Supply Chain Management Text and Cases Second edition
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Supply Chain Management TexT and Cases seCond ediTion Janat Shah Indian Institute of Management Udaipur Delhi • Chennai
Copyright © 2016 Pearson India Education Services Pvt. Ltd Published by Pearson India Education Services Pvt. Ltd, CIN: U72200TN2005PTC057128, formerly known as TutorVista Global Pvt. Ltd, licensee of Pearson Education in South Asia. No part of this eBook may be used or reproduced in any manner whatsoever without the publisher’s prior written consent. This eBook may or may not include all assets that were part of the print version. The publisher reserves the right to remove any material in this eBook at any time. ISBN 978-93-325-4820-6 eISBN 978-93-530-6252-1 Head Office: A-8 (A), 7th Floor, Knowledge Boulevard, Sector 62, Noida 201 309, Uttar Pradesh, India. Registered Office: 4th Floor, Software Block, Elnet Software City, TS 140, Block 2 & 9, Rajiv Gandhi Salai, Taramani, Chennai - 600 113, Tamil Nadu, India. Fax: 080-30461003, Phone: 080-30461060 www.pearson.co.in, Email: [email protected]
To my parents, Ghanshyambhai and Padmaben, my wife, Seema, my daughter, Riddhi, and her cousins, Medha, Stuti, Niket, Rishwa and Yashwi
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ABOUT THE AUTHOR Janat Shah, a mechanical engineer from the Indian Institute of Technology Mumbai, held several middle- and senior- management positions before returning to academia in 1989. A Fellow in Management from the Indian Institute of Management Ahmedabad, Professor Shah has worked for a short duration at the Institute of Rural Management, Anand, before moving to the Indian Institute of Management Bangalore as Assistant Professor in 1991. As visiting scholar at the Sloan School of Management, MIT, in 1997, he has worked on areas related to supply chain management. He was also a visiting faculty at the Logistics Institute, National University of Singapore in 2001. Currently, Janat Shah is a professor of operations management at the Indian Institute of Management Udaipur, and holds the position of Honorary Professor at the Nottingham University Business School in the operations management division. Professor Shah conducts management education programmes for executives in a number of companies, and offers consultancy services in the area of design and devel- opment of decision-support systems for supply chain management. He is a consultant to companies such as Tata Chemicals Limited, Mahindra & Mahindra, Infosys, Marico, Tata Teleservices, IBM, Aditya Birla Group, Yokogawa Blue Star Limited, and Ingersoll Rand. He has edited two volumes, Logistics and Global Outsourcing (2004) and Operational Research in the Indian Steel Industry (1993), besides contributing chapters to numerous books on supply chain management. In addition, he is also on the editorial board of inter- national journals such as International Journal of Procurement Management, International Journal of Product Lifecycle Management and International Journal of Logistics: Research and Applications, and has refereed diverse journal articles and proceedings. Professor Shah, voted the best teacher by the MBA class of 1999, has won numerous teaching awards. Significant among them is the IBM faculty award that was awarded to Professor Shah and his team for two successive years, 2005 and 2006, for their work on human resource supply chain management. His research interests lie in the fields of supply chain management, and design of manufacturing systems.
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CONTENTS Preface xvii Reviewers xxiii Part I: Introduction and a Strategic View of Supply Chains 1 1 The Role of Supply Chain Management in 3 Economy and Organization Introduction 4 What Is Supply Chain Management? 4 Evolution of Supply Chain Management 5 Key Concepts in Supply Chain Management 9 Decisions in a Supply Chain 10 The Importance of the Supply Chain 11 Enablers of Supply Chain Performance 13 Improvement in Communication and IT 13 Emergence of Third-party Logistics Providers 14 Enhanced Inter-firm Coordination Capabilities 14 Supply Chain Performance in India 15 Challenges in Maintaining a Supply Chain in India 16 Supply Chain Challenges for the Indian FMCG Sector 18 2 Supply Chain Strategy and Performance 25 Measures Introduction 26 Customer Service and Cost Trade-offs 26 28 Order Delivery Lead Time 31 Supply Chain Responsiveness 33 Delivery Reliability 34 Product Variety 35 Supply Chain Performance Measures 37 39 Benchmarking Supply Chain Performance Using Financial Data Linking Supply Chain and Business Performance
|x| Contents Enhancing Supply Chain Performance 39 41 Supply Chain Optimization 41 41 Supply Chain Integration 45 Supply Chain Restructuring 46 3 Outsourcing: Make Versus Buy 46 47 Introduction 48 49 Make Versus Buy: The Strategic Approach 50 51 Identifying Core Processes 52 53 The Business Process Route 53 56 The Product Architecture Route 57 58 Market Versus Hierarchy 58 59 Economies of Scale 61 63 Agency Cost 69 Transaction Cost 71 Incomplete Contracts 72 Integrative Framework of Market Versus Hierarchy 73 74 The Make-Versus-Buy Continuum 74 74 Tapered Integration 74 75 Collaborative Relationship 75 76 Sourcing Strategy: Portfolio Approach 76 76 Reconfiguration of the Supply Base 77 78 Impact of the Internet on Sourcing Strategy 79 81 Part II: Managing Material Flow in Supply Chains 82 83 4 Inventory Management 89 90 Introduction Types of Inventory Cycle Inventory Safety Stock Decoupling Stocks Anticipation Inventory Pipeline Inventory Dead Stock Inventory-related Costs Ordering Costs Inventory-carrying Costs Stockout Costs Managing Cycle Stock Cycle Stock Inventory Model Managing Safety Stock Capturing Uncertainty Impact of Service Level on Safety Stock Managing Seasonal Stock Planning for Seasonal Demand
Contents | xi | Analysing Impact of Supply Chain Redesign on the Inventory 91 Centralization Versus Decentralization 91 Choice of Mode of Transport 93 Managing Inventory for Short Life Cycle Products: Newsvendor Model 94 Multiple-item, Multiple-location Inventory Management 95 Selective Inventory Control Techniques 96 5 Transportation 103 Introduction 104 Drivers of Transportation Decisions 104 Transportation Cost Structures 104 Impact of Product and Demand Characteristics on System Cost 106 Modes of Transportation: Choices and Their Performance Measures107 Choices Available 107 Comparison of Modes of Transportation on Supply Chain Performance Measures 109 Devising a Strategy for Transportation 113 Distribution Network Design Options 113 Comparison of Distribution Network Design Options 114 Cross-docking 117 Transportation Strategies Followed by Retail Firms 118 Vehicle Scheduling 119 Saving Algorithm for Vehicle Scheduling 119 Static-Versus-Dynamic Scheduling 123 Transportation Costs in E-Retailing 124 Shipping Charges by E-Retailers 124 Impact of Transport Cost on Business Performance of E-Retailers 125 Grocery on the Internet: Experience of Webvan and Tesco 127 6 Network Design and Operations: Facility 131 Location Introduction 132 Network Operations Planning 132 Relevant Costs for Network Decisions 132 Network Operations Optimization: Cost Minimization Model 134 Network Operations Optimization: Profit Maximization Model 136 Network Design Problem 138 Network Design Model: Cost Minimization Model 139 Network Design Model: Profit Maximization Model 140 Political Dimensions of Network Design Decisions 141 Network Design and Operations Models: Extensions 143 Seasonal Products: Tactical Planning Problems 143 Multiple Capacity: Deciding on the Best Option 143 Short Life Cycle Products: A Suitable Network Design 144
| xii | Contents Data for Network Design 147 147 Demand Data 147 148 Supply Side Cost Data 148 149 Strategic Role of Units in the Network 150 151 Strategic Role Framework 152 152 Role Evolution Within a Network 153 Location of Service Systems 156 156 Locating Retail Outlets 157 Locating Public Service Systems 158 160 Designing Aftermarket Service System Network Incorporating Uncertainty in Network Design Appendix A: Solving Network Design and Operations Problem Using Excel Solver Step 1: Preparing Base Data Step 2: Formulating Model in Solver Step 3: Solving Problem and Carrying Out Sensitivity Analysis of the Solution Using Solver Network Design Decision Part III: Managing Information Flow in Supply Chains 163 7 Demand Forecasting 165 Introduction 166 166 The Role of Forecasting 167 Characteristics of Forecasts 168 169 Time Horizons for Forecasting 169 Qualitative Forecasting Methods 170 The Delphi Approach 170 Market Research 170 172 Life Cycle Analogy 172 Informed Judgement 174 Quantitative Methods 175 176 Time-series Method 177 Causal Models 181 Forecast Error 182 Time-series Forecasting Models 184 Case 1: Forecasting Level Form 187 187 Case 2: Forecasting the Trend Form Case 3: Forecasting Seasonality Case 4: Forecasting Combination of Seasonality and Trend Data Preparation for Building Time-series Models Behavioural Issues in Forecasting 8 Information Technology in Supply Chain 191 Management Introduction 192 Enabling Supply Chain Management Through Information Technology 192
Contents | xiii | IT in Supply Chain Transaction Execution 194 195 IT in Supply Chain Collaboration and Coordination 199 201 IT in Supply Chain Decision Support 202 IT in Supply Chain Measurement and Reporting 205 205 Strategic Management Framework for IT Adoption in Supply Chain Management Supply Chain Management Application Marketplace Future Trends Part IV: Supply Chain Innovations 221 9 Supply Chain Integration 223 Introduction 224 Internal Integration 225 Centralized System 226 Decentralized System 227 Hybrid System 227 External Integration 228 Increase in Demand Volatility While Moving Up the Supply Chain 228 Impact of Buyer Practices on Demand Distortions Across the Buyer–Supplier Link 229 Impact of Supplier Practices on Demand Distortions Across the Buyer–Supplier Link 231 Bullwhip Effect: Demand Volatility and Information Distortions Across Supply Chains 233 Remedial Strategies to Counteract Demand Distortions Across Supply Chains 235 Barriers to External Integration 237 Building Partnership and Trust in a Supply Chain 240 Steps in Building Successful Relationships 241 Effect of Interdependence on Relationships 242 Supply Chain External Integration: Industry-level Initiatives 243 Vendor-managed Inventory 243 Efficient Customer Response 244 CPFR 245 10 Supply Chain Restructuring 249 Introduction 250 250 Supply Chain Mapping 251 Value-addition Curve 251 Customer Entry Point in the Supply Chain 252 Point of Differentiation 252 254 Supply Chain Process Restructuring 254 Postpone the Point of Differentiation Postponement Case Studies
| xiv | Contents Postponement for Reducing Transportation Cost 256 256 Problems with Implementing the Postponement Strategy 257 Changing the Shape of the Value-addition Curve 258 259 Advance the Customer Ordering Point: Move from 260 261 MTS to CTO Supply Chain 263 Altering Customer Offering Bundle 263 264 Illustrative Case Studies 265 Moving from MTS to CTO: Alternative Approaches Moving from the MTS to the CTO Model: The Role of Innovations and Experimentations Restructuring the Supply Chain Architecture Restructure Flow in the Chain: Hindustan Unilever Case Restructure Placement of Inventory in the Chain 11 Supply Chain Contracts 271 Introduction 272 Incentive Conflicts in Supply Chains 272 Types of Supply Chain Contracts 277 Effectiveness of Supply Chain Mechanisms 278 Buyback Contract 278 Revenue-Sharing Contract 283 Equivalence of Revenue Sharing and Buyback Contracts 286 Other Popular Supply Chain Contracts 288 12 Agile Supply Chains 291 Introduction 292 Supply Chains for High Demand Uncertainty Environment 293 Forecast Updating 294 Responsive Supply Chain: Optimal Use of Dual Sources of Supply 296 Illustration of Responsive Supply Chain Approach 297 Speculative Approach 298 Responsive Approach 300 Impact of Negatively Correlated Demand Structure 304 Sources of Supply Chain Disruptions and Its Impact on Business 305 Sources of Supply Chain Disruptions 305 Consequences of Supply Chain Disruptions 307 Methodologies for Handling Disruptions 307 Multi-location Sourcing 308 Location of the Secondary Source 309 Appendix: Simulation Using Excel 311 Generating Random Numbers Using Excel 311 Building a Simulation Model 312
Contents | xv | 13 Pricing and Revenue Management 315 Introduction 316 Pricing 316 Law of Demand and Optimal Pricing Decision 316 Case of Non-linear Demand Curve 318 Revenue Management for Multiple Customer Segments 319 Pricing Under Capacity Constraint for Multiple Segments 323 Revenue Management Under Uncertain Demand and Limited-capacity Situations 325 Capacity Allocation Among Multiple Segments 325 Forward Market Versus Spot Market 327 Overbooking 328 Revenue Management for Inventory Assets: Markdown Management 330 Innovative Pricing 331 14 Sustainable Supply Chain Management 335 Introduction 336 Factors Influencing Green Supply Chain Initiatives 337 Challenges of Going Green 339 Green Supply Chain Management 340 The “Re-” process 343 The Social Aspect of Sustainable Supply Chain Management 347 Part V: Supply Chain Cases 351 Kurlon Limited (A) 353 Kurlon Limited (B) 367 Vehicle Routing at Baroda Union 373 Supply Chain Initiative at APR Limited 379 Supply Chain Management at Dalmia Cement Ltd 389 The Global Green Company 397 Marico Industries: mySAPTM Supply Chain Management 413 Subhiksha: Managing Store Operations (A) 433 Subhiksha: Managing Store Operations (B) 451 Suguna Poultry Farm Ltd 453 Brand and Company Index 467 Subject Index 471
