THE ROLE OF SUPPLY CHAIN

MANAGEMENT IN ECONOMY
1
LEARNING OBJECTIVES

Why is the supply chain important?
What are the key supply chain decisions made by a firm?
How has the supply chain evolved over the last century?
What are the unique challenges of managing a supply chain
in India?

SUPPLY CHAIN MANAGEMENT:
SUCCESS STORIES
Competitive pressure has increased for the organizations
Competitors are successful in the industry because of their
superior SCM capabilities
SCM is critical to the success.
Dell: Inventory turn-over ratio of 58.7 compared to industry
average of 12 (Net Profitability of 5.3.%) ( Drop from 7.8% in
2006)
Inventory Turnover Ratio
Inventory turnover is the ratio of cost of goods sold by a
business to its average inventory during a given accounting
period. It is an activity ratio measuring the number of times
per period, a business sells and replaces its entire batch of
inventory again.




INDIAN CONTEXT
The goal is not only to understand and apply the concepts that have already
evolved but also to continue to look for innovations and solutions customized
to meet the requirements of the companies operating in the Indian scenario.

Significant improvements will come only from innovative solutions that can
resolve supply chain problems that are specific to Indian context.


Wal-Mart: Inventory turn-over ratio of 9.9 compared to industry average of
5.5 ( Net profitability of 3.5%)


Zara Corporation: Lead-time from new product to stores is 15 to 20 days
compared to industry average of six months ( Net profitability of 11.3%)
SUPPLY CHAIN MANAGEMENT:
HORROR STORIES
Cisco: Cisco wrote off 2.2 $ billion worth of inventory in May
2001. Biggest write-off in history.
Sony: PlayStation IIa lost opportunity
SONY could supply only 25% of the potential demand for Christmas market
Nintendo Wii Game Console : Shortage expected in year 2007
Nike- i2 Technology Controversy: Lost $100million in sales in
last quarter of 2000 i2 Technologies was blamed. This is what
we get for our $400 millionNike Chairman

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SUPPLY CHAIN MANAGEMENT: A
DEFINITION
Encompasses all activities associated with the transformation of goods from
the raw material stage to the final stage when the goods and services reach
the end customer.

It includes manufacturers, suppliers , distributors as well as transporters,
warehouses & customers themselves.

Involves planning, design and control of flow of material, information and
finance along the chain in order to deliver value to the end customer in
effective and efficient way.

The customer is actually only interested in price , availability & quality of the
product at the nearest retail outlet.
If customers observe inefficiency on account of non-availability, damaged
packaging etc. at the retail end with regards to HUL product they attribute
inefficiency to HUL & not to its chain partners.
The customer is only interested in getting the desired product at the right
place, at the right time & at the right price.
For e.g.,: A soap of HUL supply chain involves ingredient suppliers,
transporter, the company's manufacturing plants, carrying & forwarding
agents, wholesalers, distributors & retailers
Obviously HUL does not own all these entities , but the brand name is at
stake.& it has to be ensured that the entire chain delivers value to the
end customer.
However, different products require different SCM
Supply Chains compete, not the organizations against each other
Supply Chain Management: A Pictorial Representation
C1
C2
C3
C4
C5
C6
VENDOR INBOUND
TRANSPORTATION
PLANTS
INTERFACILITY
TRANSPORTATION
DISTRIBUTION
CENTERS
OUTBOUND
TRANSPORTATION
CUSTOMERS
Information Flow, Finance Flow
Material Flow
The SC of automobile companies Maruti, TATA Motors, TVS as well as the
ones dealing with durables like LG & Whirlpool are very similar to the above
picture.while companies dealing with non-durable goods like HUL, P&G,
Godrej & Nestle have to work with chain that are likely to be more longer &
more complex..

