Use of Logistics Channel and Public and Private Distribution Facilities – For Material Sources

Use of Logistics Channel

The procurement cycle occurs at the manufacturer/supplier interface and includes all processes necessary to ensure that materials are available for manufacturing to occur according to schedule. During the procurement cycle, the manufacturer orders the components from suppliers that replenish the component inventories. The relationship is quite similar to that between a distributor and manufacturer, with one significant difference: whereas retailer or distributor orders are triggered by uncertain customer demand, component orders can be determined precisely once the manufacturer has decided what the production schedule will be. Component orders are dependent on the production schedule. Of course, if a supplier’s lead times are long, the supplier has to produce to forecast because the manufacturer’s production schedule may not be fixed that far in advance.

In practice, there are several tiers of suppliers, each producing a component for the next tier. A similar cycle would then flow back from one stage to the next. The processes are shown as below;

A firm can vary supply of product by controlling a combination of the following two factors:

  1. Production capacity
  2. Inventory

The objective is to maximize profits. Some of the specific approach to managing capacity and inventory are listed below:

  • Time flexibility of workforce so as to comfortably utilize the idle or unused space
  • Use of seasonal workforce so as to meet the sudden shoot in demand and not loose on the revenue thus generated.
  • Use of subcontracting so as to acquire an economical way since it works out to be cheaper.
  • Use of dual facilities- dedicated and flexible so as to produce at a relatively steady rate with fluctuations being absorbed by the flexible facility.
  • Designing product flexibility into the production processes, modification in layout, so as to meet the sudden demand as well as effectively extract the best possible from all the resources in an accommodating and flexible manner.

Managing inventory by:

  • Using common components across multiple products, which would facilitate a relatively constant overall demand.
  • Build inventory of high demand or predictable demand products, which helps in synchronization of supply and demand making the utmost and optimum use of seasonal and off seasonal advantage.

Use of Public and Private distribution facilities:

This aspect involves a two-fold consideration

  1. From the transportation point of view
  2. From the warehousing point of view

As can be clearly understood, transportation involves either owning the means of transport or appointing an agency for transport commonly known as outsourcing of transportation service. This has to be analyzed considering the long-term benefits, the cost-benefits, the responsive benefit, and efficiency, comparing the estimated results in both the cases – owned as well as outsourced. Again if the lead time is high, the location facility if at a greater proximity to the suppliers, and if the cost structure is suitable to the company the company shall go ahead to establish its own infrastructure to increase the transportation efficiency. This is mostly the case with companies that practice just in time method and is affiliated to a reduced inventory system. Similarly, the reason not many companies owning is its involves huge capital investment, increased complications, increased labour and the like. Companies now a days also design their own shapes in the trucks and other means of transport so as to accommodate maximum in the limited possible space.

A warehouse, may be, privately owned and operated by company making its own goods known as private warehouse and a warehouse may be owned and operated by another organization, including a government agency, and only used by a company on certain terms and conditions known as public ware house.

Irrespective of whether a warehouse is privately or publicly owned, the following factors have to be taken into account to work out the cost of storage:

  • Interest on the cost of buying the site
  • Interest on the cost of furniture
  • Cost of repairs and maintenance
  • Depreciation on building and equipment
  • Insurance

If productivity (or efficient use) of the warehouse can be increased by 20% there is an equivalent reduction in costs per unit handled and processed. There are fixed costs in the shape of the cost of space per square meter or per cubic meter, which have to be borne, whether or not the warehousing is operating. Maximum efficiency is obtained by processing a larger number of units through the warehouse space. The larger the number of processed units, the lower the cost per unit. There is nothing as a better or the best option but both have their sets of advantages and disadvantages and a company should critically evaluate all the expenses related and accordingly decide the better and the most suitable option for itself. However it is always advised to use a perfect blend of both, private as well as public warehouses. Also, private warehouses need not be owned, they can be rented or leased with or without equipment.

Source: ( Extracted from 60408786-Logistics-Book)