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PREFACE I have benefited from many suggestions from students, colleagues, and senior supply chain executives from industry on my first edition. Based on the received comments as well as from my experience in using my text, I have made several changes in this edition. The most significant change from the previous edition is the addition of two chapters. Chapter 11 is about supply chain contracts. Supply chain contract is emerging as a valuable instrument to coordinate various supply chains. Few popular contracts such as buyback con- tracts and revenue sharing contracts are discussed in depth. The other new chapter is Chapter 14. It deals with emerging field of sustainable supply chain management. Sustainable supply chain encompasses economic development, environment performance, and social betterment. Apart from focusing on managing relevant trade-offs, the chapter also deals with issues related to reverse supply chains. Significant changes have been made in Chapter 1 while dealing supply chain evolution. Discussion about third revolution has been strengthened using recent examples from Apple and Airtel. Chapter 4 has been reorganized and discussion on periodic review model has been moved from appendix to main chapter. Section on e-retailing has been focussed in detail in Chapter 6. Chapter 8 dealing with IT has been updated with recent advances in technologies. A few new cases have been added in Part V, and for two cases Kurlon and Subhiksha, recent updates have been captured as Case (b). PREFACE FOR 1ST EDITION Supply Chain Management: Text and Cases presents a comprehensive, yet structured, view of logistics and supply chain management, with a focus on supply chain innovations for firms operating in competitive markets. This book evolved from a supply chain management course that I have been teaching at the Indian Institute of Management Bangalore since 1998. When I first offered this course, the discipline of supply chain management was still in its infancy, leaving me to draw on my experiences with various Indian industries. Between then and now, however, many good books on supply chain management have been published, which brings us to an important question. Why Another Book on Supply Chain Management? As globalization and technological innovation continue to etch new contours on the landscape of business, supply chain management continues to evolve. In such a dynamic scenario, this
| xviii | Preface book places equal weight on state-of-the-art know-how in supply chain management as it does on the fundamentals. Moreover, while it is important for Indian companies to learn from the West, even tried-and- tested solutions may not always be applicable to Indian firms. Issues such as poor infrastructure, large numbers of customers at the base of the economic pyramid and complex distribution and taxation structures require solutions specific to the Indian context. This book addresses these issues by blending the best global supply chain practices with an in-depth knowledge of the Indian environment, encouraging practitioners and readers to innovate. Numerous real-life examples of firms that have successfully evolved their supply chain management strategies help the reader relate to the theory presented and make learning easier. Throughout the book, while presenting mathematical models, every possible attempt has been made to foster in the reader an intuitive feel for the concepts described. This approach is intended to benefit those students who are intimidated by the use of mathematics. The final material presented in the book has been thoroughly tested at executive MBA programmes as well as several in-company programmes. The Structure of the Book The book is divided into five parts. The first four parts of the book equip readers with the nec- essary concepts, frameworks, tools and techniques for understanding, analysing and enhancing supply chain performance. In Part V, the focus is on applying these concepts to real-life busi- ness situations. Part I: Introduction and a Strategic View of Supply Chains Part I lays the foundation for understanding and analysing supply chains from a strategic perspec- tive. For this, the framework for aligning the supply chain strategy with the business strategy is presented. The key strategic supply chain decisions regarding the boundary of the firm, reflected in the make versus buy decisions faced by a firm, are extensively discussed. Part I also establishes several leads for the three remaining parts of the book. Part II: Managing Material Flow in Supply Chains Part II focuses on issues related to material flow: network design, transportation and inven- tory. Furthermore, the idea of supply chain optimization is introduced here. Using analytical models based on this approach, a firm can design and operate material flow in an efficient and effective manner. Part III: Managing Information Flow in Supply Chains For several key decisions related to material flow discussed in Part II, access to real-time, undis- torted data is essential. This information, rather than customer orders, is the basis of demand forecasting in most global supply chains. This part examines the various methods of demand forecasting and the related implementation issues. The contribution of information technology in facilitating the availability of these data is also discussed. Part IV: Supply Chain Innovations In Part IV, innovative supply chain strategies that enhance supply chain performance are high- lighted. The three strategies discussed are integration, reconfiguration and optimization of
Preface | xix | supply chains. Within supply chain design and operations decisions, specific issues, decisions and models involved in network design, inventory and transportation are scrutinized. Part V: Supply Chain Cases Ten case studies, designed to bring real-life supply chain environments within the classroom, are presented in this part. Collectively, these 10 cases cover all aspects of the rich landscape of issues that managers confront in the Indian supply chain context. Some of these cases are sharply focused on specific dimensions of supply chains whereas others are quite comprehen- sive, dealing with the whole gamut of supply chain issues that affect a business. Under the skilful guidance of a faculty member, the readers are expected to analyse and synthesize con- flicting data and points of view to define and prioritize goals, to persuade and inspire others who think differently and to make tough decisions with uncertain information. Features The Role of Supply Chain Part The learning objectives define the Management in Economy and salient points in each chapter that Organization 1 the student needs to focus on while reading the chapter. Their purpose is Learning Objectives to minimize the need for repeatedly reading the chapter. After reading this chapter, you will be able to answer the following questions: > Why is a supply chain important? > What are the key supply chain decisions made by a firm? > How has the supply chain evolved over the past century? > What are the unique challenges of managing a supply chain in India? Opening vignettes capture incidents from the real world. These lay the foundation for the theory covered in the chapter and exemplify the consequences of the application of theory to real-world situations.
| xx | Preface INTERVIEW WITH we could offer a large variety to customers Asian Paints is India’s largest paint company and the third-largest paint company in Asia without increasing the number of SKUs at the today, with a turnover of Rs 36.7 billion. Sab- factory. Way back in 1998 we restructured our- yasachi Patnaik is the General Manager, Manu- selves and created different business units. In facturing, for the Decorative Paint Business Unit the business of decorative paints, we created a (DBU) at Asian Paints. position of Vice President supply chain that is responsible for the end-to-end supply chain. We What is the level of complexity of the supply have been early users of information technology chain at Asian Paints? in India and we make sure that our information Each chapter carries an interview of Sabyasachi Patnaik: At DBU, we manage SABYASACHI technology initiatives are driven by our business a senior management executive/CEO around 500-odd vendors, 5 main manufactur- PATNAIK people. Our early investments in information of a firm that is a supply chain leader ing plants, 13 processing centres, 7 regional technology has helped us in reducing forecast within the industry. The interviews highlight the supply chain challenges distribution centres and 76 depots. We serve errors, reduced safety stocks and lowered the that real companies face and the innovative supply chain practices that about 19,000 dealers who are spread all over the country. freight costs. In past few years, we have focused on improv- companies have adopted to establish themselves as the market leaders. On the variety front, we have to manage 750 raw materials ing our capabilities in manufacturing. We have implemented and packing materials and 1,500-odd inventoried SKUs at Six Sigma and other lean methodologies to improve quality, the FG level. reduce cycle times and reduce rework. To reduce our material costs we have focused on sourc- What are the supply chain challenges that you face? ing efficiency as well as on improving formulation effi- Sabyasachi Patnaik: Increasingly our customers have become ciency. Hence, our material costs are probably the lowest more demanding and as a result we are constantly expected in the industry. We also have reduced our working capital to improve service levels. Further, we add 80–100 new SKUs requirement by exploring ways in which we can get higher every year. These new SKUs are more complex products re- credit from suppliers and by reducing the FG and RM in- quiring new materials and complex manufacturing processes ventory levels. Optimal balancing has been done between but usually have lower volumes compared to our existing higher creditors and material costs. I guess our main strength product lines. It is expected that our business should not only is quality of our execution. service a larger number of SKUs at higher service levels but also reduce costs related to the supply chain. So, unlike most What are the future supply chain initiatives that the firm is other businesses, where chains have to be either efficient or working on? responsive, we are expected to be responsive as well as effi- Sabyasachi Patnaik: With increased variety, we realize that cient. How to manage this stretch is the most important chal- holding stocks close to customers may not be the best op- lenge for supply chain managers at Asian Paints. tion. We are exploring the idea of keeping stocks at central distribution centres (CDC) located close to the plant so that LAUNCH OF THE SEVENTH HARRY POTTER BOOK The caselets are snippets that present actual industrial Harry Potter and the Deathly Hallows, the much-awaited seventh and final book in the Harry Potter practices or unique solutions series of novels, was released in 93 countries simultaneously on 21 July 2007. Managing a launch of this adopted by companies. magnitude is a supply chain nightmare. Ensuring that the book is available in sufficient quantity at tens of thousands of outlets across 93 countries across the globe poses substantial challenges to supply chain managers, who have also to ensure that the content of books is not leaked out before the launch date. The books had to reach the stores just in time for the launch, neither too early nor too late. Penguin India, the distributor of Harry Potter books in India, had to manage the seemingly impossible task of delivering the books simultaneously to 300 destinations just a few hours prior to the launch time of 6:30 a.m. Summary A summary at the end of Supply chain restructuring focuses on questioning the National Panasonic have managed to move from the the chapter recapitulates the existing processes and architecture of the chain. MTS to the CTO business model. important concepts and defi- nitions from the chapter. Supply chains can be characterized using the following Restructuring supply chain architecture involves either It allows the students to con- three dimensions: shape of the value-addition curve, altering the way in which material flow takes play in a centrate on the salient points point of differentiation and customer entry point. Re- chain or alteration in inventory placement in a chain. in the chapter. structuring of the supply chain process involves alter- ing the supply chain process on at least one of the Unlike supply chain integration and supply chain opti- three dimensions. mization, supply chain restructuring goes beyond sup- ply chain function and will require integrating product Supply chain restructuring involves supply chain in- and process engineering with supply chain function. novations involving either product redesign or proc- Similarly, it may also involve closer integration be- ess redesign or value offering to customers so as to tween marketing and supply chain function. improve customer service and reduce cost. Using sup- ply chain restructuring firms like Dell Computers and Business benefits of supply chain restructuring can be quantified with the help of analytical inventory models.
