Final aug lt 2010 by Raj Misra

PERSPECTIVE Watch out!

COUNTER POINT Don’t need SC experts!

PROFILE Sitaram Geddam & Abhay Edlabadkar

LogisticsTimes August 2010

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Volume 1: Issue No.4 * August 2010 Editor in Chief Raj Misra rajmisra@logisticstimes.net Editor Ritwik Sinha ritwik@logisticstimes.net Editorial Advisor Ramesh Kumar ramesh@logisticstimes.net Mumbai Bureau Rahul Kumar rahul@logisticstimes.net Sub Editor Neha Richariya Photographer Anil Baral Design Consultant Sam Maitri Designer Kausar Syed Circulation & Distribution Kamruddin Saiﬁ Legal Advisor Rakesh Garg

CONTENTS

08 SCM: The delicate bedrock

Editorial Advisory Board Paul Lim Founder & President Supply Chain Asia Vinod Singhal Brady Family Professor of Operations Management, Georgia Institute of Technology, College of Management Kate Vitasek Faculty, Centre for Executive Education The University of Tennessee Professor K S Pawar Nottingham University Business School Prof. Samir Srivastava Associate Professor, IIM-Lucknow Prof. Akhil Chandra Institute of Logistics & Aviation Mgt Sanjay Upendram Founder & Chairman, Amarthi Management Consulting

PROFILE The H’ H’badi super duo

Marketing & Sales Outthink Strategies Ph: 65177214, 26412476, 9818097385 Email: sales@logisticstimes.net Printer & Publisher Deepa Misra for

E-77, West Vinod Nagar, Delhi -110092 Tel: +91 11 22478538-39, Fax: +91 11 22471764, Mumbai: +91 9322811550 Printed at Personal Graphics & Advertiser Pvt. Ltd. Y -22, Okhla Industrial Area-II, New Delhi-110020

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Edit Note

Events

IN FOCUS

Frost & Sullivan: LSPs-End users equation far from being perfect

PERSPECTIVE Watch OUT!

ManMohan S. Sodhi & Christopher S. Tang

SEAMLESS LOGISTICS Are we ready?

