Designing Logistics Information System

The information system is an interacting structure of people, equipment, methods and control, designed to create information fl ow in the required format for the user to make the decision to reduce the risk element. Like the management information system (MIS), which is designed more for general management information needs, the logistics information system (LIS) caters to the
specifi c information needs for decision making in the areas of logistics management. LIS basically consists of the following elements:

  • Information sources
  • Information collection system
  • Storage
  • Processing
  • Retrieval
  • Report formatting

Information Sources. There are two basic resources for information, namely external customers and the internal departments or functional areas of the enterprise.

Information Collection System. Customer order may come in the form of a purchase order through mail, fax or electronic data exchange (EDI). This information may be fed into the system manually if it is in paper form. Information in electronic form will be directly decoded and entered into the LIS. The customer order may be assigned a particular code (bar code) to track and trace it by various internal information users.

From internal sources the information may be collected and punched manually or fed into the system electronically by using an automatic identifi cation technology such as bar coding, radio frequency tags and voice interactive system.

Storage. Information storage is done on magnetic tapes, CDs or the hard disk of centralized computers. With advanced data storage systems based on the magnetic principle, it is possible to store voluminous data.

Processing. Today, with advanced computer technology using microchips, instant processing of voluminous data with great accuracy is possible. However, selection of the right computer system for a given application needs to be done cautiously, keeping in view the objectives, investment cost and maintenance capabilities.

Retrieval. An advanced computer data warehousing and mining system will facilitate instant data retrieval at user terminals spread across the system.

Report Formatting. The appropriate software designed for the installed system makes it possible to generate reports for users in the required formats.

The above system elements need to be configured as per requirements of various users of the system. However, the over-designed system will have the various capabilities, but the cost will be prohibitive; while the low-cost system will not be capable of satisfying the needs of all the system users. Hence, the trade-off may be thought of for cost and the system capabilities for the given applications. Non-value-added system output capabilities may be identified and taken out of the system to reduce investment cost.

Information for decision-making is required at all levels of logistics management. However, the type of information depends on the authority level and the criticality of the decision. Hence, the LIS is designed around the following four information requirement areas (see Figure 10.1).

1. Operating Level

This starts with the receipt of an order from the customer. The operating-level components that need to be coordinated are order registration, order processing, procurement, order filling, pack­aging and transportation. The information system is needed for logistics system efficiency in han­dling the voluminous multiple activities.

Order Registration. This is the entry point for customer order. A purchase order may be received through the mail, fax, email or EDI (Electronic Data Interchange) format. The order is then edited in the system to check for the prices, quantities, taxes, levies, delivery period and payment terms as agreed during the sales negotiation or as per the enterprise’s acceptable norms. Any deviations are to be brought to the notice of the customer for issuing amendments. The order is acknowledged and con­firmed to the customer for acceptance after ensuring that inventory availability and delivery dates con­form to the customer’s expectations. The main job at order registration is scrutiny, finding deviations if any, communicating with the customer for issuing amendments and acknowledgement of order.

Order Processing. Once the order is registered and confirmed for execution, the system looks for the inventory in the network. The available warehouse stock is first checked and inventory alloca­tion is done. In case an item is not available at the warehouse, the system looks for the availability of the item across the work-in-progress inventory and assigns the inventory from the next batch. If an item is not even scheduled for production in the near future, action for its procurement from other distribution centers is initiated or arrival of the next lot is awaited. The various functions covered under order processing are:

  • Inventory allocations
  • Creating orders and follow-up of order backlogs
  • Filled order document generation
  • Verification of orders
  • Linkage with other distribution centers
  • Inventory replenishment

Inventory Planning. Planning for procurement is based on the forecast for new orders and the accumulated backlog. It covers forecast analysis and modeling; historical analysis of inventory move­ment; forecast selection; inventory simulation and inventory requirement planning based on new orders expected and pending backlogs; and inventory replenishment scheduling and inventory build-up scheduling. LIS here does all the coordination activities for inventory and material move­ment across the supply chain. After raw materials are received, it tracks them to the manufacturing schedules for obtaining the finished goods to complete the order backlog and fill new orders.

Warehousing and Distribution. LIS, for warehousing, typically covers the following:

  • Allocation and assigning of storage space
  • Distribution of inventory to various field distribution centers
  • Material handling
  • Inventory replenishment
  • Inventory control

The LIS is more concerned with maximizing warehouse productivity.

Procurement. The LIS is not a part of the procurement system; however, the role of LIS in pro­curement is to coordinate inventory procurement by way of preparing inventory forecast, coor­dinating the transportation, organizing, receiving, managing raw material stores, and issuing of material for manufacturing schedules. It looks into lot size optimization for reducing transporta­tion and handling charges.

Transportation and Delivery. Transportation and delivery involves three parties, namely, the consigner, carrier and the consignee. The information system effectively coordinates these three parties. It helps to plan, execute and manage activities related to the movement of goods across the supply chain. The decisions on the mode selection for freight optimization, carrier selection for lowest freight rates and reliable service, and shipping schedules are possible through the infor­mation integration through LIS. For efficient and effective movement of goods, integration and sharing of information across consigner, carrier and consignee is done by LIS, which also focuses on generation of documents such as orders, invoice, delivery notes, packing list, and so on. LIS helps in reducing transportation cost and helps in increasing the planning capability of the logistics department.

2. Tactical Level

At the tactical level, the information system is required to provide information for making decisions on the formulation and implementation of logistical strategies. The decision process here requires the information for bringing in effectiveness in the logistics system. The following are typical deci­sion areas wherein information analysis is required for evaluating tactical alternatives.

