SUPPLY CHAIN EXCELLENCE-

FUTURE SCENARIO: A CASE STUDY

RAKESH. R. SINGH
HPGD/OC14/2329
SPECIALIZATION: OPERATIONS

WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

Year of submission: October 2016

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 ACKNOWLEDGEMENTS

I take the opportunity of submitting this dissertation to express my deep regards towards those
who have offered their invaluable assistance and guidance in the hour of need.

I sincerely acknowledge with a deep sense of gratitude and show inductance to my company
seniors Mr. B D. Patil (Operations and Process Manager), and plant manager Mr. M.M Agnihotri
(General Manager) of Reliance Electronics pvt. Ltd.for encouragement they gave me during the initial
phase of the project. I highly obliges to production staff of Reliance Electronics pvt. Ltd. for their
guidance, advice and co-operation.

Mr. B. D. Patil, Mr. M. M. Agnihotri and all my colleagues has been inspiring. And without their
inspiration, guidance, the project would have remained a dream

Last but not the least, I would also like to thanks all my friends & family members, who had
directly or indirectly given their kind co-operation and encouragement. I admit that co-operation and
morality are keywords to success.

(Rakesh Ramchandra Singh)

Place: Nasik

Date: 19th September, 2016

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 APPENDIX - I

CERTIFICATE FROM THE GUIDE

This is to certify that the Project Work titled SUPPLY CHAIN EXCELLENCE-FUTURE SCENARIO: A
CASE STUDY is a bonafide work carried out by our employee Mr. Rakesh Singh working as a Senior
Engineer - Production & QA, a candidate for the final year Post Graduate Diploma in Business
Administration (PGDBA - Operations) examination of WELINGKAR INSTITUTE OF MANAGEMENT,
NASIK, Roll No.: HPGD/OC14/2329, under our guidance and direction.

Guides :
Mr. B. D. Patil. Mr. M. M. Agnihotri
Operations Manager General Manager

Date: 19.09.2016
Place: Nasik

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 PREFACE

I take an opportunity to present this project report on "SUPPLY CHAIN EXCELLENCE-FUTURE

SCENARIO: A CASE STUDY " and put before the readers some useful information regarding my
project.

I have made sincere attempts and taken every care to present this matter in precise and compact form,
the language being as simple as possible.

I am sure that the information contained in this volume would certainly prove useful for better insight in
the scope and dimension of this project in its true perspective.

The task of completion of project though being difficult was made quite simple, interesting, and
successful due to deep involvement and complete dedication of my colleagues.

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 UNDERTAKING BY CANDIDATE

I declare that project work entitled “SUPPLY CHAIN EXCELLENCE-FUTURE SCENARIO : A CASE

STUDY” is my own work conducted as part of my syllabus.

I further declare that project work presented has been prepared personally by me and it is not sourced

from any outside agency. I understand that, any such malpractice will have very serious consequence

and my admission to the program will be cancelled without any refund of fees.

I am also aware that, I may face legal action, if I follow such malpractice.

Signature of candidate.

(Rakesh Singh)

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Contents
1. Research------------------------------------------------------------------------7

2. Disclosure----------------------------------------------------------------------7

3. Research Methodology-----------------------------------------------------7

4. Executive Overview---------------------------------------------------------8

5. Facing the Supply Chain Plateau--------------------------------------10

6. What Is Supply Chain Excellence?------------------------------------19

7. A Closer Look at Supply Chain Resilience by Industry----------27

8. Consumer Packaged Goods--------------------------------------------30

i) Food-----------------------------------------------------------------------32

ii) Chemical-----------------------------------------------------------------33

iii) Industrial-----------------------------------------------------------------35

iv) Pharmaceutical--------------------------------------------------------37

Global supply chain excellence-------------------------------------------------39

Scenario Planning------------------------------------------------------------------52

Future of supply chain in India--------------------------------------------------67

Conclusion---------------------------------------------------------------------------78

Bibilography-------------------------------------------------------------------------80

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Research
This report is based on data collected from financial balance sheets and income statements during the
period of 2000-2011.This report is augmented by data from quantitative research studies done on
supply chain excellence during the period of March-December 2012.

Within the world of Supply Chain Management (SCM), each industry is unique. We believe that it is
dangerous to list all industries in a spreadsheet and declare a single supply chain leader. Instead, we
believe that industries need to be measured over time by peer group.

In this report, we take a closer look at the chemical, consumer packaged goods (CPG), food, high-
tech and electronics, industrial and pharmaceutical industries and their progress over the last
decade.

Disclosure
These reports are intended for you to read, share and use to improve your supply chain decisions.
Please share this data freely within your company and across your industry. As you do this, all we ask
for in return is proper attribution when you use the materials.

Research Methodology
The source of financial information used in this report is publicly available from corporate annual
reports and income statements covering the period of 2000 through 2011. To help us better
understand supply chain excellence, we have invested in building a database of 21 supply chain
financial ratios for publically held companies. The use of financial ratios helps us to better analyze
companies across geographies and of different sizes. The quantitative data were primarily collected
across seven online surveys, among 368 respondents (manufacturers, retailers and distributors),
from March through December 2012.

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Executive Overview
Supply chain processes are now three decades old. They are maturing. Our understanding of
supply chain excellence is evolving.

Most companies feel that they have made great results in driving growth, reducing costs, improving
inventories and managing complexity; however, data from the financial balance sheets and income
statements show otherwise. The financial results support that while all industries have made progress
on improving performance as measured by revenue per employee through the use of technology,
substantial progress on costs and inventory management has only happened in the high-tech and
electronics industry. For everyone else, progress has stalled. The worst results are in the
pharmaceutical and industrial peer groups. In general, low-margin businesses, or industries facing
major inflections in market downturns, tend to move the fastest in maturing supply chain processes.

We find that most industries are at a plateau on the journey of managing supply chain excellence.
Growth has stalled, costs are rising, inventory levels are increasing and complexity reigns. We
previously examined these challenges in the September 2012 Supply Chain Insights Report,
Conquering the Supply Chain Effective Frontier. Companies are frustrated. They have invested in
systems, people and processes; but yet, the progress is elusive.

Figure 1. Current Issues for the Supply Chain Professional

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As frustration rises in the boardroom, the tendency is to have a knee-jerk reaction and try to reduce
singular metrics without understanding the impact on the supply chain as a holistic system. As shown
in figure 1, supply chain team frustration with executive level decisions is mounting. We find too few
companies really understand the role of the supply chain in driving business excellence.

The biggest opportunity to improve these business results lies deep within the organization. It comes
from leadership and clear articulation of a supply chain strategy. It takes discipline and patience.
Results on the supply chain Effective Frontier (the management of growth, costs, complexity and
cycles) does not happen quickly: these results take three to five years at a minimum. To make
progress, companies need to: educate and align on the principles, evolve the organization’s
understanding of supply chain processes, and learn from the industries that have done it well.

Bottom line, we believe that excellence in supply chain matters. The companies that have made the
most progress have managed the supply chain as a complex system. While information technology
companies tout that IT systems made the difference, we believe that the results in this report are all
about leadership and talent development. The greatest issue for the supply chain department is the
lack of clear understanding of supply chain excellence by the executive team. The goal of this report
is to help close this gap.

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Facing the Supply Chain Plateau
The definition of supply chain processes started within the company’s processes of manufacturing or
distribution. Today, the center is stronger than the ends. The vertical processes are stronger than the
horizontal. Unfortunately, the term supply chain can often be construed as the supply chain
department; not as a better way of doing business for the company. We believe that supply chain
excellence is essential for the delivery of business results.

The original goal of the use of supply chain processes to connect from the customers’ customer to the
suppliers’ supplier has gotten bogged down in functional processes, siloed metrics and a myriad of IT
projects. Less than 1% of companies have focused on end-to-end processes and most have learned
from failure versus success. Overall, progress against the goals of improving customer service,
propelling growth, reducing inventories and reducing costs have stalled.

Supply chain excellence is about balance and discipline over a multiyear journey. The best companies
manage the supply chain as a system, understanding the relationships between growth, costs, cycles
and complexity. Supply chain leaders recognize that they have more than one supply chain, each with
its own potential.

As we look back over the last decade, we find that most industries are stuck. They are currently
experiencing a supply chain performance plateau. The high-tech industry is the only peer group that
we can find that has used supply chain processes to propel growth, improve operating margin, and
better manage supply chain cycles.
Consider these results supported by tables 1-4.