Prof. Samir K Srivastava

GROUND REALITY Unique India Prof. Janat Shah

GLOBAL PRACTICES Don’t implement blindly

Howard James-Scott & Chitra Shinde

TRANSPORTATION Cutting cost

Rathinakumar Vaidyanathan

CONTRACT LOGISTICS Taking off... Vibhu Prakash

EXCERPTS

Supply chain disruptions Vinod Singhal & Kevin Hendricks

VESTED OUTSOURCING Unpacking Oliver Kate Vitasek & others

CRYSTAL GAZING

The defining decade Anand Rangachary, Frost & Sullivan

WAREHOUSING

The vital cog Vineet Kanaujia, Safexpress

AUTOMOTIVE

Determined drive Bill Olver, DHL Asia Pacific

LOGISTICS

Challenges ahead Akash Bansal, Om Logistics

TECHNOLOGY

Adapt smart solutions Sanjeev Kathuria, TNT

PHARMACEUTICALS LSP trust deficit D S Parikh, Lupin LIMITED

MANAGEMENT

Maturing, but slowly Jasjit Sethi, TCI Supply Chain Solutions

44 COUNTER POINT Don’t need SC experts! Harry S Lagad, Gati Ltd.

EDIT NOTE

SCM Microcosm Let me begin with an honest confession. The entire process of putting together Logistics Times ( launched in May this year) has been a hurried exercise. In March, three of us- me, Raj and Ramesh – agreed to go ahead with this project after a very brief discussion. That usual months of brain storming sessions which usually go into decision making of this kind was not needed at all as we pooled our grey cells to reach to the uniform conclusion that this is a domain which would be redefined dramatically in the coming years. Our collective wisdom, of course, has its genesis in some hardcore experience in mainline journalism, more particularly in the macro-economic and business journalism. The point I am trying to make is: we really did not have the luxury of time to indulge in gathering that broader market intelligence which is so crucial for a specified or niche project of this nature. But whatever little feedback we managed to collect from the industry in terms of prospective big ticket future stories in the business, one pointer was uniform: supply chain management (SCM). As Indian economy braces up to skip to new growth stratosphere in next ten years, adoption of advanced SCM would be an imperative which enterprises can ignore only if they have some hara kiri element in their DNA. And as our interaction grew with the industry with the launch of this publication, this feeling has only become more formidable. Nothing surprising, as we prepared ourselves for our first thematic edition, we chose supply chain as the crux. And here is the offering which endeavors to draw a holistic picture of SCM regime in the country – the present status of business operations vis-à-vis SCM applicability, the demand pressures and the need to adopt advanced SCMs, the global models and lessons for India, etc. The exercise to draw a comprehensive picture is purely rooted in the report summaries prepared by some of the most renowned global experts in the SCM arena, as well as column/perspective contribution by senior representatives of LSPs, end user industry and also noted global research and consultancy firms. Here I must mention that Logistics Times was one of the media partners of Frost & Sullivan’s supply chain workshop in Bengaluru last month. And almost on a golden platter, the event served us the chance to interact with players from both sides of the divide – client and service provider – and understand the nuances of this collective assertion that adoption of advanced SCM is a pressing need. In all candidness, let me underline that the entire exercise of putting together this particular edition has been a learning experience for us as well and we do sincerely hope that readers would enjoy looking at this SCM microcosm we have attempted to create. The entire edition is devoted to the various strands of supply chain issue and let me assure you that in future, there would be more thematic offerings of this nature . Waiting for your feedback

Ritwik Sinha ritwik@logisticstimes.net

LOGISTICS TIMES May 2010

The delicate

SCM:

CCURTAIN URTAIN RAISER RAISER

bedrock

delicacy terms, this clearly is a chain or a linkage which could be equated with what 16th century poet Rahim said when he referred to “ dhaga prem ka” in one of his most popular couplets. What is popularly known as supply chain management (SCM) in today’s business parlance quintessentially reverberates what Rahim had meant by that couplet – the linkage has to perpetually remain intact if the equation between the associates at both the ends has to stay on a rocksolid ground in all weathers. If we look at today’s Indian business environment, adoption of ushering in of advanced supply chain management regime in the country is clearly emerging as that critical imperative which can’t be ignored any longer. The national economy is slated to consolidate its recently acquired coveted toast of the world positioning and that would mean volume pressures (both in production and management) buffeting all the players – be it the end user industry or logistics services providers (LSPs). The exigencies of the business pressures would entail that you would have to grant that status of delicate bedrock to SCM whether you like it or not. Something which has already happened to a considerable extent in the matured markets. But even in those markets, we often come across instances where producers have to recall their products. What really triggers these unfortunate developments which can tarnish the brand image of the company, something which might have been assiduously built over a period of many decades? More often than not, such unpleasantaries emanate from supply chain failure. Noted global experts are today ready to vouchsafe – supply chains can make or mar a company’s fortune. And it is this criticality which Indian businesses have to brace or adopt in the coming years even if it means incurring untested pains. There would be issues involving procurement of raw materials, distribution of the increased volumes on a pan-Indian basis, proper and adequate storage and warehousing, and creating a cumulative platform where things happen expeditiously and in a cost effective manner. These are the challenges on the physical side which, of course, hinges largely on infrastructural base. On the application side, the critical point would be adoption of high-end IT solutions which could help in performing the mounthill task of managing an efficient

LOGISTICS LOGIST TICS CS TIME TTI TIMES MES ME M EES Au Aug August ugguussstt 20100

