and adequate

distribution reach. The demand forecast of these markets would have an impact on the network design that you have.


The total costs at each site, both fixed and variable would also decide on the number of such facilities you decide to

have. The transportation costs between sites is another key factor.

The inventory costs are very key because of two factors mainly. One, the number of facilities you spawn to or multiply

to would mean that much more inventory, and more inventory that you keep in a location implies that there could be

a risk of either obsolescence or damage due to multiple handling.

Sale price of products at every location would define also the way you place your, do your network design. Cost to

serve each of the market could be different depending on the network design you build. A crucial one would be the

response time and the service level that is required at each location or by customer segments. And finally, you may

choose to have a facility at a place that gives you tax incentives and reliefs in terms of tariffs.

Similarly, if you come to a distribution centre or a warehouse, there are two key questions that one ends up asking

quickly, how many DCs do I need to adequately serve my customers? How can I minimize the cost of warehousing?

These are broadly the questions that a logistics manager or a supply chain manager would end up asking.

It then mushrooms into the cost impact that these two would have. So, some of the factors for the cost impact,

multiple storage costs, inventory holding costs, transportation costs, customer delivery costs or last mile cost to serve


that you would incur. Plus, if you're one of those technologically savvy or it requires a pharma or a food industry which

would require, the warehouse management costs because you would have to network each one of these locations.

A typical thumb rule that one applies is basically what is your span of delivery. I've taken an example here for the

cement and a tire factory and rolled them together in one. Let's say a 250 kilometres delivery should be from order to

serve within 12 hours. Between 250 and 500 kilometres, between 24 and 36 hours. More than 501 kilometres within

48 hours from the time the order clocks into the system. These are thumb rules. Please don't take this as a cast in

stone. This can definitely be modified as the first one within 250 kms could be within six hours or eight hours also.

These are all on the higher side.

How does one define therefore given all these variables, what is an optimum parameter that I keep in my mind while

deciding how I need to place or do my network design? First and foremost, which each one of us has, is common

sense. The second, there are lots of tools, there are optimization tools that are available, which would help you do

the markets, which have taken into account the markets that are served, ones that are closer to the transportation

markets. You have a hub and spoke model; you have a DC and RDC.

We spoke a lot about, at least I talked about the cost to serve example, the cost to serve model. So, let me take an

example here. And this was typical in the tire industry where I worked in. The problem statement here is, let's say

there is, you own a Porsche car. A Porsche car, as you know, is something like a status symbol. It costs close to a crore.

A tire for a Porsche costs upward of 30,000, as opposed to an average car tire of between 4 and 5,000 or at most 6,000

rupees, per piece I am talking of.

You go forward into the problem statement. The owner of the Porsche car, which is you, has a tire that needs to be

replaced, one or all four tires that need to be replaced. As a logistics person, what is it that you would do?

One, would you stock Porsche tires in your warehouse in the anticipation that these tires would be sold at some point

in time because you have blocked your capital already by ordering certain tires. As a customer or as a logistics person,

would you not stock them at all. As opposed the cost to sell model now transcends between what the logistics person

grapples with and what customer tries to address also.


For the customer, the Porsche car is a status symbol. It is no good if it is lying in the garage. It needs to run out on the

roads for it to be seen by others. So, if the cost of the tire is 30,000, a set of tires with the stepney, let's say cost in the

range of one and a half lakhs to two lakhs, on the higher side. As a customer, I might or in all probability, what I would

do is to ask the manufacturer or the logistics team of the manufacturer to air freight these tires, which brings the

concept of the cost to serve.

As a logistics person, I am not stocking goods at all for this Porsche car, but I am able to serve the customer primarily

because I can deliver these tires quickly to that person, quickly to the customer. What is it that the customer is looking

for here? The customer is trading of between a minuscule cost of the tire and then of the air freight of those sets of

tires as opposed to the cost of idling the car versus service level.

In this scenario of cost to serve, the points of service level tick in the favour of the customer completely, I'm able to

book and do an air freight from location A to location B. The customer does not hesitate paying the airfreight, which

may be 10 times or 15 times or 20 times more than the normal freight primarily because he needs to run the car.

So, this basically summarizes the concept of the cost to serve, which is a win-win for both the manufacturer as well as

the customer.

The key learning in the network for effective distribution building, what are these? They can be summed up as the

factors that impact distribution network design, the components that affect customer service, the influencers and

basic framework in a network design, and the factors to be considered for designing an effective network.

Having now moved to the complete cycle, starting from demand, moving to supply plans, aggregate plans, moving to

production, sourcing, we see that at all point of time, we are utilizing some material in finished good form or in raw

material form. These materials which are standing at one point or the other, before getting consumed by the consumer

is called as inventory. Inventory has a big role to play in an organization's success or failure. So, inventory is either raw

material type or a finished goods type.

Let us understand the consequences of inventory. Inventory basically has a cost to it. Now suppose anything is not

being utilized as we must have also seen in the lean six sigma part. You will realize that this standing inventory or the

idle inventory obviously would have costed something.


This cost attached per unit once looked into how much money gets blocked into the whole scenario becomes an

important aspect to look into, which is what we call as working capital. So, working capital and inventory actually are

two sides of the same coin. The working capital of course also entails many other components which get into the

working capital cycle, but inventory forms a major part of it.

