Buying Strategy - Emerging Trends

Extacts of the inaugural speech of His Excellency Sri Ved Prakash Marwah, Governor of Jharkhand delivered during the Eastern Regional Conference of IIMM Ranchi Branch on 21st May, 2004.

Materials Management professionals present in the conference, friends, ladies. and gentlemen, I am very glad to be here amongst you on this inaugural ceremony of the eastern regional conference of Indian Institute of materials management.

India is surging ahead as an economic power with GDP , ranked fourth in the world and the second largest GDP among emerging economies, based oh purchasing power parity (PPP). We have over 3 million scientific & technical manpower and produce over 0.7 million graduate engineers and over 3,500 doctorates in sciences every year .

These are very positive signs for our country. We have already been recognized as a force in the Information Technology scenario in the world. Indian Managers have already made their mark in the global business scenario. Our surging service sector and our scientific and professional manpower may soon make our country a force to reckon with in related managerial professions also .

Our country is rich in resources natural recourses, human resources and a wide variety of cultural resources. What is really required is to manage t^e resources efficiently and effectively. Materials being a classical economic resource,the importance of Materials Management and supply chain management in our country can not be over emphasized.

We are seeing that companies, both in the public and the private sectors are feeling a new kind of pressure from their customers, partners, and competitors. Customers want more customized products and better service. Partners want to work in new ways, and competitors are constantly raising the bar by cutting prices and increasing operational efficiency. The new competitive pressure is exacerbated by the fact that we are experiencing a down economy and a new global reality.

Globalisation is a much discussed and hyped phenomenonin India today. I he free economy that India is trying to adopt through the liberalisation process will naturally culminate in the opening up of the markets and globalisation, the beginning of which has already started. This has ushered in new challenges and the Indian companies are facing higher levels of competition in the market place, not only from the other local players but also from multinationals, who are better organised and have considerable hands on experience in fighting competition in more matured markets. To retain existing market share and to grow in such a competitive business environment, the companies will necessarily have to Improving Quality of product, Competitive Pricing, Quicker Response to change (in volumes, models, designs, etc.), Reducing Lead Times (of enquiry, supply, development of new products) Increasing Flexibility (in commercial, payment terms, etc.)

In other words they will have to improve the quality of services in addition to the quality of products and implement Total Quality Management (TQM) philosophy at all levels of their organisations.

To be successful, the best companies will have to be smarter in managing the 4 key business resources of Man, Material, Money and Information. Effective planning and efficient management of flows of material and related information from Supplier to the Customer through the Organisation forms the major responsibility of Supply Chain Management.

As markets are becoming more volatile and uncertain, it is common experience that operating functions within companies, such as Sales, Marketing, Distribution, Logistics, Production and Purchase, seek to hedge their positions separately to minimise risks related to their own areas. They take resort to over forecasting of demand, over stocking, over producing and over purchasing to create safety nets for each function separately. Quite often a stage is reached when the unwanted inventory thus built up, ties up working capital, in addition to restricting the ability of the company to respond quickly to the changing customer demands.

Supply Chain Management concept eliminates this inter-functional protectionism drive, by accepting the whole supply chain as a single entity. All functions along the chain share the common objective of supply and are involved in strategic decision-making. The emphasis is on integration rather than on interfaces between the different functions. The Supply Chain becomes responsible for total inventories in the supply pipe line and also for satisfying customer needs and expectations while meeting all agreed customer service parameters and company targets.

So we may look at Supply Chain as the network consisting of Customer, Retailer, Distributor, Manufacturer and Supplier, closely linked through efficient flows of, Material, involving physical product flow from Supplier to the End-customer including reverse flow of returns for servicing and repairs. Information, involving Customer order receipts in the Supply Chain to delivery from the warehouse till goods reach the End-customer.

Finance, involving credit terms, payment schedules, change of title and ownership arrangements, penalties, etc: at every stage in the Supply Chain.

In any organization, the Supply Chain links the Customer orders/ expected orders (Sales forecast) with finished product Availability, from Production Availability and from Supplier Availability. The link is so fine tuned that any change in the status in any of the stages gets reported throughout the link immediately, enabling corrective actions and adjustments at every stage, without any loss of time.

I think, a Supply Chain organization has an active role in improving the bottom line of the company by taking advantage of its systematic influence upon the 3 cost categories,

Material costs

Raw material Semi-finished goods (WIP, working in progress) Finished goods Indirect material

Working capital costs

Interest on all material and goods Depreciation / value adjustments

Overheads

Other expenses

In my opinion, supply chain organizations must try to set free capital tied up in inventories in the whole pipeline from Supplier to Customer without sacrificing the desired levels of customer service.

Objectives of Supply Chain Management are, therefore to optimise pre and post-production inventory levels, obtain greater efficiency from labour, equipment and space across the company and provide flexible planning and control mechanisms.