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 High-tech Industry: Companies within the high-tech and electronics industry grew at a rate of
19%, while reducing inventories by 40%, and improving cost of goods sold by 12%. As an
industry sector, the companies have done the best in navigating the Supply Chain Effective
Frontier. They were the first to embrace supply chain planning, network design, the use of
channel data, and the building of extended value networks with suppliers and contract
manufacturers. 
 Consumer Packaged Goods (CPG): While many think of CPG as a leader within supply
chain management, over the course of the last decade, progress has stalled. The companies
with the CPG peer group grew topline revenue by 7%, increased the number of days of
inventory by 3%, and fought an uphill and then a downhill battle to manage operating margins.
The efforts towards supply chain excellence have been more project-based than systemic,
and the industry has been slow to manage the end-to-end value chain. Barriers exist to design
supply chains across sales and marketing to improve the end-to-end flows, and costs and
waste are being pushed backwards in the chain towards suppliers. These companies tend to
be more sales-driven (opportunistic) or marketing-driven (focused on share) than driving long-
term value. CPG companies will have to adopt market-driven practices like demand sensing,
test and learn practices, and demand orchestration in order to drive themselves off of the
current supply chain plateau. 
 Chemical Companies: The average chemical company grew 7%, decreased inventories by
22%, but lost ground on costs over the last decade. The segment has survived numerous
mergers and acquisitions (M&A) and successfully built global supply chain teams. While
operating margins improved from 2000 to 2007, this improvement could not be sustained in
the Great Recession. Conversely, the impact of the 2007-2009 recession was less than the
impact of the 2000-2002 downturn. Only through diligence in supply chain management has
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 the sector been able to return to prerecession operating margins. In the peer group, there is
no SINGLE leader. Overall, the industry has done a good job in attempting to build supply
chain talent through Centers of Excellence and the building of global teams. In the face of
global corporate social responsibility initiatives, the chemical industry will be forced to think
more holistically and end-to-end. 
 Food: The average food manufacturing company grew 7% with slight improvement in the
number of days of inventory. Costs rose with a 4% increase in cost of goods sold as a
percentage of revenue. Overall, the industry made some progress; but, the leaders are battling
rising commodity volatility and bracing for escalating costs. The concepts of market-driven
value networks are the most critical in the face of market volatility. The industry lags the
chemical and consumer products sectors in their understanding of supply chain excellence.
With the rising costs of materials, and the shortage of food in the global supply chain, this peer
group will be pressured to step-up their practices quickly. 
 Industrial Companies: In the last decade, the industrial companies grew at a rate of 4%,
inventories increased at a rate of 10%, and the industry made no progress in improving
operating margins. This sector has been slow to adopt new practices and there is no one in
the sector that we can point to as an industry leader. While the industry Leaned-out the
enterprise, they pushed costs and wastes downstream onto their suppliers with adverse
implications through the downturn of the 2007 recession. There is a great need to retool the
thinking of the industrial sector to better compete in the next decade. 
 Pharmaceutical Companies: The average pharmaceutical company has three times the
levels of inventory of any other process industry with only slight improvements in inventory
levels since 2003. Growth over the last decade averaged 9% and operating costs increased

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 22%. As an industry, the companies in the peer group shown have one of the lowest levels of
understanding of supply chain fundamentals. Due to high margins and a focus on new
product launch, the industry has been slow to adopt supply chain practices. As the rate of new
products slow and the number of new drugs protected by patents decrease, supply chain
excellence will matter more than ever to the industry, but each company will struggle to build
talent and build winning processes. These processes need an overhaul. 
As shown in tables1-4, the rate of progress on the supply chain Effective Frontier was the best by
companies with the tightest margins and a focus on supply chain excellence. Over the last decade,
the high-tech and electronics industry outperformed all other industry segments.

The Tech Wreck of 2000-2001 was a rallying cry for the industry segment to redefine processes and
better manage supply chain cycles. During that time, high-tech companies faced negative earnings,
escalating costs, shortening life cycles and a low return on assets (ROA). The industry used supply
chain practices to return the sector to health. This industry has the best adoption of supply chain
planning processes, the most zealous processes for inventory management, and the most enlightened
leadership on why supply chain excellence matters. As an industry, they focused on accelerating new
product launch by insourcing new products and redefining the role of manufacturing to accelerate the
time to market for new innovation. They were also successful in the use of contract manufacturing and
the building of end-to-end supply chain visibility systems.

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Table 1. Changes in Year-over-Year Sales Growth Over the Period of 2000-2011

Year-over-year sales growth values vary greatly amongst the different industries and different time
periods. As seen above in table 1, overwhelmingly, most industries have seen slowing or stagnant
sales growth over the past decade.

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Table 2: Changes in Operating Margin over the Period of 2000-2011

Operating margin has remained relatively stagnant as companies struggle to move off of the supply
chain plateau, with the notable exception of high-tech & electronics manufacturers who saw a
significant increase in operating margins over the time period.

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Table 3: Changes in Cost of Goods Sold/Revenue for the Period of 2000-2011

Some of these critical trends on costs can be seen in the cost of goods sold ratios to revenue, as
shown in table 3. The rising pressures of commodity prices have had an adverse effect on most
industries.

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Table 4: Changes in Days of Inventory for the Period of 2000-2011

While most companies have “talked” about reducing inventories, the greatest impact on the
reduction of inventories happened in the high-tech and electronics industry. In looking at company-
specific data, we find that there has been little impact on bottom-line results by companies adopting
new inventory optimization technologies. The problem is that most companies have adopted these
as projects, not as a systemic way of doing business.

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The organizations look slightly different by design. As shown in table 5, with the highest cost of raw
materials, the high-tech groups are more likely to have the procurement organization directly reporting
to the supply chain function. This industry has the most mature processes for the management of
outsourced manufacturing, and commodity councils and buying strategies for direct materials. They
are also the best in the use of supply chain planning technologies and are less likely to see the supply
chain as “a functional department.” For them, it is a way of doing business.

Figure 2. Supply Chain Reporting Relationships

In this report, we contrast the progress of these industries and take a look at where we are in the
definition of supply chain excellence.
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What Is Supply Chain Excellence?
Ironically, the need to move the supply chain forward faster has never been greater. The metronome,
or pace, of the supply chain process has increased. Data has proliferated and the frequency of market
inputs has never been higher. Yet, many companies are stuck on a performance plateau.

The question seems simple, but the definition of supply chain excellence is not. As shown in figure 3,
the steps to deliver supply chain excellence are progressive with each step building and
encompassing the prior. Companies cannot move along this framework, from bottom-left to upper-
right, without achieving mastery in the preceding phase. Progress on this path requires disciplined
leadership to build cross-functional teams in a multiyear journey. It also requires the support and
understanding of the executive leadership team.

Figure 3. Market-driven Value Network Maturity Model

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First Stage Processes Definition: The Efficient Supply Chain. In the beginning, supply chain
excellence was defined as the lowest manufactured cost. The belief was that supply chain excellence
could be achieved by “sweating the assets.” This set of beliefs formed the foundation for the efficient
supply chain. Through the evolution of supply chain processes, costs were reduced, inventory levels
lowered and waste eliminated; but each company reached a point where they could no longer just cut
costs without trading off customer service to customers. They had reached their effective frontier. The
effective frontier is the capability of each supply chain within each company to balance the results for
growth, profitability, complexity and cycles.

The supply chain is a complex system that has increasing complexity. It can only be managed
effectively by managing it as a system. Companies that try to manage “pieces of the supply chain” in
isolation to the whole system will throw the supply chain out of balance.

As shown in figure 4, 7% of companies are at this level of maturity, defining supply chain excellence
as “The Efficient Supply Chain. Lowest cost per unit.” Many pharmaceutical and industrial companies’
supply chain teams are at the first stage of the Market-driven Value Network Maturity Model shown in
figure 3. They are stuck at the lowest level running only an “efficient” supply chain.

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Figure 4. Levels of Supply Chain Maturity in 2012

The Second Stage in Supply Chain Processes: The Evolution of the Reliable Supply Chain.
The lack of reliability to deliver customer service was the efficient supply chains’ Achilles heel. This
realization gave rise to the concepts of the reliable supply chain. With this shift, the focus changed to
how companies could balance costs and also achieve reliability in customer service and working
capital management. The goal of this supply chain evolution was the right product, at the right place,
at the right time, at the right cost. At this level of maturity, companies focused on improving the
decision-support systems to increase the potential, or the effective frontier, of the supply chain.

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For many companies there was a detour. There was a general belief that the best supply chain was a
tightly integrated supply chain. As companies worked on the implementation of processes to become
more reliable, they found tight integration was not always beneficial. Instead, they found that the
supply chain needed synchronization of processes through the building of strong horizontal processes
(for more on this reference the Supply Chain Insights report The Art of the Possible: Actionable
Analytics for Value Networks ). These horizontal processes are revenue management, Sales and
Operations Planning (S&OP), supplier development and corporate social responsibility. As a result,
planning grew in importance and there was a need to focus on “what-if” analysis and simulations to
test for reliability. Each planner needed their own workbench to test the feasibility of solutions and
these solutions required a different technology configuration.

As shown in figure 4, 47% of companies are currently at this level of maturity, defining supply chain
excellence as “Right product, right place, right time at the right cost.” Redesigning the supply chain to
improve resiliency is essential for food and consumer packaged goods companies. Without designing
the supply chain to buffer market variations, companies will not be able to move off of the supply
chain plateau.

Third Stage in Supply Chain Processes: Building the Resilient Supply Chain. During the Great
Recession of 2007-2009, companies quickly learned that they had to build supply chains that could
withstand the winds of demand volatility or the pressure of supply disruption. These supply chains
were built to sense outside-in and change the supply chain response based on market conditions.
Supply chain leaders that built resilient supply chains, and decreased the latency of—or time to
sense—demand and supply changes, adapted the quickest to market changes. Based on a qualitative
survey of sixty Fortune 500 manufacturing companies that were interviewed on the impacts of the

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Great Recession, that started in December 2007 and stretched over twenty months, we found the
companies that were better at demand sensing aligned their supply chains five times faster. As shown
in figure 4, 11% of companies are at this level of maturity, defining supply chain excellence as “A
resilient supply chain that can withstand the shocks of demand and supply volatility.”