Inventory can be basically handled at the raw material levels by ensuring that you have the right material masters

when you are sourcing the materials, and hence, the importance of MRP goes directly into it. Similarly, at the finished

goods level, it's very, very important to have the right masters again, if you are using any type of software or even if

you're doing your own planning, you need to basically be minimizing buffers.

At the same time, it's equally important that you should not be so much thin in inventory that you lose an opportunity

for sale because of not having some inventory in your hand, which if you would have had, you could have made a sale.

Thus, it becomes a double-edged sword on both the sides.

Finished goods, also have a life to it. Finished goods also have a cost to it. So is the case with the raw materials. Now

what happens is that if we are talking about consumer perishable goods, then they also have a shelf life attached to it.

So, what happens, an inventory is not something which if not utilized today, can be utilized at any point of time.

Inventory also has a shelf life attached to it. It is very important hence to have your consumption plans in such a

manner that the inventory gets utilized within that timeframe at the worse scenario.

Ideally speaking today, many organizations are working towards not having an aggregate inventory level of more than

15 days of inventory for their raw material levels, and between 6 to 10 days of inventory for their finished goods levels.

These inventories are moving at a difference stocking points. So, there is always some buffer available at one point of

the other.


Inventory in a financial analysis is judged under DII, which is called as days of inventory in hand. So, what they do is

they are basically converting the inventory in equal measures of how many days of production it will equate to.

Similarly, at the finished goods level, it has been converted into how many days on hand or how many days on order

would they basically be able to fulfill by having those inventory in hand. So, inventory is normally referred either in

terms of value or in number of days of inventory.

So, on one side traditional companies use the concept of DII, the modern companies also use the concept of DOH,

which is days of inventory in hand. And what is the difference? Whereas the DII talks about how much off sale a

particular goods have been done versus the 30 days consumption they have and the inventory they have in stock. In

comparison to that, something that in a future what the orders they have and how many days of orders they will be

able to service for future.

To reduce the number of days of inventory, organization go for many progressive methods like Kanban, like VMI and

all. VMI is a vendor managed inventory. In which scenario, basically the organization is giving a complete visibility of

its own stocks to the suppliers. Now if it is decided that there will be about 10 days of inventory that will be kept in

this stock, it becomes the responsibility of the vendor to ensure that before the stock actually finishes, including the

transit time, the inventory from the vendor should reach the consumer in a duration.


So, let us look at it from an example point of view. A sugar manufacturer, suppose he has a direction from the beverage

manufacturer to keep 6 days of inventory at the beverage manufacturers plant. The sugar manufacturer will

continuously keep a watch on the stocks of the beverage manufacturer. And suppose the transit time is 4 days, then

when the inventory at the beverage manufacturer for sugar will start dropping to a level below certain degree, he will

ensure that he makes the shipment in such a manner that it again replenishes to 6 days level. So, generally there will

be a very little Delta of 6 minus one or plus one days, but generally the shipments will be made in such a manner that

there is a complete flow of materials.

On the other hand, the replenished model also works similarly like this. But here, there is a minimum maximum zone

that we are talking about and then the inventories are replenished in a manner that it is continuously ensuring that

the stocks are always there. The only difference being that in a VMI situation, it becomes the vendor's responsibility

to do that. Whereas in the replenishment model, it is a agreed form of an order from the purchaser.

Inventories are, besides having impact of cost on an organization, also involves a lot of storage space and hence have

to be judiciously planned. There are certain items which take low inventory space, but then there are certain items

besides the high space that they take, they could also have certain storage specification requirements.


There could be certain products which are required to be kept in a cold storage condition. In such a situation if not

done so, this type of inventory may actually deteriorate and make a loss to the organization by converting into

writeoffs.

We have already covered about inventory and each and every aspect when we were talking about the demand and

the supply and the sourcing pattern. Inventory becomes hence a key pattern of defining when that order has to be

placed and becomes a knitting of factor into the complete scenario.

In a production base, a raw material which is going to be used for the current production plan is called as cycle

inventory. Anything that is not supposed to be used for the current production plan is called as safety stock. So, the

concept of cycle stock and safety stock comes across which is used in not only raw materials but also finished goods.

You will now appreciate why inventory becomes so important. There has to be a reorder point in an inventory. So,

what happens is that there is a specific curve that needs to be followed. And at that particular point of time, before

the inventory actually goes below that point, it needs to be reordered so that the inventory gets replenished in time

and the minimum stock levels are always maintained. That becomes the core of inventory planning.

Any inventory at any point of time has its own cost. However, at the same time it can happen that when you order

more inventory, you may be getting a better price. So, basically there is going to be a tie-up that we have to do between

what is the ordering costs and what is the holding cost. Doing ratio analysis of ordering costs and the holding costs,


we have to arrive at the total cost and arriving at that particular point becomes important where the total cost is

minimum, which is called as the economic order quantity level.

Moving further, that makes us define what is going to be further our ordering for the cycles stock as well as ordering

for the safety stock. So, for the cycle stock as I earlier said, it is going to be utilized in the production of the material.

Look at this chart. In this particular thing, you will be able to see that there is a cycle inventory portion, below which

there is a safety inventory portion. As you will notice, combined together between the cycle inventory and the safety

inventory, it becomes the average inventory that the organization is willing to pump in money for.

We will now come to the aspect of what to do in terms of safety, inventory planning. So, when planning the safety

inventory for any supply chain, you need to consider two questions. The first is what is the ideal level of safety

inventory that the company can carry. Second, what actions can the company take to improve product availability

while decreasing the safety inventory levels.