Preface | xxi | Discussion Questions 1. What are the key dimensions in a supply chain process? depots. The company has four regional depots (one in Each chapter includes discus- each zone of the country) and all slow-moving items sion questions at the end of 2. What are the ways in which a firm can move from an are first brought to regional depots from which the en- the chapter. These questions MTS model to a CTO Model? tire basket of slow-moving goods is shipped to 50 odd are designed to facilitate a depots. All fast-moving items are shipped directly from review of the concepts pre- 3. Identify industry and technology characteristics that the plants to depots. One of the management train- sented in the chapter. make postponement strategy viable. ees has suggested that HUL should redesign its supply chain (for slow-moving items). He has come with the 4. How do other business functions like product design, following two options: process technology and marketing contribute to sup- ply chain restructuring decisions? Have only one central depot at Nagpur (centre of In- dia) and serve the entire 50 depots from one central 5. Why will one want to design different material flow depot for all slow-moving items. systems for fast- and slow-moving items? Have four regional depots but each depot should spe- 6. Identify variables that affect the inventory placement cialize and stock only selected items that gets produced decisions within a chain? from the plants that are located in that zone. So all de- pots will get served from four regional depots for slow- 7. HUL has 100 plants (geographically spread through- moving items (instead of the current arrangement where out India) where a number of different product lines each depot is served from the closest regional depot for are manufactured and supplied to 50 odd depots that all slow-moving items). Each of the slow-moving items are geographically spread throughout India. To im- will get stocked at only one of the four regional depots. prove responsiveness and simultaneously to reduce costs, HUL has come up with the concept of regional Mini projects are activity- Mini Project and/or analysis-oriented assignments that give the How will your analysis of the problem discussed in section turing component and assembly. The manufacturing com- student a clear view of the “Restructure Placement of Inventory in Chain” change if we ponent accounted for 80 per cent of value addition and lead problems that a supply chain bring product variety in the analysis: Let us say the company time. manager faces in the real offered three variants and weekly demand for each of the world. These are designed variants in each of the market follows normal distribution 1. Where should company hold stocks in the system? to help the reader correlate with a mean equal to 100 with a standard deviation of 50. theory with reality. The manufacturing company had two sub-stages: manufac- 2. Determine the optimal level of safety stocks, given the above decision. Exercises are included at the end of selected chapters where key supply chain issues are discussed. These numerical problems are designed to help a student/reader to apply the con- cepts presented in the chapter to analyse and interpret data. The Teaching and Learning Package For Students Study Card: The study card is a six-page pullout that captures the essential learning from the book. It is designed to enable the reader to rapidly recapitulate the important concepts and equations from each chapter. For Instructors Instructors’ Manual: This book is designed to offer considerable flexibility to instructors in course design. Suggested alternative course outlines have been included in the instruc- tors’ manual, available at www.pearsoned.co.in/janatshah. Using these alternative outlines, the instructor can customize the course to meet the needs of the students, keeping their aptitude/background and the number of contact hours in mind.
| xxii | Preface Apart from this, each chapter is summarized from the instructor’s point of view. Teaching tips to make learning more interesting and relevant to student groups are provided. To help the instructor, detailed solutions for numerical exercises have been provided, wherever relevant. The instructors’ manual also features detailed case teaching notes for all the cases in Part V. It is designed to help the instructors in structuring their classroom discussions in an effective manner. These can also be used by the instructor to integrate the theory/models/ concepts discussed in the course with the managerial problems presented in the case. Lecture Slides (PowerPoint Presentations): PowerPoint slides for each chapter are available along with the instructors’ manual. These provide lecture outlines, important diagrams and additional material that can be used by the instructor to deliver lectures and make presentations in an effective and engaging manner. Acknowledgements This book is the outcome of my journey into the world of supply chain management spanning the last two decades. This journey has been influenced by four sets of people: teachers, col- leagues, students and industry practitioners. My teachers from IIM Ahmedabad, specifically Arabinda Tripathy, Jahar Saha, N. Ravichandran and Priyadarshini Shukla, have influenced the way I look at and perceive the world of management. My colleagues and co-researchers have contributed significantly to various ideas and frameworks that I have developed in the field of supply chain management. From IIM Bangalore, I would like to acknowledge L. S. Murty, Jishnu Hazra, B. Mahadevan, D. Krishna Sundar, Harith Saranga, R. Srinivasan, D. N. Suresh and Rahul Patil. A special thanks to L. S. Murty, a friend and a colleague for the last 17 years, who despite being subjected to all my half-baked ideas, has always found time to offer constructive feedback. I would also like to acknowledge Kulwant Pawar of the University of Nottingham; Chandra Lalwani of Hull University; G. Raghuram of IIM Ahmedabad; N. Viswanadham from the Indian School of Business, Hyderabad; Mark Goh from the National University of Singapore; and Jeremy Shapiro from MIT. I am grateful to the postgraduate management students, doctoral students and participants of executive programmes for their patience and support with the early versions of this man- uscript. They identified errors and suggested ideas for new examples. The outcome of my interactions with these students and industry participants has found a place in the discussion on agile supply chains. A special thanks to Ashish Dhongde for contributing a section on sup- ply chain disruptions. I would specifically like to acknowledge several doctoral students who have helped polish my ideas: Balram Avittathur, Nitin Singh, Ashish Tewary, Divya Tiwari and Punit Mathur. Ashish Tewary has also contributed Chapter 8—‘IT and Supply Chain Management’. Balram and Nitin Singh have co-authored the Kurlon and Tendupatta case stud- ies, respectively. I have learnt a lot from several industry colleagues, of whom I would specifically like to mention Vinod Kamat of Marico Industries, H. G. Raghunath of Titan, John S. Dischinger of IBM, S. Ravichandran of TVS Logistics, S. S. Varma of Tata Chemicals, B. K. Dutta of BPCL, and Suprakash Mukherjee of John Deere. Several ideas in the book have been supported with data from the Indian manufacturing indus- try. I wish to credit the CMIE database, Prowess, for the data used for the analysis in the book. The contribution of the team at Pearson India Education Services Pvt. Ltd deserves a spe- cial mention. Finally, this book would not have been possible without the constant encouragement and moral support from my wife Seema and daughter Riddhi. Janat Shah
REVIEWERS Consultant Board The consultant board provided us with a detailed and critical analysis of each chapter and worked with us throughout the development of the book. We would like to thank the following for their time and commitment: A. K. Dey Birla Institute of Management Technology, Greater NOIDA R. Dorai Indian Institute of Planning and Management, Bangalore Sunil Sharma Faculty of Management Studies, University of Delhi Reviewers The guidance and thoughtful recommendations of many helped us improve this book. We are grateful for the comments and helpful suggestions received from the following reviewers: Balram Avittathur Indian Institute of Management Calcutta N. Chandrasekaran Loyola Institute of Business Administration, Chennai Debadyuti Das Faculty of Management Studies, University of Delhi Robert De Souza Executive Director, The Logistics Institute–Asia Pacific, National University of Singapore S. G. Deshmukh Indian Institute of Technology Delhi John Dischinger Supply Chain Program Director, IBM Subroto Guha Patna Women’s College, Patna Rahul Gupta Invertis Institute of Management Studies, Bareilly V. K. Gupta Institute of Management Technology Ghaziabad Ananth V. Iyer Krannert School of Management, Purdue University
| xxiv | Reviewers Jayanth Jacob Anna University, Chennai Govindan Kannan University of Southern Denmark K. V. Krishnankutty College of Engineering, Thiruvananthapuram L. S. Murty Indian Institute of Management Bangalore Bodhibrata Nag Indian Institute of Management Calcutta S. S. Pal Amity Business School, NOIDA Rahul Patil Indian Institute of Technology Mumbai Chandrasekharan Rajendran Indian Institute of Technology Madras, Chennai Jyoti Prakash Rath International School of Business and Media, Pune R. Raghavendra Ravi Technology Associates, Chennai Narayan Rangaraj Institute of Technology Bombay, Mumbai A. Vidyadhar Reddy Osmania University, Hyderabad Srikanta Routroy Birla Institute of Technology and Science, Pilani Santanu Roy Indian Institute of Technology Kharagpur Sadananda Sahu Indian Institute of Technology Kharagpur Ajay Sholkey Kurukshetra University G. Srinivasan Indian Institute of Technology Madras, Chennai Viplava Thakur Xavier Institute of Social Sciences, Ranchi Pramod Kumar Tiwari L. N. Mishra Institute of Economic Development and Social Change, Patna Ranjan Upadhyaya WISDOM, Banasthali N. S. Uppal Bharatiya Vidya Bhawan, Delhi Asif Zameer FORE School of Management, New Delhi
PART Introduction and a Strategic View of Supply Chains I Chapter 1 T hanks to the liberalization of economies, firms have discovered that the globe is their playing field. The The Role of Supply Chain Management emergence of global markets has significantly altered in Economy and Organization the way businesses work. In a globalized economy, efficiency and speed of response becomes even more critical, and Chapter 2 supply chains become the new competitive weapon. Firms operating in the Indian scenario face many supply chain chal- Supply Chain Strategy and Performance lenges that are unique to the Indian context. This book deals Measures with the concepts of supply chain management and dwells on the problems that are unique to the Indian scenario Chapter 3 Chapter 1 defines supply chain management, traces its Outsourcing: Make Versus Buy evolution over the past century and identifies major trends that have made performance critical for business success. The chapter also discusses the implications of the unique chal- lenges that are presented by the complex supply chains of Indian firms for practising managers. Chapter 2 focuses on supply chain strategy and supply chain performance measures. The framework for integrating business and supply chain strategies is presented with a spe- cific focus on the inherent cost and customer service trade- offs. This chapter also presents the framework for prioritizing supply chain initiatives so as to enhance business perfor- mance on an ongoing basis. Chapter 3 deals with key strategic supply chain decisions regarding the boundary of the firm within the supply chain, including critical issues such as outsourcing versus inhouse operations. In this chapter, several perspectives on outsourc- ing have been analysed. The chapter also presents the classi- fication approach for various sourcing strategies that may be adopted for different categories of products. The goal of the three chapters in Part I is to provide a foun- dation for understanding and analysing supply chains from a strategic perspective. This framework helps in identifying sup- ply chain initiatives that improve business performance. Part I also establishes several leads for the remaining three parts of the book, which focus on supply chain flow and innovations.
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Chapter 1: The Role of Supply Chain Management in Economy and Organization |3| Part The Role of Supply Chain 1 Management in Economy and Organization Learning Objectives After reading this chapter, you will be able to answer the following questions: > Why is a supply chain important? > What are the key supply chain decisions made by a firm? > How has the supply chain evolved over the past century? > What are the unique challenges of managing a supply chain in India? Picture this scenario: A father–daughter duo walks into a three-storey outlet that houses every imaginable brand of jeans. The daughter wants to buy a new pair of jeans for college. The father, a busy man, is aware that his only role is to flash his credit card at the appropriate time. He impresses on the salesman that he needs to be back in his office within an hour and follows his daughter in a bemused manner from one display to another, as she flits around, turning the place inside out in her hunt for the perfect pair. Meanwhile, the salesman plies the father with offers of food and drink, all of which are impatiently refused. The father cannot imagine why his daughter, surrounded by a veritable sea of denim, cannot find what she wants. Gnawing at his nails, he remembers how, when he was a boy, all it took was 15 minutes to walk into a store, look at everything that was available, and walk out with two pairs of trousers and two shirts. The daughter breaks into his reverie with a casual “Not a thing here, Dad! You can go to your office. I saw some interesting online offers on my mobile. I will order 4–5 jeans on cash on delivery. I will keep one which I like and return rest of them. Sounds familiar? In this era of hypertechnology and globalized markets, customers have become very demanding. They know what they want and will not settle for anything else. To keep up with the demands of such fastidious and fickle customers, it is essential for a company that its supply chain functions efficiently. Supply chain management is not a new concept for businesses. However, companies are just realizing that a wide product variety is not going to give them an edge over their com- petitors unless it is backed up by an equally efficient supply chain, ensuring that the entire product range is made accessible to a potential customer. The purpose of this book is to explore ways and means of improving performance on this dimension.