Fourth Stage in Supply Chain Processes: The Adaptive or Demand-Driven Supply Chain. In
the adaptive, or demand-driven, supply chain, companies increased sensing capabilities and
infused the processes of source, make and deliver into the discussions with both buy- and sell-side
trading partners. These top-to-top meetings and relationships became more data driven. As a result,
the metrics changed. Procurement discussions focused on total landed costs, not just purchase
costs. In addition, suppliers were incented to contribute through innovation networks and alignment
to Corporate Social Responsibility (CSR) programs. Scorecards and performance management
processes evolved. The emphasis evolved to focus on building win-win partnerships through
supplier development programs.

To build supply chain sensing capabilities in the downstream channel, the processes needed to be
turned outside-in. Demand planning processes changed from focusing on predicting what to ship from
factories to predicting what would be sold in the channel. For many companies, this made the
investment that they had made in the “integrated supply chain” and multiyear Enterprise Resource
Planning (ERP) programs obsolete. It was no longer sufficient to be tightly integrated to order and
shipment processes. Instead, the company needed to define the process of demand translation: the
translation of market demands to supply operations with minimal latency. These processes were built
on channel data, not corporate history. Demand architectures needed to be built to sense and then
translate the meaning of channel or downstream data. The largest benefit of a demand-driven value

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network is assessing and building the value network to meet upcoming demand.

In the adaptive, or demand-driven, supply chain, the processes first sense and then shape demand
based on revenue management practices. Demand shaping includes the active processes of new
product launch, price management, trade promotion management, marketing and advertising, and
incenting sales against revenue management processes. These processes are designed outside-in to
evaluate “what really matters to customers.” Companies that mature in this capability usually are also
mature in the processes of determining customer profitability through cost-to-serve analysis and
looking at product profitability to decide upon the right product portfolio. They actively manage
complexity.

This stage of development requires tight integration of the research and development efforts (R&D) to
the supply chain processes. Since 60-80% of the costs of a product are defined in new product launch
and many supply chain networks are defined at the time of launch, in the maturation of these
processes, companies need to carefully define the coupling of cross-functional, horizontal processes.
This includes the integration of the processes of Sales and Operations Planning (S&OP) with R&D
Stage Gate Planning and Corporate Social Responsibility (CSR) with Supplier Development
programs. This is even more critical in heavily regulated industries like pharmaceutical, agro sciences,
and aerospace and defense supply chains. If these companies do not get it right on the product
launch, they have a very difficult time amending the process later.

In this stage of supply chain development, one of the toughest change management issues is the role
of “sales” in driving a profitable demand response. Since most sales organizations are incented on
volume, not profitability, there is a strong resistance to shape demand unless the incentives are

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aligned to focus on selling a profitable unit. This is a change management issue worth fighting. As the
adaptive supply chain evolves, leaders find that one of the largest impacts is improved customer
service and the reduction of the cost of sales as a percentage of revenue. Customer satisfaction
improves and the dialogue is now focused more on what the customer values versus internal, self-
serving metrics.

Supply chain design and the architecture of supply chain strategy increases in importance. This
changed from an ad hoc or annual process to be an integral part of the monthly S&OP process.
Companies also learn that forecasting is more important than ever, but that the focus needs to
change. It is no longer about the accuracy and tight integration of numbers; instead, it is a focus on
sensing market drivers, aligning on assumptions, and planning the network based on the predicted
level of demand volatility.

Today, this stage of maturity is largely aspirational for most companies and not well understood. In
the survey, as shown in figure 4, only 16% of companies rated themselves as “A responsive supply
chain that can adapt as markets change.”

Fifth Stage of Supply Chain Process Evolution: Align the Supply Chain Market-to-Market. The
market-driven supply chain is future state aspiration for the supply chain leader. The concepts are
based on building advanced processes to test and learn. This definition is the most closely aligned
with the work that is currently happening in the high-tech and electronics industry.

These networks are termed Market-Driven Value Networks: Market-driven Value networks are

adaptive networks that can quickly align organizations market-to-market, focused on delivering a

value-based outcome.

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They sense and translate market changes (buy- and sell-side markets) bidirectionally with near real-
time data latency to align sell, deliver, make and sourcing operations. The focus is on horizontal
process orchestration.
With the evolution of market-driven supply chains, companies can focus on delivering value-based
outcomes through complex networks.

High-tech companies have been the most aggressive in the adoption of new forms of analytics. With
the decrease in innovation in the supply chain planning market, many of these advancements are
being built in-house. They clearly know that the traditional supply chain could not sense; instead, it
was a fixed response.

It was often wrong and late. Despite what was happening in the market, the response remained the
same. Likewise, supply chains were not built to test and learn. With the evolution of technologies for
learning systems, supply chains can now orchestrate demand across the organization market-to-
market while executing test-and-learn strategies.

The design of market-driven supply chains is dependent on the building of value networks, strong
horizontal processes, the redesign of forecasting and supply, and a retraining of the organization. It
should not be confused with a marketing-driven supply chain. In the marketing-driven supply chain,
the focus is on an internal signal from sales or marketing, not a market signal from the channel. In
addition, it does not adapt horizontally market-to-market (buy-side to sell-side markets). The market-
driven supply chain stretches horizontally across the extended supply chain from market to market.

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A Closer Look at Supply Chain Resilience by Industry
A resilient supply chain is one that is able to push forward on the effective frontier to drive continuous
improvement in growth, cost, complexity and cycles despite market downturns and volatility. Over the
last decade, there were two recessions. The first recession was March through November, 2001 with
a peak-to-trough GDP decline of -.3%. The larger recession was December, 2007 through June, 2009,
with a -5.1% peak-to-trough GDP decline. With a closer look at the data, we can see that the high-tech
and electronics industry survived the second recession better than the first, but that the chemical,
industrial and pharmaceutical industries stumbled. In tables 5-12, take a closer look at the differences,
the averages and the standard deviations to understand the level of variation on these two key metrics
of operating margins and days of inventory.

To achieve supply chain resiliency, the company needs to manage the supply chain as a system
while balancing market impacts to drive progress on growth, profitability, supply chain cycles and
complexity. In this section, we take a closer look at the industries—high-tech and electronics,
consumer packaged goods, food, chemical, industrial and pharmaceutical companies—and their
performance over the last decade to illustrate the principles of supply chain resiliency.

Companies have to master this third level of supply chain excellence in order to move forward and
become demand-driven or market-driven. Today, the best results and the most advanced processes
are in the high-tech industry.

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High-tech and Electronics
The industry that has shown the greatest resilience in managing the Supply Chain Effective Frontier is
high-tech and electronics. Supply chain excellence is necessary to compete, and was a key factor in
driving revenue and inventory improvements. While Apple is always touted as the inventory leader,
readers can quickly see the continuous improvement by most of the companies in the high-tech and
electronics peer group. At this point, Research in Motion and Motorola lag the peer group in managing
the Effective Frontier.

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Tables 5 & 6. Days of Inventory and Operating Margin (High-tech & Electronics

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Consumer Packaged Goods
Companies within the CPG industry show greater resilience than companies in either the chemical or
pharmaceutical peer groups, with more reliable results in both operating margin and days of inventory.
In the CPG industry sector, Colgate Palmolive consistently outperforms its peers on operating
margin.

The least resilient company in the peer group is Unilever. While many think of Unilever as a supply
chain leader, we do not. The company has grown slower than its peers, consistently posting lower
margins, with struggles to manage inventories. Unilever has consistently thrown the supply chain out
of balance by the management of project-based initiatives and metrics in functional silos. The
company has also been less successful in building supply chain talent with many layoffs in global
regions, and a failure to rebuild supply chain talent for continuity.

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Tables 7 & 8. Days of Inventory and Operating Margin (Consumer Packaged Goods)

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Food
The food industry is stalled on the supply chain plateau. Operating margins have declined and
inventory levels have started to rise. There is no clear leader.

Tables 9 & 10. Days of Inventory and Operating Margin (Food)

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Chemical
The chemical industry has struggled to manage costs and generate consistency in operating margin
through the Great Recession of 2007-2009. The industry has recently rebounded on the back of
higher energy prices. Over the last decade, the chemical sector has decreased inventories by 22%.
Next to the high-tech and electronics industry, this sector has been one of the most diligent in the
management of working capital.

The company showing the greatest improvement in the supply chain as a system is Eastman
Chemical Company. The worst management of the supply chain as a system is by Akzo Nobel
N.V.\

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Tables 11 & 12. Days of Inventory and Operating Margin (Chemical)

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Industrial
For industrial companies, the impact of supply chain excellence on operating margins and cost of
goods sold has been slow, and the impact on inventories has been slow. This industry has been slow
to adopt leading supply chain thinking. Instead, the industry has followed more predatory procurement
policies that have weakened the value network, making the value network less resilient through the
downturn.

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Tables 13 & 14. Days of Inventory and Operating Margin (Industrial)

36
Pharmaceutical
The pharmaceutical industry struggled with both costs and inventory management over the last
decade. With a focus on stage 1 of the Market-Driven Supply Chain Excellence model shown in figure
3, the companies with growing global supply chains struggled to manage inventories and manage
consistency in operations to drive reliability in operating margins. There is no clear leader.