Multiple entries are involved in each stagei.e. a manufacturer receives
material from several suppliers & in turn distribute the products through
multiple distributors.
MANAGING FLOWS IN A
SUPPLY CHAIN
Material Flow
Information Flow
Financial Flow

From An Automobile Manufacturer

Our aim is always to arrange the material and
machinery and to simplify the operation so that practically no
orders are necessary. Our finished inventory is in transit. So
is most of our raw material inventory. Our production cycle is
about eight-one hours from the mine to the finished machine
(automobile) in the freight car
HISTORICAL EVOLUTION OF THE
SUPPLY CHAIN
First Revolution: (Ford Motor Co. 19101920)
Ford Tightly integrated chainowned every part of the chain.
In 81 hrs iron ore Finished automobile..
ButSingle product, that is, no product variety
Vertical integration
Was inflexible supply chain .thus it was not sustainable in the long run
took long to make any changes
General Motors, on the other hand, placed & offered a wider variety in
terms of automobile models & colors.
Till the second SC revolution, all the automobile firms in Detroit were
integrated firms.
In-house manufacturing
High inventories

Second Revolution: (Toyota Motor Co. 19601970)
Wide Variety of products, without holding too much of inventory.
SC became more flexible and efficient.
Long-term relationship with suppliers
Keiretsu system Refers to a set of companies with
interlocking business relationships with all the suppliers.
The suppliers were located very close to the Toyota assembly
plants.so the set up time gradually decreased from hours to
minutes.
Low set-up time and long term relationships-Key to SCM in 2
nd

Revolution
The principles followed by Toyota are more popularly known as lean
production systems.

Third Revolution: (Dell Computers 1995Current)
Customized products

Medium-term relationship with suppliers

Dell dealt with world class suppliers have to maintain technology and
cost leadership.suppliers were always on test.

At dellthe trigger was actual order & not forecasts.which helped Dell
to reduce the inventory significantly.allowing them to respond to any
changes in the market place.

Shift was from:

Single product --- Wide Variety ---- Customization

And on the chain ownership front:

Vertically integrated firms --- long term partnerships ---- loosely held networks

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KEY SUPPLY CHAIN CONCEPTS

Traditionally focus was on Purchasing, Manufacturing &
Distribution.while transport & storage were not given much
attention.
Firms realized that all the above activities are to be coordinated not
just within a firm, but across the entire supply chain, right from the
vendor to the end customer.
The individual departments are more interested in performance at the
local level rather than the performance at the chain level.
This numerous bottlenecks occur. & flow gets distorted.
Then came the .concept of focal firm

Focal Firm The firm that provides identity to the products in
terms of brand has higher stakes in the chain& such a firm is
identified as the main entity in the chain.
E.g. Asian Paints, Marico Industries, etc
Also known as central node or nodal firm.
Supply chain decisions
Design
Operations
Logistics and SCM
Reverse Supply Chain

SUPPLY CHAIN DESIGN
Deciding Scope ( What activities to be done in-house and
what activities to be outsourced)
Design of Network
Plant location and capacity decisions
Warehouse location and capacity decisions (Depots)
Vendor selection
Nature of relationships.. Transactional or long-term
partnerships.

Managing Supply Chain Operations
Decisions are operational and tactical.

Demand forecasting
Procurement planning
Production planning
Inventory management
Transportation management
Customer Order processing
Relationship management
SC has to be integrated with other functions of the firm too.
E.g., New Product Development and Customer relationship
Management
Launch of the Seventh Book of Harry Porter Series

Penguin Indiaacross 93 countries..at tens of thousands of
outlets.was a nightmare.
IMPORTANCE OF THE SUPPLY
CHAIN
Proliferation of Product LinesSKU Stock Keeping
units

SKU- Stock Keeping Units as a variety. The same brand of soap
may be offered in varying colors & sizeseach is treated as a
separate SKU.
HUL in personal care has an average 1200 SKUs.
Foodworld manages about 6000 SKUs.
Either maintain greater amount of inventory or loose customer.
Shorter Product Life Cycles: Leads to obsolescence
Cell phone, Laptop, Automobile
Dell has an average inventory of 7 days as compared to the industry
average of 35 days.