So, one possibility is reduction in the demand. Variability can directly impact the safety inventory in the system. It is a

state in fact that in case you don't have to be dealing with variability, you can actually have exactly the same inventory

that you need for your cycle stock. But unfortunately, that is not the case.


You have learned how to calculate demand already earlier, and hence, also how to reduce the variance. The other type

of variability that a company needs to control is supply variability. Let's try to understand this better.

So, product availability reflects a firm’s ability to fill an order from the available inventory or the inventory on hand. A

stockout situation occurs if an order for a product arise when it is not available. There are several ways to measure

product availability. Let's try to understand some of those important metrics used to measure it.

The first is the product fill rate, which is the fraction of the product demand that is met using the available product in

the inventory. Also, the product fill rate should be measured in terms of the specified demand volume rather than

time. So, it is better to measure the product fill rate over every million units of demand rather than covering a small

period like a month. The product fill rate is equivalent to the probability of the product demand being supplied from

the inventory available with the organization.

Assume that for a beverage company, if a customer demand is hundred bottles of the beverage, but the company

supplies only 90 units because of a lack of available inventory. In this case, the beverage company achieves fill rate of

90 divided by a hundred which is 90%.


The second metrics, order fill rate. Now this is a fraction of orders and not the product alone. In the first case, we saw

the product. Now it could be an order. An order could be having more than one product in it. This is from the company's

available inventory. Just like the product fill rate, the order fill rate should also be measured in the terms of number

of orders rather than time.

Let's consider a multi-product scenario. Here, an order is filled from inventory only if all the products of the order is

applied from the available inventory. Looking again at the example of beverage company, a customer may order a Cola

and a lemonade. Now in this case, the order is considered filled only if both variances are available in the warehouse.

Please note that the order fill rate tends to be lower than the product fill rate because all the products in a particular

order may not be available in the inventory at the same time.

The next metric we consider for measuring product availability cycle service level, which is also referred as CSL. This is

the fraction of those replenishment cycles that end after all the demand has been met. A replenishment cycle refers

to the interval between two successive inventory replenishment deliveries. So, the CSL is the probability of not having

a stockout situation in a replenishment scenario, and that cycle, and thus, not losing sales resulting from the stockout.

The CSL should be measured over a specified number of replenishment cycles.

Going back to the example of the beverage company, if the order replenishment lots of 600 cases, then the interval

between the arrival of two successful replenishment lots is the replenishment cycle.


If the company manages inventory in such a way that the warehouse does not stock out of 6 out of 10 replenishment

cycles, then the CSL of 60%. Please note that the CSL of 60% would typically result in a higher fill rate. For the 60% of

cycle, that did not see stock out, all the customer demand is made to the available inventory. The remaining 40% of

cycles, that do experience stockout situation, most of the customer demand is met through inventory.

Please note that the distinction between the product and order fill rate is usually not that much in a single product

situation. However, for a company selling multiple products, the difference will obviously be significant. For example,

if most of the orders that the company receives in 10 or more different products, then the stockout situation, even for

a single product can lead to an order of not being filled from stock.

In this case, the firm may have a poor order fill rate, despite having a good product fill rate. It is important to track the

order fill rates, when customers place a high value on the entire order being filled simultaneously.


We now talk about replenishment policies. A replenishment policy pertains to the decisions regarding when and how

much to reorder. These decisions determine the cycle and safety inventories, along with the fill rate and the cycle

service levels. Replenishment policies can be of different times. Let's understand what are they?

So, they are generally of two types. First is continuous review. Under such replenishment policies, inventory is tracked

continuously and a replenishment order is placed when the inventory reaches a reorder point.


ROP, for example, consider the situation of the beverage company store manager who continuously tracks the

inventory of the beverage cases. Now he places an order of 600 new cases when the inventor drops to say 400. Now,

which is the decided threshold or the reorder point. Here, the order does not change from one order to the next, but

the interval between orders may fluctuate depending on the demand.

Now let's look at periodic review. Here, the inventory is tracked at regular intervals and a replenishment order is

pleased to raise the inventory to a set threshold.

For example, let's say that the manager of a store selling soft drinks, there's no track inventory continuously. Every

Saturday, the store employees checks inventory and the manager orders enough cases such that the total available

inventory and of the order equals thousand cases. In this case, the interval between the orders is fixed. Then, however,

the quantity of order can fluctuate depending on the demand. Although these inventory policies are not

comprehensive, they adequately illustrate the basic dilemma faced for safety inventory.

What are your thoughts? Should the safety inventory be high or low? Understanding inventory is key to ensure supply

planning is done efficiently.


So, companies need to manage the inventory, and let's try and understand how companies practically manage the

inventories that they have. So, what companies usually do is that they classify the inventories into two types. So, first

is Make to Stock and second is Make to Order. So, let's understand this in slightly more detail.

Make to Stock is for fast moving inventory. So, there are a set of goods that you keep on selling on day on day basis,

and you're able to predict it very correctly. So, these kinds of products are stocked and sold to the customer.

To take an example, if you visit Pizza hut or Dominos who sell pizzas and cakes, etc., there are products like cold drinks,

cakes, which are ordered with each and every pizza, which is ordered, right? So, you're able to predict the demand

and these are products which will not go bad. So, even you have stock of cold drinks, which is not sold on a day, it can

be sold on the next day. So, these kinds of products are stocked sufficiently so that you don't have to procure it or

manufacture it when the customer actually comes in. So, these kinds of products are known as Make to Stock products.