As you look at the year-over-year results, you will see that the companies have had a serious decline
in operating margins, and a slight improvement in inventory levels, despite the fact that the levels of
inventories are 3 times those of process industry comparisons in the chemical and consumer
packaged goods industries. The pharmaceutical sector is a great example of why industries with
consistently high margins have a tough time getting serious about supply chain management.

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Tables 15 & 16. Days of Inventory and Operating Margin (Pharmaceutical)

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Global Supply Chain Excellence: New Best Practices to
Master
Aberdeen's survey of more than 150 manufacturers and retailers finds that visibility is their top
concern, but global supply chains present many other challenges as well.

Supply chains are being transformed as sourcing from emerging markets continues to expand. That's
creating new opportunities for cost reduction but increasing the risk of supply chain disruptions and
management challenges. In addition, companies seeking revenue growth are seeking more efficient
ways to sell into international markets.

So what are leading companies doing to master global supply chains? To find out, Aberdeen Group, a
best-practice and technology research organization, benchmarked more than 150 manufacturers and
retailers.

Global Supply Chain Concerns

Companies report that their top concern is the continued lack of supply chain visibility due to
manually-driven processes. Fully 79 percent of large enterprises cite this as a major concern. Says a
respondent at a large industrial equipment manufacturer: "To help improve the bottom line, we need
more accurate supply chain visibility."

The second-highest concern is the uncoordinated nature of global supply chain processes across all
the parties involved. "Our key pressure," confirms the CIO of a mid-market retailer, "is coordinating the
diversity of forwarders and suppliers delivering a wide collection of merchandise."

39
Challenges with aligning multi-party actions and poor supply chain visibility result in an imbalance of
supply and demand across tiers, leading to stock-outs, significant "just in case" inventory carrying
costs, high transportation costs, and extended cycle times.

In many companies, these challenges are the result of insufficient automation and over-stretched
global supply chain staff.

"¢ Technology challenge: On average, large companies report that their international supply chains
are only 50 percent as automated as their domestic supply chains. Overall, only 6 percent of
companies report that they have highly automated end-to-end and cross-functional processes.

"¢ Staffing challenge: Just 36 percent of all respondents and only 13 percent of large enterprises say
their company's staffing for managing global supply chain and trade compliance processes are fully
adequate to meet their needs.

Global Supply Chain Best Practices

To improve their supply chain performance, companies are adopting new best practices. Here are the
ones making the greatest impact.

Improving Visibility

Supply chain executives identify improving visibility as their number one priority. They overwhelmingly
desire better transparency to orders, inventory and shipments across their extended supply chain. Yet
most companies still have rudimentary levels of visibility, using a hodgepodge of spreadsheets, carrier
tracking systems, and homegrown department-centric applications. Visibility leaders have deployed
40
visibility software with cross-functional access, and they are achieving better results than their peers
across key metrics (Figure 1).

Companies are on a path to take their visibility systems far beyond basic order and shipment tracking.
They are looking to turn these systems into exception-based process management platforms that
enable staff to manage exceptions rather than micro-managing steady-state processes. Key elements
include escalation policies to ensure corrective action is being taken, incorporation of resolution advice
or workflow (e.g., expedite options and policies for a late shipment), and performance trending and
root cause analysis of disruptions and lead time fluctuations.

Supply Chain Visibility in Action

Pharmaceutical supply chain: A European pharmaceutical company has 180 users worldwide that use
an on-demand international visibility system from Management Dynamics to monitor 750 trade lanes
on six continents. By effectively mining the information collected, the company found significant
opportunities for consolidating shipments, reducing expediting costs, removing bottlenecks, and
addressing potential shipping issues before they impact customer service. It also helped them exploit
more opportunities for competitive advantage in new markets. In total, the company cut its inventory
costs by $55m and lowered its total logistics costs by 5 percent through its international visibility
initiative.

Consumer goods supply chain: Liz Claiborne, the $5bn apparel and accessories producer and retailer,
sources goods from over 3,000 factories in more than 35 countries. Due to its diverse sourcing
locations, shipment delays are common; strikes, security issues in less stable countries, weather,
capacity issues, congestion, and equipment failures are some of the events that create delays. To
41
increase control, Liz Claiborne's import team decided to improve shipment visibility by implementing a
global supply chain visibility system from TradeBeam.

Any stakeholder in any Liz Claiborne division can now track shipment status online, seeing events
such as when a shipment departs supplier, leaves departure port, arrives at initial port of entry,
customs entry filed, released from customs, reaches deconsolidation facility, scheduled for final
delivery, and arrives at final destination.

Because of the increased visibility, Liz Claiborne's import group is able to manage international
shipments proactively to keep the supply chain moving. For instance, staff members may
redirect cargo into a different transload facility or an alternative port to avoid congestion or to make up
time because of unanticipated supply chain delays. The result has been a reduction in import transit
times of 5 to 7 days and removal of 7 to 10 days of inventory due to shorter lead times and increased
certainty of the position of goods

Protecting Gross Margins

Companies are seeking to monitor and more actively manage their transaction costs, even down to
the order or ocean container level. For instance, a number of retailers are now looking to expand their
visibility solutions so they can see total landed cost build as transactions occur and identify
discrepancies with cost targets. They can then take action to protect their gross margins, such as
shifting to a slower but lower cost of transportation for later legs of a shipment or changing product
pricing or promotions.

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Companies sourcing from China report that transportation is the top area of budget discrepancies. "In
our domestic supply chain, we can easily attribute freight costs and even understand the impact of
truck fuel surcharges at a carton level," says a retail international transportation director. "But on the
international side, we were challenged to answer even basic questions such as, 'What's the average
ocean freight spend per month, by lane?' because we lacked integrated systems and normalized
data." This company has deployed an international transportation management solution from GT
Nexus and has achieved multimillion-dollar ocean freight savings as a result.

Many innovators are now focused on improving their transportation management contracting, costing
and execution processes to avoid unanticipated cost overruns that lead to gross margin erosion.
Companies that have not yet audited their supply chain costing weaknesses and created a
remediation plan should begin this process; it is the first step to ensuring more accurate and
predictable budgets and total landed costs-and to identifying savings opportunities.

Increasing Logistics Agility

Managing international logistics is not like managing an extended domestic supply chain; it's
fundamentally a multi-party process fraught with greater unpredictability in quality, lead times, costs
and risks. Rather than create the absolute-lowest-cost fixed network, leaders are building into
their logistics networks more points of flexibility. This helps them continually scan their environment for
bottleneck symptoms or spikes in demand and take action.

Among survey respondents, 59 percent employ three or more of these practices at least sometimes.
However, only 11 percent use three or more of these practices on a frequent, systematic basis. These
preemptive organizations are just as likely to be mid-sized companies as large enterprises. Their

43
common attribute is that they are twice as likely to have highly automated supply chains as their
peers. This automation enables them to cost-effectively manage global shipments and inventories in a
much more aggressive and exception-based manner.

One practice in which large enterprises do outstrip their smaller competitors is in supplier drop
shipping. Some 35 percent of large enterprises report they have their international suppliers drop ship
more than 15 percent of their orders directly to their customers. Just 8 percent of small and mid-sized
companies use drop shipping to this extent. This is a clear area of potential improvement, which can
help cut lead times to customers and reduce pipeline inventory and related inventory liability exposure.
A best practice for drop shipping is to use a supplier collaboration platform to insert monitoring and
control points at the supplier, thus ensuring seamless delivery to your customer, including ensuring
shipments follow your business rules for completeness, labeling, and so on.

International Transportation

Management

Approximately eight out of 10 companies say they feel pressured to improve their
transportation processes because of growing international shipment requirements. Today, 39 percent
of participants say they are going to seek to adopt a commercial international
transportation management system vs. just 12 percent in Aberdeen's 2004 benchmark. Another 9
percent say they plan to build a new system in-house to manage international requirements.

44
In international transportation management, companies are seeking increased technology support for
both planning and execution processes. Recent advances in transportation technology solutions
include:

"¢ Closed-loop international transportation management platforms, often delivered on an on-demand

basis. These closed-loop systems support contract procurement, booking, allocation, tracking and
settlement processes for ocean and air shipments. These platforms also typically come with already
established electronic connections to freight forwarders and carriers, reducing the time and cost to
establish electronic messaging.

"¢ Transportation execution technology that makes it easier to enforce corporate shipping rules and
create spot buys for ad hoc or capacity constrained shipments, which often result in the
greatest freight overruns.

"¢ Transportation optimization technology that can be used to direct forwarders to execute better plans
and make better use of shipment consolidation and pooling opportunities. About half of companies are
considering the value of dynamic routing of international shipments (vs. static, itinerary-based routing).

"¢ Transportation procurement technology that can be used to negotiate lower ocean and air rates by
enabling more flexible expressions of bid options by carriers and forwarders, identifying freight that
best fits their networks and capacity availability. CombineNet is an example of a procurement solution
specialist that's been able to help multiple companies cut contract rates by 3 percent to 25 percent in
the midst of today's inflationary freight rate environment.

45
Enterprises with international freight expenditures above $15m should be evaluating how these
solutions can deliver savings and improved budget accuracy for their organizations.

Improving Trade Compliance

Trade compliance has traditionally been a difficult area in which to convince management to spend
money for technology automation. However, this is changing:

"¢ First, government scrutiny is increasing around areas such as import security and restricted-party
screenings for exports, so the fees and fines are becoming more onerous, as well as the risks of bad
publicity for noncompliance.