supply chain system encompassing the crucial exercises like forecasting of demand and making suitable adjustments governed by the seemingly precise indicators . Another major challenge would, of course, be finding people with right kind of skill sets. And the required numbers here are huge. Furthermore, as we look at the Indian business space, a key nagging point for proponents of advanced SCM is that the criticality of having efficient supply chain and logistics divisions have still not sunk with the top management of most Indian companies. So what rules the roost in managing supply chains is a strong element of adhocism which could prove disastrous. Last but not the least, the sway of unorganized component in this line of business makes the task of ushering in the era of advanced SCM all the more difficult. As things stand today, we are probably noticing two extreme points on this issue. On one extreme platform, there is a group of selected few who claim to have understood the imperativeness of executing supply chain functions more scientifically (yes, there are players in the same segment who are experimenting to collaborate with their rivals in sharing an uniform distribution and storage platforms) and there are those who tell you that they know they have to change but the first decisive step is still not visible. For many, an efficient supply chain model remains that typical wheels within wheel and chains within chain complicated story. More importantly, they still count it as a cost burden drive rather than something which would shore up their revenue in the future. There is another critical issue as well: will our LSPs who claim to be domain experts in supply chain management would manage to cater to the end-to-end logistics and supply chain requirements of India Inc. as it scales up its production tagged along as to the economic wave? The questions are endless and the answers are not that simple. The big consolation as of now is that most of the front ranking companies – from the client side as well as service provider side – are showing commitment to contribute their bit to bring in advanced SCM regime in the country. That too in a compressed time frame than what has happened in other markets. Clearly, the next decade period would be very crtical in terms of SCM emerging as delicate yet formidable bedrock of Indian business processes replacing the conventional rag tag loose linkages. – Ritwik Sinha

Frost & Sullivan:

LSPs-End users equation far from being perfect The equation between logistics services providers (LSPs) and end user industry is yet to find a formidable base in the country. This is the highlight of a recent report released by Frost & Sullivan even as the paper clearly underlines that growth prospects for LSPs in the coming years are rosy due to rising economic demand.

or logistics services providers (LSPs), earning the trust of end-user industry to completely take care of their distribution, transportation, storage and other logistics requirements is the bedrock of their growth and development. However, in the Indian scenario that unﬂinching equation seems to yet to evolve.

Noted global consultancy ﬁrm Frost & Sullivan released a report last month on the occasion of its workshop on supply chain in Bengaluru which clearly point out to the bottlenecks in the LSPs-end user association in the country even as the report emphasized that things are bound to change in the coming years.

The biggest positive take away of the report, of course, is the growth prospects for the LSPs. Given the envisaged high growth scenario of the economy in the coming years, LSPs growth in double-digit figures has been anticipated as surefire inevitability. The size of Indian logistics market is projected to shoot upto over $132 billion by 2015 from the w base of around $80 billion at the end of 2009. This practically means an annual growth rate of 9.9 percent with the organized front ranking players clocking even high double-digit figures. However, the report underlines the absence of formidable equation between LSPs and end user industry as the key concern. The report is based on a survey undertaken by the agency with leading industrial verticals and a major startling fact it has discovered is that 67 percent of the companies usually opt for one year contract with LSPs. This subtly underlines that end-user industry has to frequently change LSPs, probably because of dissatisfaction with services provided to them. And, therefore, the final statement which we get on this score is: the equation between LSPs and end-user industry is far from being perfect LOGISTICS TIMES August 2010

IN FOCUS

‘Urgent need for long-term strategy’ According to V G Ramakrishnan, Senior Director, Frost & Sullivan, LSPs in India would need to adopt long-term approach to make the most of the economic opportunity slated to unfold in the medium to long run. The author of the latest perspective paper by the agency also underlines the imperativeness of picking up expertise in SCM arena in the shortest possible time due to economic pressures. Editor Ritwik Sinha caught up with him on the sidelines of the Frost & Sullivan Supply Chain workshop in Bengaluru in August. Excerpts: Your report takes into the consideration the unfolding scenario and how the high GDP growth rate regime would create new challenges in the logistics and supply chain arena. Tell me, what are the major highlights in the positive sense? Talking about the big positive point: the LOGISTICS TIMES August 2010

growth is going to be there. Multinational companies would continue to come into the country. So we expect huge amount of investment and FDI inﬂow in the country. And these developments would make it necessary to induce supply chain changes in our operational processes. A lot of these changes have already happened in last ten years primarily because of arrival

of MNCs. From the maturity standpoint, automotive is more matured than other industries because you had the ﬁrst inﬂux of MNCs in this sector. And then expertise has been developed in the telecom space to a considerable extent. Companies which have global operations, for them having in house logistics management is not the norm. They believe in outsourced logistics.