The next set of products are Make to Order products. So, when a customer walks into a Domino's or a Pizza hut, you

will not know whether he's going to order a margarita pizza or a fresh farm pizza, right? So, what is done is that these

kinds of products are only manufactured when you have a confirmed order from a customer. So, these kinds of

products are known as make to order products. What is done to quicken the process in case of a make to order product

is to again use a concept of delayed differentiation, which means that if, you know that customer, when he orders a

pizza, I'm going to need a pizza base.

So, the pizza is prepared in advance, right? And also, the ingredients that go on a pizza, like baby corn or mushroom,

those are cut and kept ready so that as soon as I get an order, I'm able to customize as per the customer requirement

and give it quickly to a customer. So, this is how industry uses Make to Stock and Make to Order inventory to meet the

customer demand as quickly as possible.

Now that we know about inventory management principles and how inventory is managed, one of the three principles,

how inventory is managed through replenishment. So, traditionally the way inventory used to be replenished was that

a retailer would look at his inventory on a day to day basis and he will decide what needs to be ordered. Or a

manufacturer or a company, FMCG company, their representative would visit a retailer and they will discuss what is

required and the order is placed, right? This becomes effective when you are handling very few SKUs, like 100 SKUs or

max 200 SKUs.


So, you know, a Pan shop or a small shop can manage this, but if it's a big retailer and a big retail company, which is

operating a Superstore or a supermarket, this becomes difficult because there are thousands and in some cases lakhs

of SKUs that needs to be reordered and you can't manage this manually. So, in this scenario, a concept known as

vendor managed inventory replenishment is used. So, here, what happens is that for each and every SKU, there is a

predefined inventory level which is defined. And whenever the inventory goes below that inventory level a auto

generated order is triggered.

The order is then placed on the manufacturer or the company or the supplier, right, who on a day to day basis or on

daily basis from their distribution center or from their warehouse, they ship out the order directly to the distributor or

to the retailer. So, on a day to day basis or on the predefined interval, the replenishment order is triggered and the

inventory is supplied automatically to the retailer or to the vendor.

Let's take an example of Ikea. So, Ikea is in the business of furniture, right? It's a major company which is very loved

by the customers for their furniture products. So, it uses this concept of replenishment and it defines the minimum

inventory level as well as a maximum of inventory level. So, minimum inventory level for a particular SKU or product

is if the inventory goes below that level, then an order is placed on their centralized warehouse, which will then

replenish the stock to the store. And max setting is that whenever it is ordering a product, it will not go beyond that

level which is set.

So, for example, for a product, if the minimum level is a 100 and the maximum level is 300, whenever the inventory

falls to 100, you will place an order. And when you place an order, you will never place an order so that your inventory


goes above 300. So, that's how Ikea is managing and most of the companies which have multiple SKUs are managing

their inventories.

We now come to the movable part of the whole system, which is logistics. So, we now get into logistic planning. What

is logistics? Logistics is the science of managing or controlling the movement and storage of goods from acquisition to

consumption. Goods involved raw material to final products and everything that comes in between movement is

transportation between locations.

We now move to the transportation portion of logistics. We now study the chart, which is defining how the cost model

changes with the increase in number of warehouses with those different cost components including the packaging

costs, the material handling costs, the warehouse costs, the inventory costs, resulting into a transport and the total

cost. Now as packaging cost is fixed on the finished goods that we are supplying; hence they remain constant

irrespective of the number of warehouses.

But on the other hand, the material handling cost basically starts increasing because you will need to have more and

more equipment to handle those materials, people to handle those materials if you have increased number of

warehouses. You cannot actually be using the same forklift at more than one location, and hence, you will obviously

invest in those and similarly will go for the case for manpower.


The next cost, which is the warehouse cost is again obviously increasing because if the rental for one warehouse is say

$2,000 per month, then the cost for 10 warehouses is obviously going to be 20,000 in the inventory cost.

Each place is going to have a minimum load size to call for. It is going to have an MOQ level which will be defined either

by the shipment size, from the vendor, or by the truckload definition. In such a situation, inventory costs also will start

increasing with the more number of warehouses at different places. However, what goes down is actually the transport

costs. This happens because you will need a smaller number of transportations.

You will possibly cover lesser distances because you have more and more warehouses strategically located to different

points of the customer basis. Combining all this together, you will see that the total cost first starts sharply decreasing

up to an X level and then after that starts increasing across, with the increasing the number of warehouses.

By looking at this graph, you will understand that there was one particular point which gave you a band of the number

of warehouses which will have the minimum costs. This is the ideal number of warehouses for an organization.

The next question comes, how to transport these materials? Should the materials be sent directly to the consumer?

Should it be sent to a warehouse? Should it be sent to directly to the retailers or in what manner? You being an online

shipper must have already observed direct shipping methods that you think about. So, basically organizations use

different transportation networks to optimize the objective that they are looking at.

Let us now look at a table enclosed here with which compares different transportation networks and informs about

the benefits such as pros and cons. In this particular table, you're looking at the pros and cons of different

transportation networks. So, there are different type of network structures.

o First, direct shipping. This means that the material is directly being produced in the factory and being directly

shipped to the end consumer or the customer. The benefits of this is that there is no intermediate warehouse

and it's very simple to coordinate. However, it has the limitation that it needs high inventories due to large lot

sizes because you will need to take the benefit of the truckloads that are moving across. And hence, it is

significant receiving expense.

o The second category could be that you are doing a direct shipping with milk runs. That means you have decided

to actually distribute different materials combining the stocks of different customers.