"¢ Second, manual compliance processes are becoming a much greater productivity drain as global
trade becomes a larger part of a company's business.

"¢ Third, it is becoming increasingly well-known that market leaders are gaining total landed cost
advantages through origin management, which includes preferential treatment programs and free
trade agreements (e.g., NAFTA, CAFTA, European Union, MercoSur), quota management, and the
general process of using trade knowledge to help a company architect lower total landed costs from
product design through final delivery.

Aberdeen research has shown that best-in-class performers-those companies reducing their total
landed costs and documentation issues the most-are twice as likely to have current budgeted trade
compliance projects as their peers.
46
"A year ago, trade compliance was viewed as a tactical, necessary evil," reports a director in finance
at a billion-dollar manufacturer. "Now we understand that we must operate global business processes
and stop thinking of ourselves as a U.S. manufacturer. Now we're seeing compliance as strategic."

As regulatory oversight intensifies, enterprises are finding increasing value in moving to a single trade
compliance platform for the entire company that enables consistency of product classifications and
restricted-party screenings and provides a common view of compliance activity and trade costs.

Centralized trade management information is also a critical instrument for lowering the cost of goods
sold. In fact, leading companies are architecting new products and sales initiatives around trade
compliance knowledge housed in automated compliance systems.

Renault, for instance, has used the origin management information housed in its centralized trade
compliance platform from TradeBeam to drive a whole new low-cost car. Called the Logan, the vehicle
is partially built in Western Europe and then exported to emerging markets for final assembly and sale.
By setting manufacturing and distribution strategies based on maximizing free trade agreements and
minimizing duties and taxes, Renault has been able to create a markedly lower total landed cost. Its
compliance platform also tracks actual activity closely to ensure that currency fluctuations and other
changes don't threaten these savings-which could potentially trigger much higher total landed costs
than expected.

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Adopting Supply Chain Finance
Perhaps the hottest new area emerging in global supply chain management is supply chain finance.
Such a solution is a combination of trade financing services provided by an enterprise or a financial
institution and a technology platform that unites the trading partners electronically. It can involve early
payment discount programs, inventory financing, and other programs to help improve payment
predictability and cash flow for suppliers while helping buyers extend payment times and lower unit
costs.

Aberdeen research shows that leaders in supply chain finance enjoy a 13.6-day advantage in
payment terms and achieve a lower unit cost while creating a healthier supply base.

Supply Chain Finance in Action

Retail supply chain: AJT, a European fast-fashion retailer, has reduced its unit costs by 5 percent to
10 percent this year by using supply chain finance services from UK-based EZD Global, while
simultaneously improving its Asian suppliers' margins and their responsiveness.

"We were looking to maximize our margins but we also wanted to cultivate better trading partner
relationships," explains AJT's finance director. "In the fast fashion market, we often have to request
quick turnaround from our Asian clothing vendors, so we need them to view us as a valued customer."

According to AJT, its suppliers used to go to their local country banks and get an advance on the
money off of the letters of credit. This would get them their cash faster, but they could lose as much as
20 percent of the value of the purchase order by doing this. "We now invite our clothing vendors to use
the supply chain finance service, which enables them to get paid 70 percent when the container the
48
leaves their shipping dock and 30 percent at some later point, such as receipt at the UK warehouse,"
says the finance director.

"Using the supply chain finance service, the suppliers gain back 5 to 15 percent of the purchase order
value they were losing. We share in the savings by getting 5 to 10 percent more off of our unit costs.
However, we want our vendors to have an improvement in their bottom lines-we are not looking to
have all the savings passed on to us."

To make the process work, AJT sends information from its supply chain transactions to EZD Global so
the supply chain finance provider can more accurately assess the financial risk on an ongoing basis.
This translation of supply chain risk into financial risk also has been beneficial for AJT. "The
assessment data has been an unexpected benefit," says the finance director. "It has given us a better
view of our supply chain base and its strengths and weaknesses-for instance, can a vendor actually
supply goods in the volume, quality and speed you need?"

Consumer goods supply chain: "Before we started our supply chain finance program, we had good
relationships with suppliers on the purchasing side but struggled to keep up with the back end
payment side," says the vice president of finance at a North American apparel manufacturer. "We
were putting our supply chain at risk because of inconsistent payment times and the lack of shared
visibility to purchase order and invoice status."

To create stronger supplier relationships, the company moved to a trade platform from TradeCard that
enables the company and its suppliers to have shared visibility and document and transaction control
of the orders from purchase order placement to invoice receipt, reconciliation and payment. This
allows many more payment problems to be dealt with at the front of the process instead of at the back
49
of process, where they cause payment delays and unpredictability. Suppliers can also access credit
insurance and participate in an early payment discount program funded by third-party financing.

"Our first goal was improved payment visibility for our suppliers and creating a lower-risk supply base,
but we found that this better cash predictability drove so much benefit for our suppliers that we've
been able to move 95 percent of them from net 30 terms to net 45," explains the finance executive. "In
fact, we're now looking to ask some of our large customers to use the solution for paying us so we can
improve our cash flow projections and reduce the amount of time our people spend tracking down
payment problems."

Deploying Commercial Global Supply Chain Technology

Nearly six out of 10 companies say they have been relying on applications built in-house to manage
their global supply chains. But a big shift is occurring as software vendors are finally delivering
systems designed for global supply chain management. Only 18 percent of companies surveyed say
they plan to build additional global supply chain technology in-house.

Companies are seeking to upgrade multiple facets of their global supply chain technology. Figure 3
shows the technology investment plans for organizations. All these investment areas are critical
components for a comprehensive global supply chain automation portfolio.

Companies are now about equally likely to seek global supply chain technology from their ERP
vendor, from a specialist vendor of global supply chain technology, or from an on-demand provider
(also called "software as a service" or hosted application provider).
50
Educate your company on the different sources of global supply chain technology and their pros and
cons. For instance, ERP systems hold the promise of strong cross-functional workflow, while on-
demand platforms can deliver pre-connected communities of suppliers or logistics providers and faster
return on investment times.

Global supply chain technology solutions are no longer only for large corporations: Mid-sized and
smaller companies are increasingly gaining access to technology from their third-party
logistics providers or from on-demand global trade platforms that offer functionality on a subscription
or transaction basis. Some emerging vendors are tailoring their solutions specifically for mid-sized
organizations, such as Mitrix, which provides supply chain visibility and logistics control applications
on an on-demand model.

Transforming the Global Supply Chain

Following these emerging best practices can help companies regain control of their extended supply
chain operations and improve corporate profitability. Enhancing supply chain visibility, improving gross
margin management, increasing logistics agility, enhancing international transportation management,
improving trade compliance, adopting supply chain finance, and deploying commercial technology are
all opportunities that companies should be evaluating as they seek to make the most of today's
globalized business world.

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Scenario Planning
It is a wonder how some of the greatest engineering and business minds in history were very wrong
on their prediction of how the future will play out. The Walkman, the iPod and now the iPhone have
revolutionized how music is now being consumed and distributed. It is ironic that Thomas Edison, the
original inventor of the machine that plays musical sounds, failed to recognize the potentials of his
own invention. Until now, companies are searching for that elusive crystal ball tool that will give them
the ability to predict the future accurately.

The ability to strategically plan for the future is a key element in the success of Supply Chain Net-
works. Traditionally, forecasts have been used to guess how the future may turn out to be but in the
long term, forecasts tend to be wrong. Alternatively, key performance indicators (KPIs) have provided
organizations with an opportunity to visualize a ‘rear-view’ picture of what has occurred in past and is
occurring in current operations. Alternatively, ‘side-view’ visualization could be done through complex
analysis using deep dives into big-data made available through the use of advanced Enterprise
Resource Planning (ERP) systems. This viewpoint can also be complemented by using traditional
benchmarking comparative analysis within and across industries. Using these indirect vantage points
of the state of an organization and its immediate environment provide limited guidance that will be
useful for correctly and accurately foreseeing what is coming ahead.

This research attempts to develop a framework that will explore the possibility of developing a new
breed of indicators that will provide forward-looking guidance which helps organizations strategize
accordingly in response to the ever changing future company, industry, and market scenarios.
Through the careful analysis of how these indicators evolve, organizations can be guided on the

52
appropriate man-agement direction and strategy that should be employed in order to remain profitable
and competitive in their environments.

The sponsoring company of this research, Clariant, is a leading manufacturer of specialty chemical
products catering to the business-to-business market. The company, firm in its commitment to excel-
lence, has begun a long-term excellence initiative targeting a culture of continuous improvement. This
initiative not only covers supply chain, as part of operations excellence, but also production,
innovation, commercial and people excellence. These excellence initiatives are driven by a high level
executive committee with a clear mandate to implement solutions consistently across all business
units (BUs) and service functions, which in turn are expected to clear operational targets relating to
mobilization and cost to benefit ratios of their actions. Each of these initiatives is a comprehensive
approach for continuous improvement; it is expected to run for many years and will be adapted with
the demands of the times. Initial results of these corporate initiatives have been successful.

As part of their supply chain excellence initiative, the company has developed an internal Supply
Chain Performance Management Platform (SCPMP) that uses KPIs focusing on Net Working Capital
(NWC), Supply Chain Cost (SCC) and Service Levels. The platform has already been integrated into
existing Enterprise Resource Planning (ERP) software and other internal proprietary systems.

Phase 1 - Definition of Scope:

Defining which area of the world we are trying to predict the future for and the prediction time frame.