Facility Planning. Facility planning requires a crucial decision to be made and involves financial commitments. The decision may be for a new facility or for expansion of the existing facility. The requirements of warehousing space and storage system are based on expected volumes of prod­uct throughput. However, the information available at other distribution centers with respect to throughput may help as guidelines in designing the new facility. The expansion plan can be initi­ated only after certain throughput levels are reached at the existing facilities. Hence, for facility investment decisions LIS is required to provide an analysis of capacity utilization of the existing facilities with respect to their throughput level. The data on competition may help in the facility planning exercise. Even though these decisions are not made frequently, the LIS is required to sup­port those decisions by making information and analysis available as and when these are required.

Vehicle Routing and Scheduling. Transportation is a major cost element in logistics. Vehicle routes are planned to have wider distribution coverage so that per unit transportation cost is mini­mum. The information system here needs to provide information on route length, the unloading and loading points en route, the time taken for the vehicle to reach the destination, the replenish­ment frequency at various distribution centers, and the shelf life of the products. Depending on the replenishment frequency, vehicle schedules can be increased or reduced. In a complex situation involving multiple routes and distribution points, decision models based on linear programming using computers are recommended. For product distribution to a large network of petrol pumps across the country (from various refineries), petroleum companies need to optimize the distribu­tion system. So, elaborate exercises on route planning and vehicle scheduling using the linear programming model are undertaken by them to reduce the distribution cost, which is as high as 15-17 per cent of the product cost. Same is the case with dairy companies. A dairy company with many milk collection points (numbering around 300-1000, depending on company size), needs to make decisions on route planning of vehicles, keeping the crucial time factor in mind for their perishable product.

Inventory Management. A logistics system’s effectiveness is judged by the trade-off between the level of customer service and the level of inventory being maintained to support it. A high inven­tory turnover ratio is a sign of good inventory management. A decision on the inventory requires information on stock levels across factory, distribution centers and channel members, the route travel time and vehicle scheduling to meet customer demand at the right place and at the right time. Supplies to customers can be organized on a frequent basis in small batch quantities and can similarly be replenished internally with proper planning. Hence, the timely decision on inventory is possible with LIS which is designed for accuracy and speed in information flow.

Channel Integration. A logistics program, without close coordination with the channel members’ requirements, will have a higher probability of failure. Channel members have different inventory requirements in terms of product varieties, volumes and frequency of replenishment. Hence, the information system is required to facilitate planning of delivery schedules across the channel to maintain a continuous inventory supply, keeping a minimum level at the distribution centers. The integration of channel members with the distribution centers is possible only through a properly designed LIS.

Outsourcing. This is an area for tactical decisions, for which LIS has to provide information on the current productivity level and the operating cost of the logistical system in operation. Based on the analysis of the working of the existing logistic operations, a decision can be made whether the operations are required to be outsourced or to be performed internally. The role of LIS here is to provide the cost-benefit analysis of the existing and the proposed outsourced operation for comparison to take an appropriate decision.

3. Control Level

LIS’s major application is in the area of management control. Based on the operating-level data, LIS is required to generate reports on the performance of various logistics operations. The LIS is required to generate reports on a regular basis on the operating cost of the logistical system. This includes the cost of warehousing operation, operating cost of material handling equipment, wage bill, freight and utility cost. Deviations can be probed for timely corrective action. Major areas of management control that need LIS support are as follows.

Asset Management. Asset management is the area wherein LIS helps in evaluating a particu­lar asset investment against its returns and the payback period. The returns will be in terms of improved material movement, reduced damages, higher throughput and lower cost of operation. LIS is designed to make these reports on a regular basis to evaluate asset performance.

Customer Service. One of the major objectives of the logistics system is to provide excellent customer service. LIS’s focus today is to help management maintain the targeted level of customer service so as to gain a competitive edge. Parameters such as order performance cycle, order fill rate, case fill rate, the number of customer complaints and transit and handling damages will need to be regularly checked to maintain the level of customer service. LIS feeds the information, along with the operating-level data analysis, in the required format, as and when required by the management for evaluation and necessary corrective actions.

Cost Control. Inventory-carrying cost, freight, labour cost, equipment operating cost and utility cost are the major costs that need to be controlled. LIS needs to generate cost reports to control any deviations.

System Productivity. Higher productivity results in reduced operating cost and increased returns on assets. Hence, LIS needs to generate reports on the productivity level of immovable and mov­able assets and labour. Typical ratios such as inventory turnover, number of packages handled per day, equipment downtime, warehouse throughput and warehouse occupancy are required to be worked out by LIS to evaluate the productivity of the system.

4. Strategic Level

Strategic-level decisions require information support for developing a logistics strategy in order to gain a competitive edge. These decisions have long-term objectives. The frequency of such deci­sions is very low. Decision making requires the analysis of a variety of data collected at the operating level to build models for strategic decisions. Strategic decisions at this level include the following.

Capability and Capacity Planning. The vision, the mission and the goals of business influence capacity and capability planning of the LIS. The logistics objectives should be in line with the objectives of the main business. Capability and capacity planning requires investment decisions. The LIS role here is to evaluate planning decisions in light of their affects on other functional areas such as marketing, finance and customer service on a long-term basis. LIS also helps analyze and evaluate the probabilities and pay-offs of various available options.

Alliances and Partnerships. The LIS role in this strategic area is to provide the management a base platform to evaluate the benefits of alliances and partnerships in terms of cost reduction, customer service speed and revenue generation. LIS helps to work out the return on investment and the payback period.

Customizing. The customizing of services will involve the introduction of value-added services and resource commitments. LIS needs to help evaluate these decisions in light of the benefits and cost of customization. It will need to ask who these customers are needing customization, their business volumes and what they are paying for. Is it worth committing resources to the customized services asked for? Who are the other customers affected? Will there be any opportunity loss? LIS is required to help the management to evaluate the customization alternatives.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.

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