So, for example, if somebody is moving from Mumbai to Bangalore, then on the way route, different cities

could be covered, or within Mumbai to Bangalore, different customers in Bangalore could be covered.

So, this is direct shipping with milk runs. It has lower transportation costs per transaction because there are

smaller lots of individual customers and hence lower inventories. However, it leads to increased coordination

complexity because for one single shipment, you need to coordinate with different, different customers for

different materials, different packaging sizes, etc.

o The third possibility is all shipments move via central distribution center, which we refer to as DC with the

inventory storage happening at the DC point. Now since there's going to be an inventory storage, it is obviously

going to increase inventory costs and also because the material is getting unloaded at a particular point and

then getting reloaded for next shipment to the customer, it definitely means increased handling at the

distribution center.

o Another variation possible, in same method is that you do all shipments via central DC, but instead of going

for inventory storage, we go with cross dock. In such a situation, the negative that was happening in inventory

storage at DC point gets eliminated and leads to a very low inventory requirement. It also lowers

transportation costs through consolidation. However, there is an increased coordination complexity because

of the cross-dock involvement.

o There could also be another hybrid model, with the shipping via distribution centers and they're after using

milk runs. This really means that you are actually supplying majority of the goods first to the distribution

center, from where multiple products are then being moved in a Milk run pattern to different customers rather

than the first case where individual shipments to individual customers happen. The benefit of this is that it

lowers the outbound transportation costs for smaller lots. However, it further increases in coordination

complexity and that becomes a limitation.

o Another network design is tailored network. The transportation choice best matches here to the needs of

individual product and store, and that becomes a great advantage. However, this has been highest

coordination complexity.


By this we understand what are the different type of transportation networks, what are the benefits and what are the

limitations for the same. An organization will choose the transportation network depending on what suits best to that

particular transportation model and the organization business model.

While there is different type of transportation networks, similarly, there are also different type of transportation

modes that are used. Now each mode has its own advantage and becomes best suitable for different type of business

and logistical decisions that we want to take. Let us compare all these parameters versus the different transportation

mode to understand which becomes best suited and how they're ranked. Let's look at this table now.

In this particular chart, we are going to look at the ranking of the different type of transportation modes in terms of

supply chain performance. Hence, whereas six forms the best, one is the least preferable scenario. In terms of lot

inventory, the maximum inventory can be shipped to water, and hence, water get the rating of six followed by rail.

However, in terms of also safety parameter, again, water is termed to be much safer and rail the next. Whereas the

package shipment or a courier shipment the least safe in terms of transit damages.

However, when we look at the transit costs, again, the package falls out to be the most expensive one followed by air

shipments, and hence, they get a ranking of one and two, while rail and water get the five and six ratings. In terms of

transportation time, the package is moving the fastest, and hence, is getting a rating of six followed by air, which is

also very fast. However, water is the slowest and hence gets the rating of one. This makes us analyze what is our real

need in terms of supply chain performance and we can accordingly choose the transportation mode to our need.

Supply chain operations is a complex process, especially the organization which is into manufacturing of certain goods,

does not necessarily have the competencies to actually handle warehousing, transport and various other aspects.


Looking into this, the new concept of 3 PL and 4 PL partners came into being. What is 3 PL? This is third party logistics.

What is 4 PL? This is four party logistics. Now salient features of 3 PL is what we need to understand. The third-party

logistics basically provides deals and execution part of the logistics systems that is shipping, transportation and

warehousing.

The organization having a sound supply chain strategy can opt for a three PL logistics system and utilize them for their

own benefit. The salient features of 4 PL as opposed to three PL include that the logistics handling, the complete entire

supply chain of the organization from planning to execution. A 4 PL logistics provider also integrates data in their

operations to improve the efficiency of the supply chain. The organization having a complex supply chain can also offer

for a 4 PL logistics system.

So, logistics is one of the key legs of a supply chain. Whatever products you have manufactured, it needs to move to

the next leg and it becomes one of the key cost drivers as well as the driver for the speed as well. In the traditional

logistics industry, there were a lot of challenges which used to be there. The first challenge was availability of the

drivers or the truckers. And that used to be a challenge because, this is never a profession where drivers wanted to be

in because it has an impact on their work life balance as well as on the health as well. So, availability of truckers used

to be a challenge.


There used to be a lot of manual coordination between the truck driver as well as the people who are working with

the truck driver, the logistics managers, because it was difficult to track where they exactly are and how quickly they

will be able to reach to the destination.

Also, there used to be challenges of damages, and for fragile products, the damages used to be high. The drivers did

not use to take care of the damages as well. And there used to be delayed deliveries because the coordination was

manual. There were a lot of challenges in terms of layovers, etc. The deliveries were delayed and they were not reliable.

Now how one of the new age trucking company has solved is through a mix of innovation in the supply chain as well

as big data and analytics.

So, the first innovation they have done is to come up with a relay model. So, while previously a driver used to drive the

truck from destination A to destination B, even if it is like, let's say 1000 kilometers. Now what this company has done

is that it has created relay points. So, some 70 relay points have been created across the country and each relay point

is about 200 to 300 kilometers.