Based on interviews, discussions and expert opinion from Clariant supply chain excellence team

53
members, in addition to review of related academic research, the Scenario Planning timeline was lim-
ited to the next ten years. Considering that time horizons are specific to a particular industry under
consideration, this timeframe was deemed to be the most appropriate time window for planning in the
specialty chemical industry and for realistically expecting the uncertainties in the environment to take
effect (Schnaars, 1987). Previous research has also indicated that 72 percent of practitioners of
Scenario Planning have used a 10-year planning horizon as basis for analysis (Bradfield et al., 2005).
Aligning with the Clariant’s active strategy of growth in the developing world, the research activities
focused the scenario creation process for the Asia-Pacific, a region where the company believes has
big potentials for growth. (See Figure 1)

Phase 2 - Scenario Development:

Create Scenarios to predict possible and plausible futures.

The research applied the Scenario Planning framework proposed by Schwartz (1996), who outlined
an eight-step methodology to complete the process. This research limited the scope on the application
of the steps related to:
Figure 1. Global share of sales, 2005 and 2011 (exclusive of % share of Africa and others)

54
• The exploration and prioritization of external forces and internal factors,

• Scenario logics development, and finally

• Indicators development.

The research implemented a modified Delphi approach using interviews, workshop and
questionnaires which were deployed to key members of the supply chain excellence organization, as
well as to members of senior management with previous experience in the APAC region. The result of
this process was used to generate consensus in determining the Key Local Factors that impact supply
chain performance and the Driving Forces that may have significant impact on the future of the
organization’s supply chain. These were followed by confirmatory feedback sessions with the primary
contacts in the company. Ap-plying the Intuitive Logics School’s approach to scenario creation,
multiple scenarios were generated using prioritized Driving Forces in the external environment.

55
Phase 3 - Indicators Development:

Develop indicators to monitor which of these possible plausible futures is becoming a reality.

After the development of scenarios, indicators that could be used to monitor how the future is
evolving were extracted. These indicators will guide the organization navigate through the future by
measuring how uncertainties are unfolding, thereby allowing them to react with well thought-out plans
and strategies.
The main contributions of this research are:

1. The demonstration of how to systematically develop a set of scenarios that can be used for
strategic planning purposes (“Applied scenario development process”),

2. The demonstration of how to develop a set of forward-looking indicators that can be used to
moni-tor how the future is evolving (“Development of leading indicators”), and

3. The development of a replicable methodology that can be repeated across any of the company’s
business units around the world (“Methodology for scenario planning,” “Applied Scenario devel-
opment process,” and “Development of leading indicators”).

The third contribution is deemed to be most important, given that the application of Scenario
Planning to strategic planning in the business context is a fairly new phenomenon. The methodology
developed in this research will fill gaps in existing academic literature that have resulted from the
‘methodological chaos’ resulting from differences among practitioners and rival schools in the field of
Scenario Planning (Bradfield et al., 2005). The abundance of methodological options has made it
challenging for organi-zations that have no prior experience in Scenario Planning to effectively adopt
56
the methodology. This research will be outlining a practical and replicable way of applying Scenario
Planning, in this case the future of the supply chain of a specialty chemicals company.

REVIEW OF RELATED LITERATURE

Strategic planning is a field of research that has been covered by a whole range of academic literature
but studies involving methodologies for ‘Preparing for and detecting the future’ are very limited. The
challenge in future studies is dealing with the wide scope of possible dynamics that can be considered
even for the simplest type of issue. Future studies have been done in an array of public policy applica-
tions (Godet, 1990) but very limited in the applications to business strategic planning. In this section,
the inherent limitation of an inward view of the organization is discussed followed by the alternative of
looking at external factors as basis for future planning methodologies. Among which, Scenario
Planning is identified as the most practical framework to prepare for the future.

LIMITATIONS IN USING PERFORMANCE INDICATORS IN BUSINESS

PLANNING

Industrial practices may be measured based on economic, environmental and social criteria. For eco-
nomic criteria Key Performance Indicators (KPIs), it is further characterized in five different
dimensions: Reliability, Quality, Reactivity, Flexibility and Financial. These KPIs are then divided into
two groups: Customer-facing indicators and Company-facing indicators which are used to monitor an
organization’s performance (Gruat la Forme et al., 2010). Other research have found that most

57
companies have lim-ited success in their application of Key Performance Indicators to monitor supply
chain performance, this is due to the failure to develop performance measures and metrics needed to
maximize the supply chain network potential. Frequently there is an imbalance in the choice of
metrics, focusing either on financial performance or non-financial aspects such as those measuring
organizational or operational performance. The limited successes in using KPIs in monitoring past
performance makes it very unlikely that using traditional KPI measures will be useful inputs in
developing strategies for future scenarios (Gunasekaran et al., 2001 and 2004). These internal views
of the organization poses inherent limitations in sensing how the future may evolve since the pictures
created from performance indicators are rooted in past trends which may not hold true in the future.
Thus, an alternative framework for planning for the future must be explored.

MODELING THE FUTURE: FOUR LEVELS OF UNCERTAINTY

Existing research has proposed that the future can be modeled in four different ways through the
develop-ment of a classification topology differentiating the levels of future uncertainty (Courtney et
al., 1997). The first way of modeling is to visualize a clear enough future (Single-point model). This
simplistic view of what is to come corresponds to the first level of uncertainty. In this modeling
framework, residual uncertainties of future events are considered irrelevant. As such, traditional
strategy tool-kits such as market research, bench marking, and value-chain analysis can be used.
These types of methodology are usually done after determining a single market forecast as basis for
analysis (van de Putte, 2012). Alternatively, Porter’s “Five forces framework”, which evaluates:

1. The effects of the threat of new entrants,

2. The threat of substitute products or services,

58
3. Bargaining power of customers,
4. Bargaining power of suppliers, and
5. The intensity of competitive rivalry, can also be very useful in determining strategies to prepare
and respond for the future (Porter, 1979).

The second level of uncertainty is to consider the possibility of alternative versions of the future
(Discrete point model). In this second category of modeling, several versions of the future, which have
corresponding probabilities, are developed. The discrete probabilities determined for each version of
the future are then applied to various methodologies such as Game theory, Decision Analysis, or
Option Valuations Models. In this modeling framework, the dynamic relationship between sets of
decisions and the value of a specific strategy are taken into consideration. To apply this type of
modeling, managers must already have developed a deep understanding on how uncertainties may
play out. This is essential to establish the assumptions needed to estimate the likelihood of each
version of the future coming to reality (Courtney et al., 1997).

The third level of uncertainty is to consider a range of possible futures (Range of future model). In
this third modeling framework, a defined set of variables define the spectrum of possibilities the future
may become. Possible future scenarios are no longer limited to a small set of discrete probabilistic
ver-sions of the future but actual scenario outcomes may lie within a range of eventualities that are
driven by uncertainties influenced by a set of external and internal forces. By monitoring key trigger
events and signals, the direction of the future can be detected and can be exploited for strategic gains.
Scenario Plan-ning is one useful methodology to model the future in this level of uncertainty
classification (Schwartz, 1996). Other methodologies that could be applied are technology forecasting
and latent demand research (van de Putte, 2012).

59
 The fourth level of classifying uncertainty is to view the future in terms of true ambiguity
(Ambiguous future model). This is the most complex way of modeling the future, in which it is virtually
impossible to visualize how the future may look like. Uncertainties interact with each other in very
complex dy-namics that essentially no believable/plausible scenario can be generated (Courtney et
al., 1997). Exotic mathematical models and research on analogies and pattern recognitions as well as
non-linear dynamic models have been attempted in this area of research (van de Putte, 2012).

In this research, a modeling framework that offers the flexibility of covering a wider range of plausible
futures (Range of future model) has been chosen. Specifically, the Scenario Planning methodology
has been identified to be most appropriate for application, as this framework of analysis provides the
right balance of sophistication and applicability that allows for the straightforward generation of
relevant and believable scenarios.

METHODOLOGY FOR SCENARIO PLANNING

Scenario Planning is a long-range planning process that is based on understanding the nature and im-
pact of the most uncertain yet important Driving Forces affecting our world. Scenarios are described
as “carefully constructed plots that make the significant elements of the world scene stand out boldly”
(Schwartz, 1996). It is a group thinking process that encourages knowledge exchange and
development of mutual deeper understanding of central issues important to the future of the business.

There are many methodologies for Scenario Planning; many of them share some common ground
with the technique used by the Royal Dutch Shell Corporation known as the Intuitive Logics. The
advantage of Intuitive Logics over other methods is that it provides “the right mix of technical

60
sophistication and ease of use for a professional audience” (Bishop et al., 2007).

The steps for creating scenarios using the intuitive logics were first articulated in the book called “The
art of the long view” (Schwartz, 1996). In this book, an outline of a high level process that could be
used as guide to perform the scenario creation process was proposed. It is an eight step methodol-
ogy (adopted from Schwartz (1996)) that generally describes the process without specifying how each
step must be conducted in detail; this seminal book stops short of outlining a step by step description
of how each step can be translated into practice. The absence of these detailed procedures is rooted
in the firm belief by most practitioners that Scenario Planning is a developed skill, since “you cannot
create scenarios from recipes – but you can practice creating scenarios” (Schwartz, 1996).