|4| Supply Chain Management Introduction A quick research carried out in a local grocery store will reveal that, on an average, it takes 3–4 months for goods to reach the end customer. Sometimes, it takes as much as a year for goods to reach the end customer in the chain. It is indeed an amazing realization that there is a very complicated chain in place to ensure that one can buy the denims of one’s choice at a retail store. Companies have managed supply chains for decades, but never in history did they have the variety of the kind they handle now, or the kind of competitive pressures that they face now. Companies all over the world have realized that the difference between good and bad supply chain management can affect their profitability significantly. Firms like Apple and Wal-Mart have demonstrated the impact of supply chain management on business performance. Due to its superior supply chain systems, Apple managed a significantly higher return of assets at 20 per cent, compared to other players in same business. Similarly, Wal-Mart has emerged as the largest American corporation with return of assets close to 8 per cent, which is considerably higher than that of its competitors in the retailing business. Within India, firms like Asian Paints and Marico Industries have maintained significantly higher levels of profitability and growth compared to competitors in their respective industries because of their superior supply chain capabilities. The aim of this chapter is to introduce the concept of supply chain management, trace the evolution of supply chain concepts over the past century and identify major trends that have made supply chain performance critical to success. We briefly look at the performance of the Indian economy and firms across various sectors, focusing on the supply chain dimension. We also identify key supply chain challenges for Indian firms. As the Indian economy is growing at 8 per cent annually, despite the infrastructure bottlenecks, we have to look at the challenges in supply chain management that are unique to the Indian scenario. The goal is not only to understand and apply the concepts that have already evolved but also to continue to look for innovations and solutions customized to meet the requirements of companies operating in the Indian scenario. It is obvious that significant improvements will come only from innovative solutions that can resolve supply chain problems that are specific to the Indian context. What Is Supply Chain Management? The supply chain encompasses all activities involved in the transformation of goods from the raw material stage to the final stage, when the goods and services reach the end customer. Supply chain management involves planning, design and control of flow of material, infor- mation and finance along the supply chain to deliver superior value to the end customer in an effective and efficient manner. A typical supply chain is represented in Figure 1.1. As can be seen from the definition, the supply chain not only includes manufacturers, suppliers and distributors but also transporters, warehouses and customers themselves. Of late, firms have realized that it is not the firms themselves but their supply chains that vie with each other in the marketplace. Thus, it is not Hindustan Unilever (HUL) versus Procter & Gamble (P&G). Rather, the supply chains of both these firms compete against each other. The cus- tomer is interested only in the price, availability and quality of the product at the neighbour- hood retail outlet, where they actually come into contact with products supplied by HUL and P&G. If customers observe inefficiency on account of non-availability, damaged packaging, etc. at the retail end with regard to HUL’s products, they attribute inefficiency to HUL and not to its chain partners. The customer is only interested in getting the desired product at the right place, at the right time and at the right price. For a simple product like soap, the HUL supply chain involves ingredient suppliers, transporters, the company’s manufacturing plants, carrying
Chapter 1: The Role of Supply Chain Management in Economy and Organization |5| Vendors Plants Depots Retail Customers outlets Information Flow Finance Flow Figure 1.1 A supply chain network. Material Flow and forwarding agents, wholesalers, distributors and retailers. Obviously, HUL does not own all these entities, but the HUL brand name is at stake and it has to be ensured that the entire chain delivers value to the end customer. HUL cannot afford to focus only on those parts of the chain that are owned by it and ignore the other parts of chain. Firms need to realize that the performance of the chain is determined by its weakest link. The supply chains of automobile companies (Maruti, Tata Motors and TVS) and other companies like BPL, LG and Whirlpool, dealing in consumer durables, will be very similar to the one depicted in Figure 1.1. On the other hand, companies in the consumer non-durables business—for example, HUL, P&G, Godrej Soaps and Nestlé—have to work with supply chains that are likely to be much longer and more complex. The term chain is a little misleading because it gives the impression that there is only one entity at each stage of the supply chain. In reality, as seen in Figure 1.1, multiple entities are involved at each stage: a manufacturer receives material from several suppliers and, in turn, distributes the products through multiple distributors. The more appropriate term probably will be either supply networks or supply web. However, the term supply chain has been widely accepted by both practitioners and academi- cians; hence, we will continue to use the same throughout the book. Evolution of Supply Chain Management The evolution of supply chain management has been a gradual process. Over the last cen- tury, there have been three major revolutions in the field of supply chain management and we examine each of them in the context of the broader evolution in the economic and tech- nological environment. Consider the following statement made by the chief executive of an automobile firm: Our aim is always to arrange the material and machinery and to simplify the operations so that practically no orders are necessary. Our finished inventory is in transit. So is most of our raw material inventory. Our production cycle is about eighty-one hours from the mine to the finished machine (automobile) in the freight car.1 It is clear from this statement that this firm had a well-integrated supply chain in place that allowed it to minimize cost and maximize asset productivity. Most people, including students and business executives, are surprised to learn that the company that achieved this, did so
|6| Supply Chain Management almost a century ago. Indeed, this statement came not in the 1960s or 1970s. Rather, Henry Ford achieved this fine balance in the 1910s with the Ford Motor Company. Clearly, this achievement set the standard for all managers the world over. If such a well-integrated and efficient supply chain was achieved a century ago, then the obvious question is why are managers still worrying about it and, more pertinently, why are you reading this book? Before we look for the answer to this question let us take a look at the evolution of supply chain management over the past century and try to understand of the key dimensions over which supply chains have evolved over the past century. There have been three major revolutions along this journey, and we examine each of them in the context of the broader evolution in the economic environment. The First Revolution (1910–1920): Vertical Integrated Firms Offering Low Variety of Products The first major revolution was staged by the Ford Motor Company where they had managed to build a tightly integrated chain. The Ford Motor Company owned every part of the chain— right from the timber to the rails. Through its tightly integrated chain, it could manage the journey from the iron ore mine to the finished automobile in 81 hours. However, as the famous saying goes, the Ford supply chain would offer any colour, as long as it was black; and any model, as long as it was Model T. Ford innovated and managed to build a highly efficient, but inflexible supply chain that could not handle a wide product variety and was not sustainable in the long run. General Motors, on the other hand, understood the demands of the market place and offered a wider variety in terms of automobile models and colours. Ford’s supply chain required a long time for set-up changes and, consequently, it had to work with a very high inventory in the chain. Till the second supply chain revolution, all the automobile firms in Detroit were integrated firms. Even traditional firms in India, like Hindustan Motors, were highly integrated firms where the bulk of the manufacturing was done in-house. The Second Revolution (1960–1970): Tightly Integrated Supply Chains Offering Wide Variety of Products Towards the end of the first revolution, the manufacturing industry saw many changes, including a trend towards a wide product variety. To deal with these changes, firms had to restructure their supply chains to be flexible and efficient. The supply chains were required to deal with a wider product variety without holding too much inventory. The Toyota Motor Company successfully addressed all these concerns, thereby ushering in the second revolution. The Toyota Motor Company came up with ideas that allowed the final assembly and manufacturing of key components to be done in-house. The bulk of the components was sourced from a large number of suppliers who were part of the keiretsu system. Keiretsu refers to a set of companies with interlocking business relationships and shareholdings. The Toyota Motor Company had long-term relationships with all the suppliers. These suppliers were located very close to the Toyota assembly plants. Consequently, set-up times, which traditionally used to take a couple of hours, were reduced to a couple of minutes. This com- bination of low set-up times and long-term relationships with suppliers was the key feature that propelled the second revolution—and it was a long journey from the rigidly integrated Ford supply chain. The principles followed by Toyota are more popularly known as lean production systems. The Toyota system, involving tight linkages, did get into some problems in the later part of the century. Gradually, when Toyota and other Japanese firms tried to set up assembly plants in different parts of the world, they realized that they would have to take their suppliers also along with them. Further, they found that some of the suppliers in keiretsu had become com-
Chapter 1: The Role of Supply Chain Management in Economy and Organization |7| placent and were no longer cost competitive. With the advent of electronic data interchange (EDI), which facilitated electronic exchange of information between firms, it was possible for a firm to integrate with the suppliers without forcing them to locate their plants close to the manufacturers’ plant. In actual practice, the Toyota supply chain also had certain rigidities, such as a permanent relation with suppliers, which could become a liability over a period of time. This, in turn, led to the third revolution spearheaded by couple of progressive companies like Dell Computers, Apple Inc., and Bharti Airtel, which offered, its customers the luxury of customization with loosely held supplier networks. The Third Revolution (1995–2020): Virtually Integrated Global Supply Networks Offering Customized Products and Services Technology, especially information technology, which is evolving faster than enterprises can find applications for some of the innovations, is the fuel for the third revolution in supply chain. It will probably take at least couple of years before we can fully understand the IT-enabled model that has emerged and begin to apply it to all industries. However, we have enough infor- mation to get a reasonably good understanding of the contours of the third revolution. We will illustrate key characteristics of the third revolution using the example of Dell computers, Apple Inc., and Bharti Airtel. The first is a product company, the second combines product and service, and third is a pure service organization. In each of these organisations, we will see different aspects of the third revolution. Dell computers allows customers to configure their own laptops (in terms of processors, video cards, screen sizes, memory, etc.) and track the same in their production and distribution systems. Apple offers personal digital devices to its customers and iPod is a classic example. However, it is not just about the product. Apple allows the consumer to have a personalized user experience through the features and services. Users can personalize the music and other media content on their device through the various features available on iPod. Similarly, Bharti Airtel allows services like My Airtel through which customer can have unique personalized experience. As one can see we have moved to the stage where firms offer a bundle of goods that leads to personalized experiences, which would be of great value to individual customer. Value is unique to each customer, and therefore, each customer would wish a customized experience to be fully satisfied with the value delivered to him or her. In summary, we have moved from single product (Model T black colour) to wide variety as offered by Toyota to customization as offered by companies such as Dell computers, Apple, and Bharti Airtel. Businesses can no longer be content in providing select product variety to customers. Organizations have moved from offering products to offering user experiences, which are a bundle of goods and services selected by the user. This has changed the way supply chains are configured to deliver value. Let us begin with Dell. To make sure its customers get the completely customized product, Dell has built a strong network of vendors who are cost and technology leaders. These medium term relationships are based on the understanding that the vendors will adhere to a high bench- mark on cost and technology leadership which in turn will reflect in Dell’s products. Apple Inc. brings together a product and a user experience in a revolutionary new way. Similar to Dell, Apple has global partners with which it maintains medium term relationships based on cost and technology benchmarking to fulfil its product manufacturing requirements. However, for creating a better user experience, it has gone a step further by creating a plat- form that enables anyone to contribute to the Apple user experience. Take the example of Apple iTunes and App Store. At the first level, iTunes made it possible for Apple to provide all the music in the world to its users through a seamless and tightly integrated platform. While this was only about entertainment, the App Store took it to the next level. It created a global
|8| Supply Chain Management community of small and medium sized application development teams who could become partners with Apple, use its App Store platform, and offer a rich bouquet of utilities and appli- cations which would all help create a one-of-its-kind user experience. So now, in addition to its strategic global manufacturing partners, using this platform, Apple also built a global network of partners in a few core areas like app development who had very low engagement with the company itself. Practically, anyone could become a partner to Apple on this platform. A key thing to note here is that the primary driver that enabled Apple to build this platform was infor- mation technology and the use of Internet. In Bharti Airtel, we have a company that has broken several stereotypes. For a telecom company, the core activities like network management and IT being handled in-house was con- sidered a given. However, Bharti Airtel chose to go with strategic outsourcing and partnerships with global partners for these core activities. Although the relationships were still medium term similar to Dell, the companies were thoroughly aligned and worked like a single entity because of common goals and revenue sharing arrangements. This ensured that Bharti Airtel was free to focus on the user experience which was the ultimate service it provided to the consumer. To summarize, organizations are moving from an era where the central theme was the satisfaction of a customer need with a product to an age where the need is satisfied with a user experience that combines products and services. It is the age of virtual integration where all information regarding the customer is harnessed to provide a personalized customer expe- rience. There are three key characteristics of these global networks that are enabling compa- nies to deliver this experience seamlessly. The first involves high degree of engagement in the medium term with strategic partners based on cost and technology leadership for the core offerings. This is obvious in the way Dell, Apple, and Bharti Airtel create and engage in strate- gic partnerships with a close group of technology vendors with clear alignment. For example, Bharti Airtel is a telecom major that outsources the core activity of network management to a strategic partner with a clear revenue sharing arrangement, which ensures both are aligned completely. Similarly, Apple, which is known for its amazingly designed products, does none of the manufacturing itself but completely outsources it to its strategic manufacturing partners. The second is the way global resources of varying kinds, which are crucial to delivering the unified customer experience, are harnessed with the help of information technology and a highly evolved and efficient transportation infrastructure world over. Physical proximity of the strategic partner is no longer an important factor in making the choice of partners. Whether it is Dell using specialized chip manufacturers, Apple sourcing apps from the far flung corners of the world, or Bharti outsourcing core telecom activities to global technology leaders, this trend of utilizing global resources from near or far-flung corners of the world is evident in the operations of all leading companies. The third characteristic involves leveraging IT in the crea- tion of a platform using which multiple partners each having very low engagement contribute to non-core activities, which enable the enhancement of the user experience while keeping individual transaction costs very low. Apple’s app development platform is an example of this characteristic. An organization which exhibits these three characteristics—ability to carry out strategic out- sourcing by building strong medium term relationships based on cost and technology leadership, ability to harness global resources, and the creation of an easy to use platform to diversify global supply base—are able to create the virtual integration necessary to provide the user experience. Our discussion of the three major revolutions in supply chain has given us an understand- ing of how the dynamic markets and rapidly evolving technologies force us to continuously improve our understanding of supply chain concepts. To be able to apply the key concepts of supply chain management, we must be able to observe how they are used in the context of the business and market scenario. With this backdrop in mind, let us look at some of the key supply chain concepts and understand why it has become such a critical success factor in most industries and how firms find better and more efficient ways of managing this crucial aspect of business in today’s world.