So, the way it operates is that driver drives from point A to the first relay point. And at relay point 1, he gives the truck

over to the next driver. And then from relay point 1, he comes back in a truck which is coming from point B and he

comes back to point A. So, now what happens is that the driver is able to come back to his home or base destination

once in every 1 or 2 days, right? So, this solves his challenge of stress as well as work life balance.

The other thing this company has done is to use big data. So, each and every truck has a inbuilt sensor. So, now there

is no need for coordination between the logistics manager and the trucker. The logistics manager sitting in his office

can see where each and every truck in the country is right, and reliably he can know whether the truck will reach on

time or not and whether it is following the right route or not.

They have used big data also and past data analytics also they have used. So, the challenge of damages, the way they

use big data was to see in the past, which other truckers who are reliable and which are the truckers who are not

reliable. So, if there is a fragile product which is being sent, then they will only give it to the drivers who in past have

been reliable and who have not damaged the products. They will not give it to the drivers who used to damage the

products. So, in this way, they are able to reduce the demand.


So, this new age company has used innovation through relay model, as well as a mix of big data and analytics to solve

the challenges in the traditional logistics sector. This has led to reduction in the overall transit time by almost 70%,

which would definitely result into a lot of cost production.

We now come to warehousing. What is a warehouse? A warehouse is a place where the inventory is stored. A plant

may have a warehouse where raw material packaging material is stored based on their derived inventory levels. It may

also have a warehouse for finished goods. From where, batches of goods are shipped to the market or other

warehouses depending on the company's go to market strategy.

The operational costs of a warehouse can be divided into two parts, A, capital cost. These include the rent and material

handling and equipment costs, and the second is the operating costs, which includes the labor cost per unit.

The primary function of a warehouse are as follows. First, receiving goods from a mix of plants or associated plants,

checking the goods against the bill of quantity, checking for damages and acknowledging and accounting them into

the ERP system, which is actively known as the goods received note system. Now, identifying, sorting, and storing SKUs

as per the ABC or FSN classification.


ABC, which is generally a Pareto helps in identifying the right batch, storage required for each SKUs. And FSN, which is

fast slow non-moving, hence, in placing them near the dock as the frequency of moment. This is also known as

putaway.

Storing them for as long as the inventory levels desire, enacting them as a buffer from market shocks helps across.

Picking goods from the storage area whenever required for billing is another advantage. Loading and dispatching them

while updating the information system on invoicing is the next step.

To manage cost efficiently, a warehouse must optimize its capital cost by ensuring high density packaging to maximize

cubic space utilization. It must also optimize operating costs by managing shift times of labor and giving them the right

material handling equipment in order to maximize their throughputs, which are units persists divided by time.


MHEs, such as pallets, HEPTs, trolleys, lifts, orbiters, in racking systems, etc., help in increasing manpower productivity

in a warehouse while improving its throughput. As a warehouse manages multiple SKU simultaneously, the inventory

record accuracy is of the utmost importance.

The key is having all the right SKUs that are flashed by the information management system. Finding all the SKUs at

the desired place enables the manpower to improve efficiency and it reduces the time wasted by moving ideally in the

warehouse to find a product.

Maintaining the right inventory record accuracy ensures the following benefits.

1. First, satisfactory customer service. Its record show that an item is an inventory when it is not any order

promising that item will be in error and that could lead to problem, when effected and efficient operation.

2. Planners can plan confident that the parts will be available.

3. Third, inventory analysis, any analysis of inventory is only as good as the data it is based upon.


Inaccurate inventory records will result in the following issues. One, lost sale, second, shortage and disrupted schedule.

Third, excess inventory of the wrong things, fourth, low productivity, fifth, poor delivery performance, sixth,

expediting. Since, people will always be reacting to a bad situation rather than planning for the future.

Inventory errors in warehouse are majorly caused due to the following reason. What could be those? Unauthorized

withdrawal of materials, unsecured stock room, poorly trained personnel, inaccurate transaction recording.

And these types of errors can occur due to inaccurate piece towns, unrecorded transactions, delay in recording

transaction, inaccurate material location, and incorrectly identified parts. Then, poor transaction recording systems.

Most systems storage is computer based and can provide the means to record transactions correctly. However, when

errors do occur, they are usually caused by human intervention in inputting the data in the system. The documentation

reporting systems should be designed to reduce the likelihood of human error. Then the lack of audit capability, the

verification of the inventory counts and location is necessary. The most popular method today is cycle counting, which

is periodic review of the system against physical inventory.

Today, many tech enabled WMS, which is the warehouse management systems are available in the market and are

also part of the ERP system, which helps in capturing all the tasks and activities to ensure a smooth flow of inventory

while sending the right data signals upstream, and this becomes an input also into the demand planning aspect.


In the end of the session, we need to understand what is ultimately our target. The role of a supply chain manager is

to ensure that the key KPI of the order fill rate of an organization is met. All the other KPIs which are from purchase,

sourcing, transportation are all ultimately merging into this key KPI of the organization, which is the order fill rate of

the customer, so as to ultimately handle and make a customer satisfied. But we also now have to see the practice of

improving efficiency at every point. It is not time to end this course with the manager's insight.

A supply chain manager must do the following two things in order to optimize the business. First of all, shorten the

planning horizon to remain agile. Secondly, broaden their view of supply chain as much as possible while making the

decisions.