In the next sections, the process of developing scenarios based on the Intuitive Logics approach
will be described. As part of the objective of this study, a more detailed elaboration of the methodology
for creating scenarios to prepare for the future is discussed. In latter sections a demonstration on an
applica-tion in the specialty chemical business context is described.

MANAGERIAL IMPLICATIONS

This has been an initial attempt to introduce the Scenario Planning methodology to the sponsoring
company as a tool that can help their supply chain navigate through the uncertainty of today’s world.
During the realization of this study, some decisions were made to streamline the research activities
given the time limitations and other constraints that emerged. This section highlights some of the
managerial implications that were identified to improve the applicability of this methodology within the
organization.
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SCENARIO CREATION PROCESS

As mentioned before, Scenario Planning is a group thinking process that encourages knowledge
exchange and development of mutual deeper understanding of central issues important to the future
of the busi-ness. Being so, the selection of people that would be involved in creating the scenarios is a
key factor in the quality of the outcome of the process. People in high managerial roles from different
areas of the organization are needed to take part in this process, as each of their input is a very
crucial factor in the quality of the scenarios.

As most Scenario Planning processes take 12 to 18 months (Godet, 2000), the limited time-window
used in this study only allowed for the collection of inputs from the participants through a modified
Delphi process. Ideally the identification of the Local Factors and Driving Forces and the subsequent
ranking of the Driving Forces and relationship between them should be done in a workshop
environment where all the people involved in the creation of the scenarios participate and complement
their viewpoints. The iterative nature of discussion in repeated workshops will support the acceleration
of organizational learn-ing through the iterative and participative steps implemented in the scenario
creation process. Although, it is advisable to use questionnaire as a preparation tool for the workshop,
the bulk of the information that is to be used in the development of scenario narrative must be
collected through active discussion and participation of the people involved. It can be inferred that the
quality information collected in this manner will be much higher and hence the scenarios developed
are expected to be much better.

It must be stressed that the development of scenarios is not just a one-time project. To be able to
sustain the organizational effects of learning about an ever changing external environment, scenarios

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have to be updated and re-evaluated regularly. The first reason for this periodic review is that the skill
of creating good scenarios is only developed through the repeated practice and immersion in the
methodol-ogy. Secondly, the uncertainty of external Driving Forces implies that the developed
scenarios have a time window in which the assumptions used will hold true. As such, scenarios need
to be updated and refreshed periodically taking into consideration the changes in the external
environment. For sure, any scenario that was built over a decade ago will include a number of
assumptions that are no longer valid in today’s world.

In actual practice, it is recommended that the management of the Scenario Planning processes
should be facilitated similarly to other corporate initiatives such as Lean Six Sigma, among others. A
central function should take the lead in coordinating the resources necessary in the scenario creation
processes. In companies that have successfully used Scenario Planning, dedicated teams that
coordinated the de-velopment of scenarios have been created and institutionalized. More than the
creation of the scenarios, this functional team takes the role of deploying the scenarios across all
business units. In the case of Royal Dutch Shell, the Scenario Planning group uses seventy five
percent of their time doing capac-ity building all around the world, facilitating workshops to enable
business units to use their ‘Global Scenarios’, as well as developing ‘Focused Scenarios’ that are
specific to a business location and/or domain (De Gues, 1988).

STRATEGIC IMPLICATIONS OF SCENARIOS

Above and beyond the understanding of how dynamic forces interact to form a range of plausible
futures, the value of creating scenarios can also be seen on their implications on the strategic
positioning of an organization. In this study, how to evaluate strategic implications was not elaborated
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as it is not covered in the original scope.

The scenarios developed in the methodology described in this study can be used by Clariant in
tandem with existing supply chain methodologies already used in practice. For example, sensitivity
analysis for supply chain network design and redesign projects could be complemented by the
conditions defined by the different scenarios. Instead of arbitrarily assigning percentage
decrease/increase of certain factor inputs and constraints to developed models, Scenario Planning
can offer an alternative structured ap-proach for these types of analysis. In addition, strategic
conversations during planning processes, such as facility/warehouse/capacity location planning, can
be enhanced by using the multiple perspectives offered by these scenarios. The dynamics of the
Scenario Planning methodology reduces the risk of organizational groupthink that severely limits the
strategic options that can be used to prepare the sup-ply chain of the future.

As a recommendation for practical application of the methodology, the Clariant should attempt to find
strategic middle-grounds that will be effective across a number of scenarios. This form of hedging
ensures that the organization can remain competitive regardless of how the future may become. The
search for these ‘special’ strategies will be very challenging but this totally outweighs the risk of being
caught off-guard as critical Driving Forces swing against the organization’s favor. Previous research
has argued that the ultimate goal of scenario creation is the development of strategic options that is
robust and resilient across multiple scenarios (O’Brien & Meadows, 2013).

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LEADING INDICATORS IN PRACTICE

This project has demonstrated a straightforward demonstration of how leading indicators can be used
in scenario monitoring. The role of indicators and sign-posts is not only to serve as ground sensors to
monitor which path the world is actually evolving, but they also to serve as triggers to reinitiate the
scenario creation process as time passes by. Scenario monitoring can also be used to detect whether
the Driving Forces which serve as the foundation for scenario development have already evolved
resulting to drastic change in the uncertainty surrounding them.

This demonstration of scenario monitoring can be further developed by the sponsoring company by
incorporating additional indicators that could be put into the mix of ‘ingredients’ that make up the fea-
tures of the scenarios. This can be done by taking advantage of current trends in analyzing “Big-data”,
in which data-analytics, as well as econometric analysis can potentially complement the next stage of
scenario research by introducing more sophistication to the scenario dynamics. In these approaches,
inter-relationships and inter-dependencies of variables and factors are explored in more detail, using
both internal and externally available.

India today and in 2025

The India of 2025 will be very different from that of today.

The country will have experienced another decade of economic growth, with nominal GDP estimated
to be around $7 trillion (up from the current approximately $2 trillion), catapulting India into third place
among the world’s economies. Much of that growth will be rooted in the growth of middle-income
households and of the working population, with rapidly rising income levels. The growth is likely to be

65
accompanied by a stronger manufacturing sector, which may account for one fourth of economic
output. And India’s economy will be significantly more integrated into the world economy, potentially
contributing to about 6 percent of world trade.

As more citizens move to large urban centers, consumerism will rise, as will the preference for new
products, services, and retail formats. This mammoth economy, with its shifting demographics, will
ask for more from its supply chain.

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The future of Supply chain in India will be shaped by 6
Mega trends.
1) More Mega Cities
Nearly 18 Indian cities—up from four today—will be mega demand
centres

As rapid economic development, ongoing urbanization, and the emergence of a sizable middle class
fuel India’s growth, two major developments are likely to manifest by 2025:

• Many of today’s tier 1 cities will evolve into mega demand centres, as their GDP surpasses the
$20 bn mark, joining the ranks of Mumbai, Delhi, Kolkata, and Chennai. Organizations may have to
serve 18 such cities by 2025. Projects such as the Delhi-Mumbai Industrial Corridor can spur large-
scale urban devel-opment, with seven new “smart cities” or satellite towns across six states, scaling
up to 24 such urban centers. What might appear now to be mid-size demand clusters (such as
Pune, Lucknow, and Kochi) are likely to grow to equal many of today’s most important markets.

• Moreover, the current mega demand centers—which today are only a fraction of the size of
their Chinese counterparts—will roughly quintuple in size and approach their Chinese
equivalents’ current levels of economic activity. While this is a massive opportunity for Indian
companies, they will need to rethink their supply chain strategies to cater to such large markets.

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Organizations will have to rethink their mega center supply
chain model

Today most organizations have one or, at best, two types of supply chains: urban and rural. By 2025,
additional considerations will emerge, such as labor availability (in light of the increasing cost and skill
gap), space availability (given the increasing demand for land), and traffic congestion. These will
require multiple supply chain solutions to cater to mega and hyper cities:

1. Automation in manufacturing and material handling, as scale makes this a sensible

investment.
2. Verticalization (that is, high-rise warehousing and distribution centers) to contain rental costs
for depots and storage areas.
3. Lean design for example, using flow-through distribution to manage the movement of large lot
sizes across the supply chain.
4. Cooperation third-party logistics providers and competitors.

Case studies

Mega Shanghai: With a population of tens of millions and a proliferation of small-format stores that
promise fresher products delivered faster, it is impossible for a single distribution center located
outside the city to serve the entire metropolis. Couple that fact with the high price of land, and it
becomes clear why many organizations are exploring the possibility of building networks of smaller,

68
high-rise distribution centers.
To tackle the issue of traffic congestion and pollution, organiza-tions are considering resorting to
common carriers to consolidate deliveries and reduce the number of trucks on the street. Going
forward, smaller, electric, or hybrid delivery vehicles may also be used.
Mega Moscow: Unique customer expectations of a mega city, such as better service and higher
delivery frequency, could be met throughout Moscow via flexible unloading facilities, combined
transport and delivery with other goods, the use of unconventional vehicles (for example, bicycles),
and flexible planning systems. Furthermore, regulatory constraints on manufacturing within the city
are leading to consolidated manufacturing parks in outlying areas.

69
2) Supply chains will need to handle higher variety
and faster transitions

• The use of intermediaries to develop a lean supply chain model will be crucial. Industrial supply
distributors such as Grainger, Wolseley, and Fastenal, which maintain large logistics networks in
their area of operation with hundreds of thousands of maintenance, repair, and overhaul items in
inventory, help organizations efficiently meet the need for unplanned purchases.