And that is how outsourcing has picked up momentum in the country. This would get accelerated as we have more FDI coming in the country. So the positive element is the growth is going to be there in the logistics sphere. Every activity is attached to some logistics functioning like transportation and warehousing. You can’t do without it. From industry standpoint, there could be different cycles of growth. IIP can increase or decrease which will determine the growth in the logistics sector. We clearly anticipate more outsourcing happening in warehousing. And then there is the huge area of foodchains logistics which is completely untapped and is a virgin market for logistics services providers. So the biggest positive element as I see is there could be a steady growth in the range of 20-25 percent for LSPs over a period of next 15-20 years.

Well, that is the scenario on the positive side. Now tell me, what are the major worries? Maintaining high level of supply chain means that your logistics professionals have to be people who know how to forecast. But if you see in the end-user industry, they are not aware of the changes that are happening. Logistics professionals are upgrading themselves today but it will be a timeconsuming process. The LSPs are not able to fully communicate their value proposition. When these two things start synchronizing, at least to the extent of 50-60 in their level of understanding and working, the outsourcing is going to be pretty substantial. The end users may not have that much time to set their own supply chain, and then make it robust and scalable. Today supply chains are not very robust. But you have to do it. You not only need to set it up but also make it scalable because we see massive growth.

Your report clearly contains some hard-boiled prescriptions for LSPs in terms of how to attain that qualitative scale and how to align more with the enduser industry. Please, share the defining statement of the report on this score.

From the LSPs perspective, the biggest worry we have today is that LSPs are still not thinking long-terms when it comes to investment. Everybody wants to amortise their investment as soon as possible. And the industry has still not gained scale since logistics speciﬁc large scale infrastructural investments have not materialized. They are not able to visualize for more than a year or two. Some of the people say we have four months forecast. But the need of the day is to have a long-term standpoint and considerations. How many LSP actually take the pain to understand the industries you are serving on the cost end basis? LSPs need to understand the industry’s dynamics. They need to have two-pronged approach. One, you need to consistently improve your own capability and secondly, you need to understand your end user industry much better.

Your report also defies the conventional wisdom that the share of logistics cost to GDP is as high as 13-14 percent. Your report pegs it at 6.2 percent. How have you managed to reach this figure? What we have done is that have taken each and every industry in terms of its size currently. We have actually taken the entire industrial GDP. We have broken them down to each and every sector that contributes to the industrial GDP. We have taken the size of that market. For example, automobile industry is say $40 billion and we have made an attempt to analyse how much each company spends on its logistics. We have calculated that based on our extensive interaction with all companies. Similarly, we have taken about 16 industries that totally account for 95 percent of the industrial GDP. In industrial GDP, you have electricity and water also but we have taken out these segments. But we have taken into the picture, the mining industry which is critical. We have looked at outbound logistics. For the steel sector, outbound will go into many sectors. In our analysis, we have looked at basic raw material, then the intermediate and ﬁnished goods.

For the basic raw material, we looked at the inbound cost and for the rest of the stage, we looked at outbound cost as the cost for the next year’s supply. So we looked at that and at every mode, we analysed what is the logistics cost – transportation, warehousing, value-added services, and freight forwarding. In this report, we have speciﬁcally not covered the inventory carrying cost because it goes along with the interest which you may have borrowed for the expansion of facility. But we also looked at how much could be the potential interest component based on what is the average inventory they hold. And incorporated average inventory holding cost based on say norms of holding inventory for the average of 30 days across the year. It comes around 14-15 percent – this could be the potential cost of inventory holding. There is also administration cost involved in the process. Logistics costs are based on four critical elements that account for 8090 percent for the total cost which we have captured in our analysis. And base cost of logistics has been pegged at 6.2 percent. But this can go upto 7 to 7.5 percent if you bring in administrative cost element and could go up further to ten percent if you consider the interest element. So at the end of the day, total supply chain costs for the economy ranges between 8.5 to 9.5 percent. What has been given by many people in the past and this number has been rotating right from 2002 is like 13-14 percent. Everybody is using this number in their presentations today. And the claim keeps on going.