Chapter 1: The Role of Supply Chain Management in Economy and Organization |9| Key Concepts in Supply Chain Management Traditionally, firms have focused their energies on three main functions: purchasing, manu- facturing and distribution. Transport and storage activities within individual functions and across functions have not received adequate attention, and have usually been handled by the department managing the logistical aspects of the company. Initially, supply chain manage- ment focused on the internal integration of activities in these three functional areas with the logistics function. Gradually, firms realized that these activities have to be coordinated, not just within a firm, but across the entire supply chain, keeping in mind the material/product flow, right from the vendor to the end customer. To integrate material flow across the chain, information and financial flow across the chain also have to be integrated. As shown in Figure 1.1, a typical supply chain involves managing all the three flows in the chain. In firms like Asian Paints and Marico Industries, material, information and finance flow seamlessly across department and organization boundaries. Customer pull, and not any internal compulsion, governs all the three flows in well-managed chains. In most chains, there exist many blocks, both at the departmental and the organiza- tional boundaries. Individual departments and firms are more interested in performance at the local level rather than the performance at the chain level. Thus, numerous bottlenecks occur at the boundaries and the flow gets badly distorted. As observed earlier, often, material and products seem to spend a significant amount of time at the departmental and organizational boundaries. Since most of the inefficiencies seem to creep in at the boundaries, while studying supply chains, our focus will be on linkages rather than on individual operations. Though a typ- ical supply chain will have a large number of firms, the standard practice is to analyse supply chains from the perspective of a focal firm like HUL, Asian Paints or Marico Industries. The concept of focal firms is discussed in Box 1.1. In certain situations, apart from the forward flow of material and products, firms are also interested in the reverse flow of material as many companies also have to manage product returns, warranty claims, etc. As per the European Union regulations, firms that manufacture and sell consumer products are also expected to take the responsibility for product disposal at the end of the life of the product. Tougher regulations and increasingly liberal product take backs are forcing firms to focus their attention on reverse material flow as well. There is a growing realization that we need to develop a special field to deal with the reverse flow of material/product from the customer to the manufacturer and it is known as reverse supply chain management. Refer Chapter 14 on Green Supply Chain for details on reverse supply chain management. In this book, by and large, we will focus our attention on the forward flow of materials/products. BOX 1.1 Focal Firms The firm that provides identity to the products in terms of will refer to this entity as the focal firm or central node or the brand has higher stakes in the chain, and such a firm is iden- main entity in the chain. While studying supply chains, we tified as the main entity in the chain. By virtue of being the analyse them from the perspective of this main entity, also main entity, the firm concerned also has the necessary clout known as the focal firm or the nodal firm, which is at the and resources and usually takes on the responsibility of de- strategic centre of the supply chain. In marketing literature, signing the incentive systems for the various entities in the the focal firm is known as a steward firm that provides lead- supply chain. For example, Nike might not manufacture the ership to the entire value chain and ensures that the chain product, or may not own the retail outlets, but since the end simultaneously addresses customers’ best interest and drives customers identify the product with Nike, we will identify profit for all chain partners. Nike as the main entity in the supply chain. In general, we
| 10 | Supply Chain Management Decisions in a Supply Chain Successful supply chain management involves several decisions with varying time frames. We can broadly classify them as design decisions and supply chain operations decisions. Design Decisions Supply chain design (network design) or strategic decisions involve the following critical issues: • What activities should be carried out by the nodal firm and what should be outsourced? • How to select entities/partners to perform outsourced activities and what should be the nature of the relationship with those entities? Should the relationship be transactional in nature or should it be a long-term partnership? • Decisions pertaining to the capacity and location of the various facilities. The decisions pertaining to location and capacity are for those facilities that are owned by the nodal firm. In addition to manufacturing locations and capacities, the firm has also to worry about locations and capacities for warehouses (depots). Supply chain design decisions are made for the long term (usually a couple of years) and are very expensive to alter at short notice. Operations Decisions Once supply chain design decisions are in place, the firm has to take decisions regarding the management of supply chain operations for shorter horizons. This involves tactical decisions, which have a horizon of about three months to a year; and operations decisions, which usually have a horizon ranging from a day to a month. Both tactical and operations decisions involve the following areas: • Demand forecasting • Procurement planning and control • Production planning and control • Distribution planning and control • Inventory management • Transportation management • Customer order processing • Relationship management with partners in the chain Given the demand forecast and the business strategy of the firm, decisions related to pro- curement, production, planning, distribution and transportation have to be integrated with customer order processing and inventory management decisions. Relationship management essentially involves the alignment of incentives to the various entities in the chain so that the overall supply chain performance meets customer requirements at the lowest cost. Though not so obvious, the supply chain has also to be integrated with other important functions of the firm, for example, customer relationship management and new product development. Since customer relationship creates demand, the supply chain must ensure that it is in a position to fulfil the demand created by customer relationship management in a profitable way. Well- managed firms integrate their customer relationship and supply chain activities. Similarly, while designing new products, well-managed firms ensure that supply chain issues are kept in mind at the design stage. Firms have to find a way in which the new products can use the
Chapter 1: The Role of Supply Chain Management in Economy and Organization | 11 | existing product platforms and components, so as to minimize the supply chain costs for the product family as a whole. Traditionally, terms like integrated logistics or business logistics have been used synonymously with the term supply chain management. In some firms, traditional logistics professionals have taken up the responsibility of integrating supply chain activities within the firm under the banner of integrated logistics. In some other firms where this integration is quite weak, the top management has taken on the responsibility of developing the supply chain culture within the organization. Since both these approaches are prevalent in the industry, a lot of practitioners and academicians refer to this body of knowledge as logistics and supply chain management. LAUNCH OF THE SEVENTH HARRY POTTER BOOK Harry Potter and the Deathly Hallows, the much-awaited seventh and final book in the Harry Potter series of novels, was released in 93 countries simultaneously on 21 July 2007. Managing a launch of this magnitude is a supply chain nightmare. Ensuring that the book is available in sufficient quantity at tens of thousands of outlets across 93 countries across the globe poses substantial challenges to supply chain managers, who have also to ensure that the content of books is not leaked out before the launch date. The books had to reach the stores just in time for the launch, neither too early nor too late. Pen- guin India, the distributor of Harry Potter books in India, had to manage the seemingly impossible task of delivering the books simultaneously to 300 destinations just a few hours prior to the launch time of 6:30 a.m. The Importance of the Supply Chain In the past, customers were not very demanding and competition was not really intense. As a result, firms could afford to ignore issues pertaining to the supply chain. Today, firms that do not manage their supply chain will incur huge inventory costs and eventually end up losing a lot of customers because the right products are not available at the right place and time. The following are the five major trends that have emerged to make supply chain management a critical success factor in most industries. • Proliferation in product lines. Companies have realized that more and more product va- riety is needed to satisfy the growing range of customer tastes and requirements. This is evident from the fact that every time a customer walks into a neighbourhood store, he or she is bound to discover a couple of items on the shelf that he or she had not seen during his or her last visit and that he or she has more varieties to choose from now. Every time you walk into a neighbourhood store, do not be surprised to find that even a simple product like toilet soap has 50-odd varieties. We define stock-keeping unit (SKU) as a unit of variety. For example, the same brand of soap may be offered in varying colours and sizes. Each variety is treated as a separate SKU. Companies like HUL, in their personal care products, manage, on an average, 1,200 SKUs. Chains like Foodworld manage about 6,000 SKUs. With increas- ing product variety, it becomes rather difficult to forecast accurately. Hence, retailers and other organizations involved in the business are forced to either maintain greater amount of inventories or lose customers. • Shorter product life cycles. With increased competition, product life cycles across all in- dustries are becoming shorter. For example, technology leaders like Apple works with a life cycle as short as 6 months. So a firm like Apple , which has, on an average, just
| 12 | Supply Chain Management 5 days of inventory, as compared to the industry average of 35 days, does not have to worry about product and component obsolescence. Its competitors with higher inven- tories end up writing off huge amounts of stocks every year as obsolete. In the past, in developing countries where inflation was a way of life, higher inventories used to be a major source of profits for the firm. With inflation in control and shorter product life cycles, firms have had to change the way they manage their inventories. Also, with shorter product life cycles, there is not much data available for demand forecasting. Most of the technology firms find that 50 per cent of their revenue comes from prod- ucts that were introduced in the last three years. • Higher level of outsourcing. As discussed in the section on “Evolution of Supply Chain Management”, firms increasingly focus on their core activities and outsource non-core activities to other competent players. Michael Dell, the CEO of Dell Com- puters, had mentioned that if his company was vertically integrated, it would need five times as many employees and would suffer from a drag effect. Apart from pri- mary activities in the value chain, even support activities that were usually done in- house are outsourced in a big way now. Bharti Tele-Ventures, India’s number one private telecom service provider, has outsourced network-management services, IT services and call centre operations. This trend towards outsourcing is irreversi- ble but a higher level of outsourcing makes supply chains more vulnerable, there- by forcing firms to develop different types of supply chain capabilities within the organization. • Shift in power structure in the chain. In every industry, the entities closer to customers are becoming more powerful. With increasing competition, a steadily rising number of products are chasing the same retail shelf space. Retail shelf space has not increased at the pace at which product variety has increased. So there have been cases of re- tailers asking for slotting allowance when manufacturers introduce new products in the market place. Savvy firms have started talking about trade marketing and treating dealers and retailers as their customers while simultaneously trying to woo the retailers aggressively. There is a clear shift in the power structure. Retailers have realized that they are powerful entities in the chain and hence expect the manufacturers to be more responsive to their needs and demands. Discount retailers like Wal-Mart have been asking their suppliers to replenish the supplies on a daily basis based on actual sales data from their point-of-sales systems. In general, manufacturers are forced to respond more quickly to the customers’ demands, because of changes in the power structure within the chain. • Globalization of manufacturing. Over the past decade, tariff levels have come down significantly. Many companies are restructuring their production facilities to be at par with global standards. Unlike in the past, when firms use to source components, pro- duce goods and sell them locally, now firms are integrating their supply chain for the entire world market. For example, companies like ABB have developed some global centres of excellence for each of their product lines that take care of the global market. General Motors is talking about a world car and has been designing a few cars for global markets. In the telecommunications and electronics industry, companies usually get their chips from Taiwan, test them in Europe and finally integrate them with other products in the United States of America to sell in the international market. This has made managing supply chains extremely complicated. Unlike information and finance flow, which can be managed electronically, materials and products have to move phys- ically, and as this movement can even be across continents, managing supply chains is now an extremely complex issue.