Make
• Production lines, too, will need to be more focused and flexible to accommodate a greater
number of products. India’s leading textile players are doing this well already.
• More products with smaller lots will also need more changeovers. Honda’s US plants can shift
from one model to another on the same line in just five minutes.
•
• Manufacturing units need to handle a larger variety in packaging (for example, shelf-ready
packs) to meet different customer and channel needs.

Deliver
• Traditional mom-and-pop stores will coexist with an upsurge in online and organized modern retail.
All major US retailers have already adapted (or are in the process of adapting) their supply chains
to accom-modate omni-channel sales.

• Late customization or value addition at the distribution center or point of sale is an excellent

70
 technique to keep manufacturing complexity in check while still serving differentiated demand. Asian
Paints provides retailers with just 20 base colors that can be combined to produce 1,000 shades for
consumers. Fast-moving consumer goods companies in India are increasingly adopting packaging
customization at the distribution center to navigate through customization and demand volatility
during promotions and festivals.

And, of course, to enable tailoring to market demands, collaboration between different value
chain participants and integration of systems and processes across the value chain will be
essential.

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3) Improved Supply chain infrastructure
Faster. Introduction of the Dedicated Freight Corridor could see rail speeds rise to as much as 100
kilometers per hour. Road speeds will increase too, thanks to infrastructure investment through
public-private partnerships and technology advances such as electronic toll collection, and fleet
modernization.
Wider. Presently, road is the dominant transport mode, and rail has lost significant share over the
past two decades. The Dedicated Freight Corridor will enable modal shift to rail, along with
increased levels of containerization. Connectivity will improve further, with strong growth among
third-party logistics providers and the emergence of multimodal logistics parks—11 of which
Indian Railways intends to develop along the Delhi-Mumbai corridor. Additionally, the last mile
connectivity is expected to improve with the introduction of more efficient small vehicles.
Better. With rising need for consolidation, distribution and logistics will be more efficient through
standardization of pallets and trucks, higher containerization, use of semi-automated material
handling, improved storage facilities, and other modernization techniques. Further, the reliability
of service providers is expected to improve significantly.

Case Study

China has set up bonded logistics parks in eight large cities to handle growing demand volumes and
increase inventory velocity. These parks are primarily free trade zones that combine land access and
international port capabilities to create a full-service logistics and supply management platform. These
parks also provide express customs clearance, reduced duties, and simple processing of goods, with
cargo consolidation for transshipment, export, and import.

72
4) Better regulatory climate
While there may be uncertainty in the timing of implementation, regulatory reforms and activism-
driven changes are certain to arrive.

The major expected changes are:

• Goods and Services Tax (GST). In today’s state value-added tax (VAT) environment,
organizations fragment their supply networks to optimize taxes. Implementation of a harmonized,
national GST is likely to bring about consolidation in warehousing, with large distribution hubs.
Consolidation will also lead to the emergence of more modern warehouses and more automated
packaging, storage, and delivery.

• Fiscal incentives. On the one hand, many of the existing region-based fiscal incentives will cease
to exist, driving organizations to rethink their supply networks. On the other hand, incentives may be
enacted in new regions such as Seemandhra. A wave of fiscal incentives targeting efficiency are
also in the offing, such as:

— National investment and manufacturing zones, where compliance burdens are lower

— Free trade warehousing zones (mega hubs, with state-of-the-art warehousing and storage,
governed by special economic zone provisions)

• Sustainability and activism-driven changes. Society’s increased focus on sustainability will

73
heighten demands for the efficient use of scarce resources, driving changes in operational practices
to include, for example, the use of renewable energy sources. Rising consumer awareness may
also cause legislators to hold manufacturers responsible for the proper recovery and disposal of
their products after use or to use water more judiciously in their manufacturing processes or use of
recyclable materials for production. Development of sustainable product designs and the
implementation of eco-friendly logistics practices will require greater collaboration with suppliers and
logistics partners.

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5) Stronger global connect
India will become a bigger contributor to the global economy:

• Trade volume is likely to multiply by about five times, exceeding China’s current volume of
imports and exports, with India accounting for a six percent share of global trade.

• Foreign trade’s importance to the Indian economy will increase, thanks to potential demand in
adjacent markets (for example, Nepal, Sri Lanka, Eastern Africa, and Southeast Asia) and favorable
economics.

• Facilitating the previously cited trends will be an increase in the number of free trade agreements
signed by India. ASEAN and select other Asian countries are expected to emerge as a significant
trade bloc over the next decade, and negotiations are in progress with key developing and
developed economies such as the Gulf Cooperation Council, the European Union, and the
European Free Trade Association (Switzerland, Norway, Iceland, and Liechtenstein).

75
6) Affordable and accessible technologies
Information explosion is a certainty

• Internet penetration in India is presently just 11 percent, as opposed to the global average of 36
percent. With the growth of mobile Internet among the rural population and the e-commerce demand
from tier 3 and 4 cities and towns, penetration could well rise to half of the Indian population by
2025.

• Today, about half the internet users in India are on some social media platform, though the number
of users is only around 90 million. Growing Internet penetration and the emulation of adoption
patterns in developed countries (where 80 percent of Internet users have social media accounts)
lead us to expect a huge surge in the number of social media users.

• Data volume will increase exponentially, as internal data provided by enterprise resource planning
systems are complemented with external data from email, social media, text messages, geospatial
data, weblogs, clickstreams, and point-of-sale terminals.

• Mobile penetration, now at 73 percent in India, is below the average for developing countries. By
2025, penetration is likely to approach 100 percent. Availability of affordable smart phones and
internet service packs is driving internet usage in India.

Technologies will be more affordable

• For example, a radio-frequency identification (RFID) tag currently costs about $1 in India. As
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 industries such as retail deploy this technology by the hundreds of millions, the cost per tag could
drop by 90 percent.

Global data storage costs have fallen with the development of distributed storage techniques and
cloud computing. Furthermore, open-source analytical platforms and architecture such as Hadoop and
MapReduce are making data analytics flexible, reliable, and relatively affordable for many companies.

77
CONCLUSION

In today’s managerial world, companies struggle to find ways to prepare for the future especially in the
supply chain arena. In this chapter, an alternative methodology was presented to Clariant, the
sponsoring company to tackle this situation in the form of Scenario Planning. The choice of this
approach is counter to the inward approach of measuring performance to sense the state of the
organization in relation to the environment. Scenario Planning has offered an outward perspective in
looking at where the Clariant is in relationship to its environment. This perspective offers a definite
advantage in better positioning the organization for the future.

Three main contributions to the sponsoring company were seen in this research. First and foremost,
how scenarios are efficiently created was demonstrated in section on “Applied scenario development
process” of this chapter. In this part of the chapter, the main structures for creating a vivid description
of three versions of the future have been laid-out in the form of scenario logics that can be used as
founda-tion of creating storylines that can be used for strategic and sensing purposes. Second, a
straightforward framework to monitor scenario evolution was presented in the section on development
of leading in-dicators. For this, a simplified methodology to monitor the scenario evolution through
identifying and measuring key ‘ingredients’ that indicate the relative position of the present to the
developed scenarios was demonstrated. The Scenario Scores represented the measurement of how
much of each scenario has already come to reality. In addition, ‘weak-signals’ also have to be
monitored to ensure that immeasur- able changes in the external environment are also taken into
consideration. Third and most importantly, an elaboration on the whole Scenario Planning Process
was developed the section on “Methodology for scenario planning” of the chapter (some steps are
further elaborated in “Applied Scenario development process” and “Development of leading

78
indicators”), this is by far the most important contribution of the study, not only to Clariant, but also
within Scenario Planning literature in general. Previous research in the Intuitive Logics school of
Scenario Planning has only vaguely and/or partially described steps of the Scenario Planning
methodology. This research developed and demonstrated a practicable descrip-tion of each step of
the Scenario Planning process that will enable any organization that is encountering this methodology
for the first time, to adopt it as part of their portfolio of strategic planning toolkit. The adoption of this
methodology also presents an opportunity to facilitate organizational learning in the organization,
since the sensing and intuitive properties of Scenario Planning activities is a fertile ground to develop
better understanding, as well as facilitate strategic conversations across all levels of the organization
including managers and decision makers who will ultimately decide on key strategic decisions that can
better prepare the organization for the future.

The study has also demonstrated that despite a limited time window, it was possible to develop
usable baseline scenarios that can be used not just for future sensing purposes. To improve the
effectiveness of this approach to planning, these scenarios can even be developed by adding more
texture and dynamics with regards to how the Driving Forces and Local Factors interact.

There is an Arab proverb that says “He who foretells the future lies, even if he tells the truth”, this
means that there is no crystal ball that can tell us what exactly the future will be, but this research has
demonstrated the alternative option of active identification of the Driving Forces and active monitoring
of their associated ground sensors to lead an organization to the general direction of what lies ahead.

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3. OPERATIONS MANAGEMENT FOR COMPETITIVE ADVANTAGE by Richard Chase, Robert

Jacobs, Nocholas Aquilano.

4. PRODUCTION PLANNING AND INVENTORY CONTROL by S. L. Narsimhan, Dennis M. Leavey,

Peter Billington.

5. ELEMENTS OF PPC - by Samuel Eilon

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