You can achieve efficiency only when all the nodes of supply chain that is source, make, move come together

seamlessly in the same flow by planning functions, which is demand planning and supply planning and material

planning. As you begin your career with the responsibility of one small piece of this puzzle, it is essential to take a step

back and assess the impact of your actions in the broader value of chain. You may have fully optimized the piece under

your purview, but it may lead to an inefficiency upstream or downstream.

For example, a sourcing manager may feel that buying a high quality product at the cheapest conversion costs from a

supplier in Kolkata has optimized a sourcing cost of raw material or packaging material, but transporting this raw


material from Kolkata to a factory in Maharashtra may add to the landed cost of the goods, which we learned in the

total cost of goods.

Similarly, a plant manufacturing manager may feel that they have optimized its capacity utilization by producing large

quantities of the product in each shift, large batch sizes. But in reality, this higher production, which if it keeps the

demand, may put pressures on the logistics function to ship the product out as soon as possible and which can also be

sometimes at the inefficient rates into warehouses, which increases inventory holding costs. And at the same time, it

may put pressure on the sales team also to sell something which is not so much in demand and reduce the flexibility

to take a change over.

For the transportation manager, it would be an ideal scenario if all the full truckloads orders are shipped in the highest

possible container by the cheapest mode of transportation. But in reality, to ensure the whole value chain run

smoothly, they may choose to opt the air sometimes due to uncertainties in the system or sudden demand spikes and

work with a healthy mix of transport mode and fleet.

A supply chain manager's core objective is to have a bird's eye view of the supply chain and then optimize the total

cost of the system. To summarize, optimize globally, implement-execute locally.


To execute locally, a lot of small improvements must be made in each process function. For example, a warehouse

manager can improve the throughput of the dock by installing a simple dock leveler to enable the pallet to move inside

the truck. Thereby increasing metric in terms of number of cases handled per order. Or some conveyor systems can

be installed inside the warehouse to fit starts from the storage locations to the docks.

The eCommerce industry has been the pioneer in embracing conveyor belt with the augmented, sort of technology to

reduce number of touch points. A product has to undergo in the warehouse.

Now for all of this, the objective of the shipping industry is to reduce the number of handlings of a product. Technology

has come a long way in fulfilling these objectives. Now, as we discussed in an example earlier, the paint industry has

postponed the distinguishing the final color to the last mix by pushing the color mixture to the last node of the supply

chain. This has resulted in reduction in inventory and carrying costs across the value chain, and has decreased the

forecasting error, as a high bulk or standardized color has lowered the demand uncertainty.

Let's take another example. When PIMCO took over Apple, the inventory across the chain was 36 days. He took it upon

himself to work with strategic windows and standardizing all those to reduce it to six days, a drastic reduction of 30

days and then eventually took two days. The pull of the Apple brand is enhanced by supply chain to deliver profitable

bottom lines each quarter. No wonder Apple is the most valued company for such a sustained period of time. Saudi

Aramco has just opened an IPO overtaking now Apple.


The importance of closely coordinated supply chains were explained by Howard D. Schultz, founder and ex CEO of

Starbucks as follows. And depending on the changes in weather conditions, orders varied.

In today's world, it has been stated that there is no longer a competition between products. It's a competition between

supply chain and operations of different organizations. It is the operations and supply chain of the organizations which

are defining the success or the failure of the company.

Let's now look through a real life and actual issue that was addressed and resolved using principles of logistics,

distribution, network design, that we went through in these sessions to provide a workable solution for a tire

manufacturing company in reaching its end objective.

So, this example here talks of two companies, Michelin tires and Apollo tires. So, the factual data is as under. Michelin's

sales office in India was established in 1999. It entered into a joint venture with Apollo types in 2004. Apollo has

multiple manufacturing units while Michelin important and sells products using the joint venture network.

This was at that time in 2004. Apollo tires has a network of six regional distribution centres and 117 depots across the

length and breadth of the country. The joint venture entity between Michelin and Apollo used 75 of these depots to

stock and sell products.


Here's where the problem comes in. The joint venture did not last more 18 months. The exit clause in the joint venture

compelled Michelin to move out of the Apollo tire network and find its own distribution networking channels.

What are the problem statements? How does Michelin move out of all the depots, all the stocks? Basically, from the

6 RDCs and the 70 depots that it used. How does Michelin establish self-sufficiency in logistics and distribution? How

does Michelin ensure zero disruption in servicing existing customers? How does Michelin put in place an organization

that delivers and sustains logistics, distribution and customer service? And to top it all, it had to be done in 30 days

flat.

So, the solution that Michelin adopted, it created detailed plans with stakeholders, internal as well as external. Who

are the internal stakeholders? Predominantly sales. Who are the external sales holders, the dealers, the distributors,

the end customers on how to go about each activity? It agreed on a distribution strategy with the sales team.

The fact was that Apollo tire's distribution strategy, deliveries were all done in the same day, thanks to the span of

distribution network that they had within the country, which would have become a very costly affair for Michelin as

an entity. So, therefore there had to be a handshake between logistics and sales for the distribution strategy. It defined

and agreed on service levels with the sales team as a consequence.


It came to the conclusion that we had to work with a third-party logistics service provider for logistics, transportation

and warehousing and credit management, which is very, very essential at an agreed cost.

So, what did Apollo tires have, that Michelin didn't have. It had a network which ensured same day and express

deliveries, thanks to its 6 regional distribution centres and 117 depots. Michelin's network or the network that it

proposed finally, which was implemented ensured same day deliveries, day plus one and day plus two deliveries

depending on the distance and volume of take based on its final implementation to begin with one hub and 36 depots.

