Third party logistics: a framework for Indian railways

Abstract

The introduction of demand-pull based EOQ procurement system along with Third Party Logistics (3PL) service provider and implementation of Routing and sequencing of vehicles based on Saving Matrix Method, being looked as a tool for increasing efficiency and reducing the cost. In the context of Indian Railways, Materials Management is one of the areas where expenditure on materials is of the order of Rs 13000 crores and there is a possibility of cost cutting by employing efficient method of procurement and introduction of 3PL service provider, as there is no much scope to reduce wages bills and pension liability drastically. A frame work based on EOQ model of procurement have been developed on optimization of total cost of ownership (TCO) which contains four elements of cost viz. annual ordering cost, annual materials cost, annual inventory holding cost and annual transportation cost. The choice of location of collection centres (CC) is based on well thought out critical factors. The CCs in the Railway premises would be operated by the 3PL service provider, whose prime role would be the effective coordination with vendors, MTN Stores Depot and the Purchase office for most efficient ways of materials transportation by effective segregation, consolidation and dispatch in Full Truck Loads (FTL) to MTN Stores Depot. For the check on optimality of the mathematical modeling of TCO, A and B category stock items pertaining to MTN stores depot, having annual usage value of Rs 84.04 crores have been considered. The results of analysis have shown cost saving of the order of Rs.6.78 crores over current TCO of Rs. 95.62 crores while considering introducing 3PL service provider in the Materials Management function. The cost saving can further be achieved by implementing Routing and Sequencing of vehicles based on Saving Matrix Method. The proposed model apart from cost saving will result in to avoidance of stock out situations on one hand and better control of inventory on the other hand.