Do you think five years down the line, the SCM regime would have a semblance of maturity in the country? We are not going to mature so quickly. But our learning curve would be shortened tremendously. If any economy learnt and adopted advanced SCM in 20 years, then probably we would develop the expertise in half the time. Industry will be forced to do it because our growth has become so rapid now. And the good thing is it has coincided with the growth in IT which will help in crunching the spell to reach to a particular scale. LOGISTICS TIMES August 2010

IN FOCUS

status of the Indian logistics markets, the report also highlights some other interesting observations. For instance, 99 percent of the companies are outsourcing their transportation requirements to LSPs and 66 percent are handing over their freight forwarding works. But only 44 percent of the covered companies are outsourcing their warehousing needs which has been pointed as a critical gap. And so is the area of value added logistics services (VALS) where only 12 percent of the companies are entrusting LSPs in terms of outsourcing. Another interesting observation is the sectoral contribution to the total logistics expenditure in the country. Here the top five contributors are: food processing, oil & gas, engineering goods, metals & alloys and textiles. and it would have to go through the maturity curve in the shortest time possible given the economic demand pressures. In the developed markets of the world, long-term contracts between LSPs and end-user industry are a norm rather than exception but in India, it’s the other way round story. According to the report, only one percent of companies in India have shown preference for five years contract with LSPs serving them. Over 75 percent of companies in the country use multiple LSPs while only 22 percent are using single LSP to take care of their all logistics and supply chain requirements. The report clearly points out the areas where LSPs need to improve to ensure better equations with their clients. From clients perspective, the major challenges cited are: safety of goods during transit and warehousing with 67 percent of the respondents underlining it as their major concern. 57 percent of the companies find slack delivery period and inefficiency of logistics service providers in adhereing to timelines a major turn off point for them. 46 percent of the respondents feel that logistics costs are too steep and 41 percent are unhappy with the LSPs’ inability to provide multi-modal services in general. To present a complete picture of the present LOGISTICS TIMES August 2010

Only 44 percent of the covered companies are outsourcing their warehousing requirements which has been pointed as a critical gap.

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LOGISTICS TIMES July 2010

CRYSTAL GAZING

The defining decade

Anand Rangachary MD (South Asia & Middle East) Frost & Sullivan

LOGISTICS TIMES August 2010

In the coming years, the need for the supply chain management efficiencies would be driven by consumers demand. And it would be a sector agnostic phenomenon. Look at the case of telecom. The next wave of growth is going to come from 250 million consumers from smaller centers. Similarly, healthcare penetration would be made in tier-II and tier-III cities. The change in SCM sphere would by and large fall in place by 2020 and in next five years, we will have a clear idea how these changes are unfolding. You take the case of automotive components for instance. Many MNCs companies which were not present in India have suddenly arrived here in last six months. Similarly, Indian companies are going global. So the dynamics of the entire globalization process which have unfolded in the country in last ten years could pick up exponential pace in next five years. And this would have a clear bearing on adoption of supply chain processes as the growth skips to a new trajectory and competition intensifies. The stress on supply chain would also be necessitated by a critical structural change in the domestic market. From the stand point of Indian logistics and supply chain businesses, the markets are going to move away from a handful of cities. We are already witnessing mushrooming of satellite towns and new industrial clusters. If you look at any of the six mega cities in the country, a bunch of satellite towns have evolved or are evolving around them. That is going to change the way the entire industrial activities are structured here. Volume and margin paradigm would change in many businesses. My feeling is that we may not see a dramatic revolution in adoption of advanced supply chain models in the near run but the process will start. And we may see the difference after ten years. After all, at the end of the day everything boils down to our infrastructural abilities. Supply chain management is actually the

ﬁnal ultimate challenge after people have addressed all their competency issues. The growth of supply chain here would naturally depend on how fast we address the infrastructural problems. There is this mega project of freight corridor. These projects have to be implemented with much faster pace because projects like these would be driving the magnitude of change that has to happen. In next ﬁve years, the logistics industry is likely to grow at a rate of 10-12 percent annually. Infrastructure is the microeconomic worry. But at the macro level, there are a lot of fundamental mind-shift issues. Today, one pertinent question is: end user industry is changing but is the logistics industry ready? At this stage, we are probably ready in our minds. Today enduser industry’s biggest worry is cost which has to be brought down. Delivery is another critical point. The biggest challenge which end user industry faces is damaged goods. So cost, delivery and services quality are the issues which need to be addressed. Even end-user industry needs to make suitable changes and treat supply chain as part of their overall integrated operations. The companies clearly need hard-core supply chain professionals. This is not an operation which can be executed by anybody. Additionally, supply chain instead of being seen as cost reduction mechanism needs to be rather viewed as a revenue generating option. In terms of adoption of advanced SCM applications, today I don’t think we can compare ourselves with some of the developed countries even in Asia. But the good point is: our capability across all these sectors is emerging at the value-added manufacturing level. We are not competing with China in costs when it comes to basic manufacturing. Our contribution is at a much higher level of value addition and in this sphere there is no choice but effective SCM to evolve.