The concept of a hub was primarily because Michelin imported all its tires. The factors that were considered when

adopting the strategy.

1. One, the cost that Michelin was willing to spend basically measured as logistics cost as a percent of sales.

2. The service levels to which the sales team was willing to stretch. So, it is not that it was easy for sales. They

had to convince the customer on the other end while ensuring a seamless transition that because of the time,

the deliveries would not be immediate.

3. The number of depots that were strategically located to cater to the above two, both the costs and service

levels.


So, the map here that shares therefore based on the actual customer profiling and off-take, the depots and the location

of the hub distributed between the four regions in the country. This was done in accordance with taking into a

cognizance the service levels and with the 3 PL that the company engaged to work with. So, Michelin logistics, Michelin

sales, and the outsourced service partner, all three were instrumental in designing this.

So, the scenario and network setup look somewhat like this. It gives the total number of warehouses, basically there

were three vendors or service providers to whom the RFQ or the request for quote or proposal was floated, of which

two were considered worthy of following up for second round and third rounds of negotiation.

And this is the complete details based on service level, the number of infrastructure and the distribution of costs

between the product lines, PC signifying passenger car, TB signifying truck and bus that was designed or set out in the

first place.


What were the strategies adopted by Michelin in finally choosing the service provider? The strategies as we go about

and as we re-capture what we talked about in logistics and distribution and costs.

o In terms of distribution compared to Apollo tires, which was local in nature and Michelin, which is completely

imported business with supply points as the focus, that is one. Two, again on distribution, it was agreed on

permissible service levels with the sales team. So, one should note that in the joint venture, it was the same

day delivery, thanks to the infrastructure that was provided by the joint venture partner. Whereas here, one

did not have the luxury to do that.

o On the cost front, it was worked backwards to ensure that logistics cost did not exceed 10% of net sales. This

was the basic starting point. Finally, on negotiating with the prospect and final service provider, Michelin

achieved an 8.8% logistics cost as a percent of net sales, which also is high compared to the global Michelin

standards of less than 6%.

In the second and third years, Michelin worked vigorously with the outsource partner to bring this down to

6% in the second year of operations. One has to see that Apollo's logistics costs as a percent of net sales is 3.5.

It's primarily because of the sheer volume, top line revenue that they got and therefore the luxury of the

fragmented infrastructure that they could have on the field.

o From a service provider point of view, the strategy adopted, chose to work with a third-party logistics provider

as inventory management activity was carried out by Michelin because of imports, which necessitated

Michelin to directly coordinate with the manufacturing locations outside globally. All other activities were

performed by the third-party logistics service provider.


This is how in summary, the stacking up, if one were to look at it on two parameters, the capacity to execute a project

of this magnitude and the cost to serve the customer, which is Michelin from a standpoint of logistics were to be

looked at in terms of flexibility, execution capability and costs.

The first 3 PL, which is called the 3 PL A, low capacity to execute and high cost. And therefore, was not invited to the

negotiating table or discussion table as we saw in the second round. 3 PL B was mid in both these execution and cost,

whereas the 3 PL C from a cost perspective was low and from an execution perspective was found to be highly flexible

and willing to, I wouldn't say bend, but address the client requirements.

The comparison or the selection criteria and recommendation. If one were to go through on the decision of a 3 PL and

setting up the distribution network based on the logistic service that Michelin as a company required, did not

necessarily or may not have necessarily gone by the textbook standard. But instead it chose, like I have been

emphasizing and reiterating time over that one needs to have a little bit of flexibility and common sense built into the

various parameters that we decide on or that we discuss on.

So, the recommendation factors that we chose to work with and measure or stack up the service providers was on

feasibility to execute a project of a magnitude such as this, both from the perspective of time, 30th day had to be up

and running and taking customer orders and delivering them from the start to finish, and the feasibility to be available

at all points in time to serve the customer requirements, which gets addressed in the service levels.


If it is agreed that it's the same day delivery, it has to be the same day delivery. D plus one, D plus two are the other

two delivery levels and every time that every single month the service provider and the company Michelin used to sit

together to take stock of these objectives and where we are on the path to progress.

The risks and the capabilities other than the feasibility and service level, the implementation. Basically, the

implementation risk and capabilities were also considered in both these scenarios by the management team that was

there of the chief executive, the head of logistics, the head of sales and the head of accounting.

The current costs which were there at Michelin, globally, the current costs under which Michelin tires are being sold

through the joint venture network were kept as the benchmark as we move forward in assessing the cost and chipping

it away while working with the strategic partner.

Always looking at the future in mind, saying that it is, we are not going to choose a partner who we are going to discard

within six months or one year. If they meet on the feasibility service level and implementation, we would work with

them on the costs and the future to ensure that the partnership is cemented well.

So, Michelin chose to work with the 3 PL that it selected by using the concepts of the network strategy and customer

service both together, and taking the sales team and the customer's voice and giving them a guarantee that what is

going to be agreed on will be implemented and only better in times to come.

So, this was a classic case in not only Michelin India, because of the time it took to implement from start to finish,

within 30 days, 30 days was the time was given, the 28th day, the first tire or the first sets of tires from various depots

rolled out to the customers or they were invoiced. So, it was a case that was taken up even globally in the Michelin

Asia Pacific world.


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