Chapter 1: The Role of Supply Chain Management in Economy and Organization | 13 | INTERVIEW WITH VF Corporation (Major brands: Wrangler and shelf when the order comes in, or you’ll miss Lee) is the largest apparel manufacturer in the the sale because, with a 6-month lead time, you world with sales of $6.5 billion. Ellen Martin won’t have time to produce it fast enough to or- is the vice president of supply chain systems der. You would miss the season altogether. So at VF Corp. we went from a 1-week lead time to a 4-week What are your volumes? lead time when we moved down south, and to a 6-month lead time for Asia. Ellen Martin: VF has 850,000 SKUs of style, ELLEN MARTIN What are VF’s biggest supply chain challenges colour and size. And our business is getting now? more and more seasonal, so that 850,000 is not the same 850,000 every year. As much as 60 per cent of Ellen Martin: We have to shorten the 6-month lead time. it could change. And it could change twice a year. I’ve asked everyone why it has to take so long. They say the How has that (supply chain) changed today? product is 40 days on the water. But where is it the rest of the time? The sewing takes the same time, wherever it’s done, as Ellen Martin: This outsourcing (to Asia) puts a huge chal- do some of the other operations, like cutting and laundering. lenge on the supply chain. The challenges in the last 10 The answer is in acquiring the raw material. This is one of years have changed substantially. We still need to have very the longest lead-time factors. So what we’re working on is accurate plans of what needs to be made, but factors such as increasing that verticality between the mill and the manu- inventory policies, safety stocks and risk management—not facturer and the wholesaler by creating partnerships. to mention relationship management (we have hundreds of contract manufacturers)—have become much higher priori- Source: Victoria Cooper (2006), “Planning at a Global Scale”, Sup- ties than they were before. The product had better be on the ply Chain Leader, 4–8 October. Enablers of Supply Chain Performance As mentioned in the previous section, managing supply chains is becoming increasingly com- plex. Despite this, firms have actually managed to reduce their logistics costs. For example, in a country like the United States of America, logistics costs used to account for 15 per cent of the gross domestic product (GDP) in the 1980s. Today, because of innovations in technology and management practices, logistics costs account for about 8.5 per cent of their GDP. Three major enablers that have helped firms and nations in reducing supply chain costs are briefly discussed below. Improvement in Communication and IT Computing power has become cheaper and communication costs too have come down. This has helped firms in coordinating global supply chains in a cost-effective manner. Advances in enterprise resource planning (ERP) systems have helped firms in automating several busi- ness processes resulting in seamless information flow throughout the company across differ- ent functions. The way ERP systems have changed the nature of information flow within organization, Internet technology is likely to change the nature of information flow in inter- firm transactions. In the past, only large companies could integrate with partner firms using expensive EDI technologies. Now, even small firms can communicate with their chain partners using the worldwide web at a fraction of the earlier cost. Companies are realizing that they can replace physical inventory by information. To really exploit their IT investments, companies need to re-engineer their supply chain and other supporting organizational processes and try to replace physical inventory with information. Unfortunately, many Indian companies have
| 14 | Supply Chain Management invested in information systems but have not made the corresponding changes in their supply chain systems and processes, which has resulted in the company failing to exploit the informa- tion system to its full potential. For example, a company with multiple plants can work with a common pool of safety stock of raw materials and does not need to have safety stocks for each individual plant. Similarly, on the order-processing side, companies can offer greater cus- tomization as compared to the past because their order-processing system can be designed to handle customized orders and their manufacturing and distribution system would allow them to track these customized products in the system. In the absence of an information system, this would not have been possible at all. But unfortunately a significant number of companies have used IT to just automate the existing supply chain systems and processes. Companies that have successfully exploited IT have made major changes in their supply chain structure, systems, processes and strategy. Emergence of Third-party Logistics Providers Traditionally, many firms have been managing their logistics activities internally. Lately, com- panies have realized that they need to focus their energies on managing core business activities, and hence have been exploring the possibility of outsourcing logistics activities to third-party logistics (3PL) service providers. In developed countries, almost 90 per cent of the logistics activities are outsourced and are managed by 3PL companies. Apart from bringing in the much needed professionalism to the field, 3PL companies have economies of scale as they are able to pool demand across customers. In developed markets, global firms would like leading 3PL companies to go beyond the traditional role and play the role of a fourth-party logistics (4PL) company that can integrate the capabilities, resources and technology so as to provide compre- hensive supply chain solutions to its customers. Currently, the 3PL industry in India is still evolving. Two sets of companies have emerged in this field. One set of companies involves traditional transporters, shippers, warehouse ser- vice providers and freight forwarders, who want to offer value-added services and would like to see if they can develop competencies and become a 3PL company. The second set of service providers comprises international 3PL companies that have come to India along with their global MNC customer. For example, when Toyota wanted to set up a manufacturing plant in India, it asked its logistics service provider Mitsui and Co. to come to India to take care of its logistics requirements. Currently, not many companies in India employ the services of other 3PL companies. However, with the evolution of the Indian market, new MNCs and progressive Indian compa- nies operating in the mid-volume, mid-variety segment have started using the services of 3PL companies. Over a period of time, the 3PL companies would not only develop the competence required to function smoothly in the Indian context but also take care of the logistics require- ments of the bulk of the industries in India as well. Enhanced Inter-firm Coordination Capabilities Successful coordination across a global network of companies has been a comparatively new phenomenon in the corporate world. It has been realized that for a network to function meaning- fully one needs a firm to play the role of the strategic centre. Many companies, like Apple, Nike, Benetton, Nintendo, Sun and Toyota, have successfully managed complex networks, played the part of the strategic centre and, hence, have emerged as role models to other companies. While each company in the network focuses on its core competencies, the strategic centres function as a leading and orchestrating system. Consequently, supply chains become more efficient and responsive. However, there have been a large number of failures also, where firms within the chain could not align their interests, and as a result the network could not function effectively. The
Chapter 1: The Role of Supply Chain Management in Economy and Organization | 15 | industry is still on the learning curve in this matter, but better understanding and coordination of issues would greatly help in diffusing the third supply chain revolution across all industries. Supply Chain Performance in India Supply chain performance measures involve multiple dimensions and they are discussed in detail in the subsequent chapters. In this section, the focus is on performance, both in terms of inventory turnover ratio at the organizational level and logistics costs at the economy level. Logistics costs include inventory-carrying costs, transportation costs and logistics administra- tion costs. As can be seen in Table 1.1, logistics costs in India are quite high when compared with other countries. Of course, one could argue that since customer service expectations are not the same across countries, logistics costs may not be strictly comparable. However, as tariff levels have been coming down with globalization, logistics costs do become comparable to a significant extent. Higher logistics costs definitely affect the competitiveness of the Indian industry. Firms often argue that inefficiency in the transport and warehousing sector makes it difficult for them to compete in the global market. For example, the cost of sending an export cargo to Mumbai from Punjab and that of shipping it further to London from Mumbai are the same. Further, variable transit time and in-transit damages make transportation in India a very expensive affair We now analyse the performance of the supply chains of Indian firms using inven- tory turnover ratio as a measure of performance. When we look at the performance of the Indian manufacturing sector in last decade (Figure 1.2), we find that performance has gradu- ally improved in the time period between 2003 and 2008. After 2008, the inventory turn has dropped significantly and subsequently improving gradually. Impact of global financial crisis had deep impact on Indian manufacturing, and even after five years, Indian manufacturing has not reached level of performance achieved in 2008. Over a decade, Indian manufacturing industry has more or less maintained the performance and has shown only marginal improve- Table 1.1: Ratio of logistics cost with GDP for few selected countries. Country Japan United States Korea India 8.7 8.5 16.5 12.3 Ratio of logistics cost with GDP (in %) Source: G. Raghuram and J. Shah, “Roadmap for Logistics Excellence: Need to Break the Unholy Equilibrium,” Working Paper, Indian Institute of Management Ahmedabad, No. 2004-08-02. Inventory turnover ratio 5.60 Figure 1.2 5.40 Performance of the 5.20 Indian manufacturing 5.00 industry [Source: Prow- 4.80 ess (CMIE)]. 4.60 4.40 4.20 4.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Years
| 16 | Supply Chain Management Figure 1.3 Inventory turnover ratio 8 1999 7 2004 Sector-wise inventory 6 2009 performance of Indian 5 2014 firms [Source: Prowess 4 (CMIE)]. 3 2 1 0 ChFeoomidcaalnadCnoTadrrnagsctnorhCsueobpcnatmoiisrstcoueaneldmqeppmrurriaootpgddeormiuuoeccalttdnstsss Textiles Machinery products metal and Metals Years ment. Though there is evidence of moderate improvement, this rate of improvement has to be sustained. On the other hand, the best international firms have improved at much faster rates in the past decade when compared to the best Indian firms. The sector-wise performance of Indian firms is shown in Figure 1.3. We find that most sectors show performance trend similar to the overall manufacturing sector except consumer goods, construction, and chemicals. Unlike other sectors, consumer goods and construction sector have maintained inventory levels in last decade, whereas chemi- cal industry had shown significant improvements in the last few years. To compete successfully in the global market the Indian firms need to improve their performance in managing their inventory and keep their logistics costs low. Let us now look at the challenges that Indian firms face when it comes to supply chain management. Many of these challenges—which arise due to the economic environment, taxation structures and also the geography of India—are unique to the Indian scenario. Challenges in Maintaining a Supply Chain in India Most Indian firms traditionally have focused on the production and sales aspects of the busi- ness. Logistics was a neglected area. Until recently, not many firms made a concerted effort to improve the performance of their respective supply chains. There are many reasons that have contributed to this neglect of supply chains within organizations. The prime factors responsible are discussed here. Taxation Structure Drives Location Decisions In India, most decisions pertaining to facility location have been driven by taxation consider- ations and not by customer service issues. For example, almost all pharmaceutical manufac- turers have located their facilities at Baddi in Himachal Pradesh not because of either market access or resource access, but because Baddi offers taxation benefits. Similarly, air conditioners and diesel power generators are manufactured in Silvasa. Special economic zones offer taxa- tion benefits, and many firms have altered their plant location decisions, driven by these con- siderations. Though taxation issues cannot be ignored, given the fact that India has poor road infrastructure, some companies may not have captured the indirect costs of poor service while making relevant decisions. Further, companies are forced to keep one stock point in each state to avoid taxes on inter-state sales. Currently, all inter-state sales attract a central sales tax (CST).