Higher Level of Outsourcing: Makes SCM more vulnerable
Dell computers, Bharti Tele ventures.
Dell if vertically integrated would have needed 5 times more
employees.giving a drag effect.
Bharti-Televentures
Shift in Balance of Power in Chain: Entities close to
customer are becoming more powerful. i.e., retailers. They may
ask for slotting allowance, replacement of inventory on a daily
basis, etc.
Impact of organized retail chain
Globalization of Manufacturing
Impact of tariff structure, which has come down significantly.
In the telecomm & electronics industry, companies get chips from
Taiwan..test them in Europe & finally integrate them with other products of
USA to sell in the international markets.
Due to physical material flow, SC has become more demanding and
complex.
ENABLERS OF SUPPLY CHAIN
PERFORMANCE
From 1980---Till Date, Logistics Cost has gone down
from 15% -- 8.5% of GDP in US
Three major enablers that have helped firms to
decrease SC costs are:
Improvement in communication and IT: ERP, re-engineering.
Even small firms can use IT now
Exploit IT and make changes in SCM and other systems
Better understanding of inter-firm coordination issues: Strategic
Centers Benetton, Sun, Toyota.. Have core competencies
Entry of third-party logistics service providers: 3PL:
90% of the logistics are outsourced, Economies of scale and
expertise achieved, can integrate capabilities, resources and
technology
RATIO OF LOGISTICS COST TO
GDP FOR SELECTED
COUNTRIES*
* Source: Raghuram and Shah 2003
Does logistics cost capture every thing?
How do we capture logistics cost of India versus
China?
LOGISTICS COSTS FOR THE INDIAN
ECONOMY*
Rs billion
*Source: Raghuram and Shah 2004

Total
Logistics
Cost
GDP Logistics
Cost/GDP
(%)
95-96 1201.27 8995.63 13.4
97-98 1261.01 10163.99 12.4
99-00 1388.93 11485.00 12.1
01-02
1508 12679 11.89
03-04
1658 14305 11.59

93-94 prices
INDIAN SCENARIO ON
3PL
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The 3PL in India is in its infancy
New MNCs in India and progressive Indian
Companies operating in the mid-volume, mid-
variety segments have started using the services of
3PL.
It shall develop over a period of time

SUPPLY CHAIN
PERFORMANCE IN
INDIA
Its performance can be viewed at two levels:
Inventory Turnover Ratio @ Organizational level, and
Logistics Costs @ the economy level, which includes, inventory carrying
costs, transportation costs, and logistics administration costs.
The important roles played in costing are:
Higher logistics cost
Variable transit time
In-transit damages
These costs are quiet high in India and make
transportation a very costly affair.

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Performance of the Indian
Manufacturing Industry*
Data Source: PROWESS, CMIE
Sector-wise Industry Performance of
Indian Firms*
Data Source: PROWESS, CMIE
CHALLENGES IN MAINTAINING SC
IN INDIA
Neglected area in organizations
Taxation structure drives the logistics related decision, not
cost or service considerations
SEZs, CST, Local ST, Octroi, Entry Tax, increased transportation Lead
Time.
Unified goods & Service Tax (GCT) is required.
Poor state of infrastructure
Complex regulations affecting logistics decisions
Unorganized Sector- trucks, warehousing, transportation
Unreliable Lead Time
Damages
India has unique problems andchallenges, No other countrys
model can work here.
E.g.,Amul, Shakti-HUL, Dabbawallas

SUPPLY CHAIN CHALLENGES
FOR THE INDIAN FMCG SECTOR
Managing Availability in the Complex Distribution Set up
(SKUs)
Working with Smaller Pack Sizes
Entry of National Players in the Traditional Fresh Products
Sector
Dealing with a Complex Taxation Structure
Dealing with Counterfeit Goods
Opportunistic Games Played by the Distribution Channel
Infrastructure
Emergence of Third-party Logistics Provider
Emergence of Modern Retail Chains: <3% organized
Reservation for Small-scale Sector
The Marico Supply Chain
SUMMARY
What is supply chain management?
The supply chain encompasses all activities associated with the transformation of goods from
the raw material stage to the final stage,.
Supply chain management involves planning, design and control of flow of material, information
and finance along the supply chain
Why is the supply chain important?
On account of globalization and increased competition, firms have to manage a larger number
of product lines with shorter product life cycles under the situation of changed power in supply
chain performance would help Indian firms equations within a chain.
improvement in becoming globally competitive.



SUMMARY-II
Supply Chain Evolution
Technological and managerial innovations, along with the development of logistics specialists,
have helped progressive firms to improve supply chain performance under trying times
Supply Chain Challenges in India
Indian firms need to learn from progressive firms in developed economies, which have
managed to improve supply chain performance considerably,
But at the same time emerging economies like India and China have their own unique supply
chain problems and challenges. Obviously, different geographies and their economies have
their own unique set of problems and we need to look for specific solutions to these problems.