I believe that Supply Chain management strives for a single chain of supply having the following objectives: Controlled customer service performance Reduction of pre and post-production inventory Minimum variance (Standardisation) Minimum total cost of operations and procurement Product quantity control Maximum efficiency in using labour, capital and plant through out the company Flexible planning and control procedures

The question is how to transform a traditional company with functional organisation into a successful Supply Chain Organisation ? I think the key challenge is to build a platform (supply chain network) that facilitates the 3 flows i.e. material, information and financial flows. Such a platform will be built on 3 pillars as follows,

Core processes New organisational structure Information and related Infra-structure technologies Now let me deal with them separately.

1. Core Processes

Supply chain has 2 major functions here viz. Physical and Market Interface functions.

Physical functions are related to Procurement, Production, Storage and Transportation.

Market interface functions ensure that the right product is available at right time, in right place and in right quantity, exactly as per Customers needs and expectations.

Effective execution of these functions is possible only when the key processes in New Product Development, Production, Production Planning & Scheduling, Logistics, Distribution and other support and service functions are planned, developed and implemented in line with the targeted Customer service criteria, global performance matrix and benchmarking for best practices.

2. New Organisational Structure

Transforming from a functional to a process-oriented organisation is crucial for success of the Supply Chain concept. In addition to a thorough understanding of all the basic flows, cross-functional collaboration is of utmost importance for such an organisation to be effective. Cooperation across functional and even Organisational boundaries ensuring free flow. is the core essence of the supply chain concept. This needs change in ways of working and setting targets. It also needs change in attitude of personnel at every level in the company which calls for sustained Human Resource development programmes.

People are managers greatest resource. Supply Chain managers must organise this resource by demonstrating effective leadership and team management acumen while removing any obstacle to high performance and unifying potentially divisive interests.

Successful Supply Chain organisations have a cross-functional framework with well-synchronized coordination and integration between all functions, both internally as well as between suppliers, distributors, retailers and end users.

3. Information Technology

IT support systems are the key enablers in transforming companies and re-defining supply chain relationships. In addition to the Enterprise Resource Planning (ERP) package, other infrastructure technologies e.g. Electronic Data Interchange (EDI,), Internet and Bar coding have to be used profitably in developing the Supply charn in the company. Choosing the correct systems, to meet the organisational needs, is of vital importance. This is critical as there are various IT packages now available in the market, which cater to different needs and requirements.

Thanks to advances in Information Technology, artificial intelligence and expert systems are being used to generate models representing the entire material flow, tracking goods as they move from suppliers through manufacturing facilities and through distribution channels to the end customers. These models even simulate human thinking and based on feedback from all points in the supply chain can modify the decision rules; by itself, if and when required.

Now a question coming to your mind naturally, will be how these tilings will bring benefits to the Customer? Let us examine them one by one.

Ultimate benefits that will accrue to customers by dealing with a well-managed vendor (with an effective Supply Chain Organisation in place) are : Improved customer service through fewer shortages, Better delivery performance, Quicker response to changes in demand, Optimal purchase cost due to possibility of long-term purchase contracts.

And the benefits to the organization will be :

Reduction in tied-up capital and administrative costs, Reduction in time and money lost through production line stoppage, More flexibility in planning, Sustained growth, Increased shareholder value

A company with a well functioning Supply Chain organisation has thecompetilive edge, as it is capable of satisfying customer needs for flexibility, competitive price, quicker response time and shorter lead times, all of which help in providing overall cost benefit to the customer. This is possible because the focus of (he Supply Chain is always on the parameters of customer service and it has the responsibility, authority and competence to manage them in the best interest of the company as a whole.

Finally, let me say that the progress made in developing a total approach to supply chain is attributed to the emergence of systems application to management. The traditional functional

organisations set performance goals for each function, to be managed in isolation with little or no explicit attention given to inter-functional relationships. Systems approach assert that by determining the inter-relationships and their interactive effect on each other, the total system will achieve its overall goals, possibly at lower costs, which is usually achieved by sub-optimising one or more functions. Central to this approach is the idea that rather than optimisation of individual functions, these individual functions are subordinated to the optimisation of the total system. In the Supply Chain system this implies that the organisation is regarded as a whole and its performance is optimised either by maximising customer service levels within a budget or minimising the total cost for a given or targeted service level.

Supply Chain management influences about 64% of all costs in a manufacturing company. American companies had spent 10 % of their GDP on Supply Chain related activities in 1997. In Europe Supply Chain related costs hover around 55-65% of total turnover. In India such costs would be around 7080% of turnover.

We can get a fair idea of the potential for savings and at the same time improving competitiveness, if supply chain related activities are organised and managed strategically while improving process efficiency and enhancing effectiveness of the systems.

With these words, I come to the conclusion of my talk. At the end I like to reiterate that what India needs to day is an efficient supply chain management system and a supportive infrastructure.The professionals like the members of the Indian Institute of Materials Management can play important and significant roles to achieve this goal. I hope that this conference will throw light on the current and emerging issues related to this important task before us. I wish the conference all the success.

All reserved Indian Institute of Materials Management