Chapter 1: The Role of Supply Chain Management in Economy and Organization | 17 | There have been lots of discussions in industrial and political circles regarding this issue, and it is most likely that CST will be scrapped under the new modified tax regime. This will have a significant impact on the supply chain structure of most companies. A plethora of state taxes affect supply chain operations. Currently, firms have to grapple with various state-level taxes, like local sales tax, entry tax, octroi and turnover tax. So, at each state border, one has to negotiate through numerous checkpoints leading to increased transportation lead time. In states like Bihar, Uttar Pradesh and West Bengal, a special road permit is to be obtained before one can send a truck to these states. Further, the necessity to pay taxes at various levels has forced firms to carry out more activities in-house rather than focusing only on core activities. There are ample data to show that a firm needs to be part of a network comprising multiple firms, with each firm focusing on its competencies. But in the current structure, supply chains comprising multiple firms will have to pay sales tax for every inter-firm material transaction, resulting in a cascading effect. The proposed concept of unified GST (goods and service tax) will remove this anomaly. The likely impact of GST on design and operations of supply chains is discussed in Box 1.2 Poor State of Logistics Infrastructure Both the transportation and the warehousing industry are in the unorganized sector. About 90 per cent of the trucks in the country belong to owners who have less than five trucks. An unorganized trucking industry, such as this, results in unreliable lead times and high in-transit damages. With lots of old trucks on the road, breakdowns are quite frequent, further adding to unreliability. Modernizing warehouse management is an idea that is yet to see the light of the day in India. Logistics, being a neglected area in traditional organizations, did not attract the best talent in the industry. It is only since the last couple of years that firms have realized the importance of this function and have started inducting qualified people to handle supply chain management. BOX 1.2 Effect of GST on Supply Chain Design and Operations The Government of India has indicated that it would like bution centres based on factors relevant to business rather to move to a better tax structure, one which simplifies and than on tax avoidance. Companies would also be able to rationalizes the present taxes at centre and state levels. The leverage benefits accrued due to economies of scale be- Goods and Services Tax (GST) aims to subsume taxes at the cause of lesser number of larger distribution centres, reduce central level viz. central excise duty, service Tax, additional inventory carrying costs, and reduce the working capital customs duty, surcharge, and cesses as well as the taxes at employed in supply chains. More importantly, decisions the state level viz. VAT/sales tax, entertainment tax, entry related to choice and number of suppliers, number of prod- tax (not in lieu of Octroi), other taxes, and duties (includ- ucts manufactured, manufacturing locations, expansion ing luxury tax, taxes on lottery, betting and gambling, and of manufacturing facilities, or distribution centres will be all cesses and surcharges by states). Under the GST regime, based on supply chain efficiencies and cost efficiencies. the goods will be levied a value added tax at every point in Studies show that the number of distribution centres can the supply chain. Further, manufacturers will also be able be reduced by 30 to 50 percent with the new GST regime. to avail credit for taxes paid earlier in the supply chain. The The move to GST would definitely benefit the manufac- tax structure will also remain common across all the states. turers because of lower number of distribution centers as Taxes will be redistributed across all categories resulting in well as reduced costs due to inventory, transport, and doc- lower taxes. Further, the interstate transfer of goods will be- umentation. With the design of lean supply chains, man- come tax neutral as CST (Central Sales Tax) is reduced to ufacturers can then dedicate their attention to improve 0%. In other words, manufacturers can look at India as one operational efficiencies, cost efficiencies, reduce cost, and unified market rather than markets divided between many improve product variety to meet the changing consumer states. preferences. The GST regime will also help to bring in efficiencies in supply chain design and rationalizing the number of distri-
| 18 | Supply Chain Management With the induction of new blood and greater re-organization at the boardroom level, we are likely to see many innovations on this front. Indian firms obviously need to learn from the progressive companies operating in devel- oped economies. However, a country like India has its own unique problems and challenges. Thus, ready-made solutions that have been tried and tested in the developed economies may not work. For example, complex distribution structures, large numbers of customers at the bottom of the economic pyramid, poor infrastructure and complex taxation structures are issues unique to India that require innovative solutions. Amul, the Shakti project of HUL and the dabbawalas of Mumbai are cases in point where Indian firms have come up with unique solutions to supply chain challenges in India. To discuss these issues in their specific context, we focus on the fast-moving consumer goods (FMCG) sector and identify a couple of challenges unique to the Indian context. Supply Chain Challenges for the Indian FMCG Sector The fast-moving consumer goods (FMCG) sector is the fourth-largest sector of the economy with a size of about Rs 500 billion. The FMCG sector generally includes a wide range of frequently purchased consumer products such as soaps, dairy produces, confectionery, soft drinks, fruits and vegetables and batteries. FMCG products usually have a low unit cost but large volumes. The top 10 FMCG companies in India consist of both global players, such as HUL, Nestlé, Cadbury, P&G, and home-grown Indian companies, such as Amul, Asian Paints, Dabur and Marico Industries. The FMCG sector is also known as the consumer packaged goods sector. In the FMCG sector, the performance of the supply chain is a key factor. The FMCG industry is characterized by a complex distribution network and intense competition forcing firms to constantly work on supply chain innovation. Over a period of time, supply chain inno- vations from the FMCG sector will be adopted by other industries as well. Companies with better supply chain practices will perform well, whereas those with poorly managed supply chains will find it tough to even survive in the competitive market. There are numerous supply chain challenges that an organization in the FMCG sector faces in India. Some of the major challenges are briefly discussed in this section. HUL’S SHAKTI INITIATIVE A significant part of India lives in rural areas not well connected by road. Hence, most FMCG com- panies have not been able to penetrate these rural areas. HUL has launched a new initiative called project Shakti to increase its penetration in rural areas in a cost-effective manner. HUL has partnered with self-help groups (SHGs) to extend its reach to rural areas, particularly those areas where there are no established HUL distribution networks because of lack of connectivity. A Shakti dealer is a member of an SHG, who works as a direct-to-consumer HUL distributor, selling primarily to villages in her neighbourhood. The business objectives of this initiative are to extend HUL’s reach into untapped mar- kets and to develop its brand through local influences. In the process, HUL also provides sustainable livelihood opportunities to underprivileged rural woman. Managing Availability in the Complex Distribution Set Up The Indian FMCG sector has to work with a very complex distribution system, comprising multiple layers of numerous small retailers, between company and end customer. For exam- ple, a company like Marico has to ensure reach to 1.6 million retailers spread geographically throughout the country (see Box 1.3 for details on Marico’s supply chain structure). As the numbers of SKUs have been increasing exponentially, just ensuring availability at the last stage of distribution has become a nightmare for companies. Standard solutions applicable
Chapter 1: The Role of Supply Chain Management in Economy and Organization | 19 | BOX 1.3 The Supply Chain at Marico Industries The retail trade for the company consists of 1.6 million re- tailers, of which less than 2 per cent represent organized Plants retailers. More than 95 per cent of the retailers are grocery stores, each occupying less than 300 square meters. Depots To reach all areas of the nation, the company’s products Distributor Super (35 million consumer packs per month), bought by 18 mil- Retailer Distributor lion Indian households monthly, are sold to approximately Urban 1,000 distributors. These intermediaries, in turn, store, sell Stockist and deliver the company’s products directly to those 1.6 mil- Consumer lion retailers or indirectly through 2,500 stockists. See the Retailer accompanying schematic figure for details of the compa- ny’s distribution network. A part of the company’s business Rural strategy is to expand continuously into ever-smaller locales Consumer until its brands are available to most Indian households. Currently, the company’s distribution network covers every Indian community with a population of 20,000 or more, and the plan is to penetrate more of the rural areas, where 70 per cent of India’s people live. Currently, its rural sales and distribution network ranks among the top three in the industry and contributes 24 per cent to the company’s sales. in developed countries are not always suitable for a country like India. A large-scale study showed that at the SKU level, availability in the organized retail is as low as 65 per cent.3 As the availability levels at an organized retail player are so low, one can imagine the situation for a typical retailer. Working with Smaller Pack Sizes Unlike in developed countries, where companies have been trying to work with large pack sizes (reduction in transportation, handling and packaging costs for large pack sizes can be passed on as price cuts to price-sensitive customers), in India the trend is in the opposite direction. To increase market penetration, Indian companies have realized that they need to reach out to consumers present at the lower end of the economic pyramid. This con- sumer base can be tapped into only by offering smaller pack sizes. However, smaller pack sizes mean higher packaging and transportation costs for the companies. Eventually, com- panies will have to find innovative ways of balancing market penetration and logistics costs. Entry of National Players in the Traditional Fresh Products Sector National players want to market “fresh” products that have been traditionally handled by local players in each region. For example, ITC wants to make inroads in the market for atta (wheat flour) and Nestlé for yoghurt. In these items, the freshness of the product is an important requirement from the consumers’ point of view. Traditionally, national companies have worked with centralized plants, where they can manage quality and also enjoy big economies of scale. As freshness is one of the most important criteria from the customers’ point of view, national players will have to work with decentralized manufacturing plants. Balancing quality, freshness and cost is a major issue for national players. Amul is an interesting case where a local firm has successfully managed the complex trade-offs by building superior supply chain capabilities.
| 20 | Supply Chain Management AMUL Milk is a perishable commodity and poor farmers from rural India had no means of storing excess milk. The farmers were forced to sell milk through middlemen and had to settle for very low prices. To cir- cumvent the middlemen and improve their returns, a cooperative society was set up in each village. As each village-level society would not have enough volume to justify setting up a milk processing plant, all the village cooperative societies in a district formed a union, which, in turn, collected milk from all the societies and processed it in a centralized processing plant and liquid milk and milk products were marketed to customers all over India. Thus, Amul came into existence in 1946. Over the years, Amul has set up a very efficient and effective supply chain that links 2.41 million marginal producers of milk from the rural areas of Gujarat to 500,000 retailers who make Amul products available throughout India. Dealing with Complex Taxation Structures Because of the complex taxation structure, it is difficult to treat India as one market. Varying local-tax structures across states encourage traders to indulge in the smuggling of goods across states, leading to the creation of grey markets. It is common knowledge that union territories with lower state-level taxes are used to feed many neighbouring states illegally. Experts are of the view that smuggled goods account for about 15 per cent of the total goods flow. Such activities distort the plans and activities of FMCG companies. Further, because of the tax on inter-state sales, companies can never ship goods to customers located outside the state. They first have to transfer goods to the state-level warehouses on a consignment basis and then sup- ply the goods to the customers. With the introduction of value added tax, harmonization of taxes across states and the possible removal of tax on inter-state sales, FMCG companies will see lots of changes in the way they have been managing their supply chains. FMCG companies need to prepare themselves for this transition, which will affect them significantly. Dealing with Counterfeit Goods According to a recent study conducted by Assocham,4 counterfeits accounted for loss of sale worth Rs 300 billion for the FMCG sector every year. P&G found that various counterfeit products of Vicks Vaporub raked in sales equivalent to 54 per cent of the original. To prevent such losses, FMCG companies in India have to ensure that they exercise greater control over their distribution channel and not just leave it to the market forces. Opportunistic Games Played by the Distribution Channel It is a common notion in distribution that only 50 per cent of the promotion actually reaches the final customer. This is due to the fact that many distributors work unscrupulously. Rather than playing the role of the facilitator, they try to grab a significant part of the promotion budget for themselves. One FMCG company found that it ended up paying significant amounts as rebate to its trade channel because of illegal printing of coupons by some wholesalers and distributors. Some of these distributors also indulge in the illegal movement of goods from one market to another during local promotions, due to which companies lose control of the sales of their products (the company may want to target a specific market but the distributors might divert the goods to a different region). Thus, FMCG companies end up wasting a significant part of their resources on these issues, which do not really add any value to their customers. Infrastructure Poor roads and unreliable transport systems have an adverse impact on costs and uncertain- ties. Non-availability of infrastructure, like cold chains, affects certain product categories
Chapter 1: The Role of Supply Chain Management in Economy and Organization | 21 | significantly. Even if the cold chain is available, power problems add to the uncertainty. For example, in the ice-cream business, if the ice cream melts even once because of the non-availa- bility of power, the quality in general, and the taste in particular, of the ice cream are adversely affected. Most Indian cities face power problems in summer and ice-cream manufactures have to live with these problems in their distribution network. In general, FMCG companies have to take these issues into account while planning their supply chain activities. The dabbawalas of Mumbai present an innovative supply chain approach that uses the existing infrastructure to deliver high-quality service at low cost. THE DABBAWALAS OF MUMBAI The dabbawalas of Mumbai deliver home-prepared food to the middle-class office workers. On every working day, they collect 175,000 lunchboxes (dabbas) from the customers’ houses between 7:00 and 9:00 a.m. and deliver the same to the respective offices by 12:30 p.m. The empty lunchboxes are picked up by 3:30 p.m. and returned to the homes of the respective customers by 6:00 p.m. To ensure that no more than one in 6,000,000 deliveries (six-sigma quality) goes astray, the dabbawalas have developed ingenious systems that use a very simple but effective coding system to sort the lunchboxes, on both the forward and the reverse journeys. The extensive use of public infrastructure in Mumbai (local trains) helps keep the operation costs low. The use of local trains and an ingenious coding system allows them to manage their supply chain remarkably well, which translates into high-quality service, at an affordable cost, for the customer. Emergence of Third-party Logistics Provider Traditionally, most companies have been managing all logistics activities themselves. So far, the logistics sector in India has lacked professionalism. Of late, many 3PL providers, who claim to have the requisite expertise, have entered the market. These new players are still to learn a lot about Indian conditions and also are not in a position to offer economies of scale. Hence, they will be of value only to new MNCs and FMCG players who operate in the mid-volume, high-variety segment of the market. Established FMCG companies like Nestlé and HUL are unlikely to use their services as logistics solution providers, as they are not likely to be cost effective. The problem gets compounded further because most Indian FMCG companies have skewed sales patterns that place huge demands on service providers in the last week of the month. Thus, service providers are not in a position to manage their resources effectively. Over a period of time, these 3PL companies will develop an understanding of the Indian market and also the relevant capabilities necessary to handle these markets, which will enable them to bring down their costs and to provide cost-effective services to even large-volume players like HUL. Reservation for the Small-scale Sector There are many items that have been traditionally reserved for the small-scale sectors. So FMCG companies had to source material/products from various small players. With liberali- zation likely on this front, companies will have to rework their sourcing strategies. Emergence of Organized (Modern ) Retail In the West, large departmental/discount chains have managed to grab huge market shares and have clout with FMCG companies. On account of their bargaining power, they are able to demand huge discounts from FMCG companies. In India, the nascent organized retailing sector accounts for less than 8 per cent of the total retail business. Like in developed markets, modern retailers in India have been trying to extract
| 22 | Supply Chain Management higher margins from FMCG companies so as to offer better deals to their customers. Unlike in the West, margins in distribution are traditionally quite low in India. Hence, in India, the FMCG sector finds it difficult to offer the kind of deep discounts that the modern retailers have been demanding. The FMCG companies are in a dilemma. On one hand, FMCG com- panies will have to bypass their existing stockists and distributors, so there is a likelihood of channel conflict. On the other hand, they also have to examine the impact of higher discounts to modern retailing on the overall distribution system. Further, modern retail chains are also likely to introduce private-label brands, which will pose a considerable threat to the existing manufacturers. As the use of Internet and online applications gather pace, customers are increasingly mak- ing use of web-based transactions to purchase FMCG products. The story of online retail industry in India is similar to the one in the US in the 1990s when online retailers such as eBay and Amazon grew rapidly to challenge the competitive position of traditional retail- ers. Online retail in India has grown swiftly and has been growing at CAGR (Compounded annual growth rate) of close to 50% during 2012–2015. Led by factors such as increase in the Internet penetration and broadband services, the online retail industry is poised for expo- nential growth in the future in India, as more and more rural areas are included within its domain. Summary nn The supply chain encompasses all activities associated However, technological and managerial innovations, with the transformation of goods from the raw-material along with the development of logistics specialists, stage to the final stage, when the goods and services have helped progressive firms to improve supply chain reach the end customer. performance under trying times. nn Supply chain management involves planning, design nn The Indian economy as a whole, and the manufactur- and control of flow of material, information and fi- ing sector in particular, need to improve supply chain nance along the supply chain to deliver superior value performance considerably if Indian firms are to com- to the end customer in an effective and efficient man- pete globally. ner. In well-managed chains, material, information and finance flow seamlessly across department and nn Indian firms need to learn from progressive firms in organization boundaries. developed economies, which have managed to im- prove supply chain performance considerably. How- nn On account of globalization and increased competi- ever, at the same time emerging economies like India tion, firms have to manage a larger number of prod- and China have their own unique supply chain prob- uct lines with shorter product life cycles under the lems and challenges. Obviously, different geographies situation of changed power equations within a chain. and their economies have their own unique set of problems and we need to look for specific solutions nn Most supply chains the world over are slow, costly to these problems. and do not deliver good value to the end customer. Discussion Questions 1. Describe the supply chain involved in making the bar 3. Though supply chain principles are universal in na- of Lux soap that you have just picked up from your ture, application of these depends on the context of neighbourhood retail store. the country, which is why India has to find its own unique solutions. Explain why you agree or disagree 2. A customer planning to buy a book can either order with the above statement. the book on the Internet from Flipkart.com or go to the nearby Landmark outlet. How are the supply chains 4. Compare and contrast the supply chains followed by different for these two companies? Are customers look- the two food product firms mentioned below: ing for the same kind of service from both the com- panies? How can these factors affect the strategies of (i) A firm offering a food product targeted at the low- both these companies? er end of the economic pyramid (e.g., Tiger biscuit offered by Britannia).
Chapter 1: The Role of Supply Chain Management in Economy and Organization | 23 | (ii) A firm offering a premium food product (e.g., Lays 7. HUL has decided to increase its reach in rural areas. offered by Pepsi). What are the implications of this decision for the depart- ment that manages the supply chain for HUL products? 5. Indian companies complain that high logistics costs make their products less competitive in international 8. With the emergence of organized retailing, power markets. Identify products that are likely to be signif- structure in the supply chain is likely to shift over a icantly affected by the poor logistics infrastructure in period of time. What do you think are the implications India. of this for manufacturing firms? 6. Most Indian firms have increased their product variety 9. Can ideas of supply chain management be applied to by about 50 per cent in the past five years. What are firms like Wipro and Infosys, which offer software ser- the implications of these increased varieties on supply vices? chain management practices in these firms? Mini Project Field Study: Estimating the Length of a Supply Chain for • From each retail store, collect the following data for an FMCG Company each of the selected product lines: The objective of the study is to estimate the length of the • Packing/manufacturing date on stock held at supply chain for packed goods. This field study will help retailer (as per the law, all packaged goods you in understanding supply chain opportunities in distri- companies are expected to print manufactur- bution in India. ing date/month data on each package) Methodology • Estimate of average sales rate (How many units are sold per month?) • Pick up two competing companies from the FMCG sector. Identify the different product lines offered by • Stock available with the retailer these companies. • Estimate length of chain • Select four retailers (two from organized sector and two from the unorganized sector) for the study. Estimation of Chain Length A B Manufacturing date Time at which the Estimated time study is done of sale Item Data collected from retailer Date of manufacture A Ba A+B on stocks heldb (in months) (in months) (in months) Product line X Stock (units) Sales (units) Product line Y /Month October 2014 2.5 0.25 2.75 Product line Z 3.5 1 4.5 20 40 September 2014 4.5 1.5 6.0 40 20 August 2014 30 10 aAverage time stock would spend at retailer from the time of study = (stock/sales)/2. bIf the date of manufacture is August 2014, we can assume that the actual date of manufacture is 15 August 2014.
| 24 | Supply Chain Management • Let us suppose that three products X, Y and Z have • Compare and contrast the time taken in chain been chosen for the study and the study was carried for a fast-moving product (Colgate toothpaste) out at the end of December 2014. Data (stocks, sales vis-à-vis a slow-moving product (Colgate-Pal- rate, manufacturing date on stocks on the shelf) and molive shaving cream). estimation of the length of the chain for the three prod- uct lines is as shown in the table above. • Compare the time taken by a chain for the or- ganized retailer (Subhiksha, Foodworld) vis-à- • The same analysis can be carried out for multiple vis a neighbourhood kirana (the unorganized retailers for the same company. Use the above meth- retailer, also known as mom-and-pop stores) odology to carry out the following analysis: store. • Compare the time taken by a large firm (say Colgate) and small firm (say Anchor). Notes 1. Henry Ford, Today and Tomorrow (Cambridge, MA: and L. V. Wassenhove, “Hewlett-Packard Comny Un- Productivity Press, 1988). locks the Value Potential from Time-Sensitive Returns,” Interfaces (2007): 281–293. 2. B. Avittathur and J. Shah, “Tapping Product Returns Through Efficient Reverse Supply Chains: Opportuni- 3. M. Anand, “Operations Streamline,” Business World ties and Issues,” IIMB Management Review 16 (2004): (18 February 2002). 84–93; V. D. R. Guide, T. P. Harrison, and L. V. Wassen- hove, “The Challenge of Closed-Loop Supply Chains,” 4. K. K. Shankar, “India Inc Raises Voice against Interfaces (2003): 3–6; V. D. R. Guide, L. Muyldermans, Rs 30,000 Cr Counterfeit Trade,” The Indian Express (4 January 2007). Further Reading R. D. Blackwell and Kristina Blackwell, “The Century of Hau L. Lee, “The Triple – A Supply Chain”, Harvard Busi- the Consumer: Converting Supply Chains into Demand ness Review (October 2004). Chains,” Supply Chain Management Review (Fall 1999): 22–32. Hau L. Lee, “Don’t Tweak Your Supply Chain – Rethink it End to End”, Harvard Business Review (October 2010). K. Ferdows, M. A. Lewis, and J. A. D. Machuca, “Rapid Fire Fulfilment,” Harvard Business Review (November J. Magretta, “Fast Global and Entrepreneurial: Supply 2004, Vol 82): 104–110. Chain Management, Hong Kong Style,” Harvard Business Review (May–June 1993): 87–98. M. L. Fisher, “What is the Right Supply Chain for Your Product?” Harvard Business Review (March–April 1997): J. Magretta, “The Power of Virtual Integration: An Interview 83–93. with Dell Computer’s Michael Dell,” Harvard Business Review (March–April 1998): 79–80. Victor K. Fung, William K. Fung and Yoram (Jerry) Wind, “Competing in a Flat World: Building Enterprises for a Bor- C.K. Prahalad and M.S. Krishnan, “The New Age of derless World”, Pennsylvania: Wharton School Publishing Innovation: Driving Co-Created Value through Global Net- (First Impression, 2008). works”, Mc Graw Hill Education (2008). C. Gianpaolo, D. M. Xavier, S. Regine, V. Wassenhove, F. J. Quinn, “Re-engineering the Supply Chain: An Inter- and W. Linda, “Inventory-Driven Costs,” Harvard Business view with Michael Hammer,” Supply Chain Management Review (March 2005, Vol 83): 135–141. Review (Spring 1999): 20–26. Çagrı Haksöz, Sridhar Seshadri, and Ananth V. Iyer, “Man- Y. Sheffi and J. B. Rice, “A Supply Chain View of the aging Supply Chains on the Silk Road: Strategy, Perfor- Resilient Enterprise,” MIT Sloan Management Review (Fall mance and Risk”, CRC Press (January 2012): 105-120. 2005): 41–48. R. Henkoff, “Delivering the Goods,” Fortune (November R. E. Slone, “Leading a Supply Chain Turnaround,” 1994): 64–78. Harvard Business Review (October 2004): 114–121. Larry Lapide, “Demand – Shaping with Supply in Mind”, Supply Chain Management Review (November 2013).
| 25 | Supply Chain Management Supply Chain Strategy and Part Performance Measures 2 learning Objectives After reading this chapter, you will be able to answer the following questions: > What are the key supply chain performance measures? > How does supply chain performance affect financial performance? > Why is it necessary to ensure a good fit of the business strategy with the supply chain strategy? > What are the different dimensions of customer service? > What are the ways in which a firm can simultaneously reduce supply chain costs and improve customer service? T hree management students are poring over data that they have recently acquired and want to incorporate it into their presentation for the next morning. They have been at it for quite some time, when one of them calls Domino’s and orders pizzas for the whole group. The pizzas arrive in exactly 25 minutes. While they take a break and devour the pizzas, they wonder how Domino’s manages to deliver pizzas within 30 minutes to almost any location in Bangalore even with the traffic snarls in Bangalore and the unpre- dictability of the timing and quantity of the pizza that might be ordered by customers. Domino’s, in its efforts to deal with such unpredictable variables, has set up outlets at 50 strategic locations across Bangalore. It plans its resources (raw material, equipment and human resource) in such a manner that it can deliver on time to any location in Bangalore. Domino’s business strategy to deliver delicious pizzas in 30 minutes is a reflection of its commitment to bring fun and excitement into the lives of its customers. It designs and operates its supply chain so that it can support this business strategy. In this chapter, the focus is on supply chain strategy and supply chain performance measures. We discuss customer service and cost trade-offs and suggest ways by which a firm can integrate business and supply chain strategies. We also look at the various dimensions of customer service and use two of these, namely, order delivery time and responsiveness, to characterize various types of supply chains. A framework to analyse the impact of supply chain initiative on business performance has been provided. Finally, an approach that can help firms in enhancing their supply chain performance on an ongoing basis has been suggested.
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