Many CEOs would give their right hand to be able to know what is going to happen to the global economy so they can adjust their supply chains efforts as needed. However, they can identify forces and trends shaping the future regardless of what the future holds for the global economy and redesign their supply chains accordingly. Leading companies are already doing that, writes ManMohan S. Sodhi (Top) and Christopher S. Tang (Bottom). Sodhi is professor and head of the Operations & Supply Chain Management group at Cass Business School, City University London. Tang is professor in operations management at the UCLA Anderson School of Management in Los Angeles where he holds the Edward W. Carter Chair in Business Administration.

Watch T

out!

here are two categories of forces pulling a company and its supply chain at right angles to each other: (1) the ever-present shareholder pressure, and (2) the growing pressure of a multifaceted corporate social responsibility. Companies’ efforts to reshape their supply chains will align with or against these two forces. Shareholder pressure: Revenue growth and cost reduction are ever-present drivers

of supply chain design and management. Companies have to increasingly seek growth in emerging markets as growth in developed countries ﬂattens. Besides the Brazil, Russia, India and China, regions in Africa, Asia and South America offer juicy markets, where companies like India-based Godrej Consumer from emerging countries can compete with western multinationals like UK-based Reckitt Benckiser on an equal footing.

Cost cutting too favours globalization by way of sourcing from the lowest cost source and producing in the most efﬁcient plant worldwide. Outsourcing of existing functions, whether it is manufacturing or IT, is another way companies seek to cut costs or increase efﬁcacy for the same cost and this too favours globalization. Thus, this category of forces produces global supply chains. However, the resulting supply chains also typically have lower LOGISTICS TIMES August 2010

PERSPECTIVE

supply chain visibility, greater complexity and more vulnerability and rigidity. A broader corporate social responsibility agenda: The other category of forces stemming from a broad corporate social responsibility agenda will push companies in the opposite direction: more localization, greater visibility, less complexity and less vulnerability. The forces in this are also increasingly backed by government or international regulation. Consider the following three sub-categories. The environment including fears of climate change: “Greenwashing” or slogans change alone cannot help and companies will ﬁnd themselves having to do something tangible to reduce emissions and to conserve energy and water throughout the supply chain. While “climate change” is not accepted by all, it is clear that the same natural disasters create far more havoc in a world with global supply chains than one where supply chains are not global. Governments individually or jointly are stepping in to add to the pressure on companies and we can expect them to get more heavy-handed over time. And, while carbon is the focus of most international discussions, expect water to get the same attention especially in China and India. The consumer and changing demographics: Consumers will expect more from the companies they buy from and will also expecting their government to lean more on companies on their behalf. Some beverage companies use western juice brands to sell sugary drinks as “juice” in developing countries like India that have already a high and growing number of diabetes patients: this is not a sustainable strategy in the long run. As average age increases –in India this is coupled with the shift from joint family structure to nuclear families – people will be less willing or less able to move around, which has an impact on how they will order goods and how goods will be delivered to them. Society as an ecosystem: ecosystem Whether we expect it or not, we have to prepare for increasing social unrest and make an effort to be part of the solution rather than the problem. After all, in a connected world, unrest in LOGISTICS TIMES August 2010

Regardless of what companies do and don’t do at the local level, we can expect the need for demonstrable supply chain security to grow

one part of the world can manifest itself in other parts of the world. The interests of the communities where companies mine natural resources will require re-balancing in favour of the former – Hague-based Royal Dutch Shell’s problems in the Niger Delta (Nigeria) and London-based Vedanta’s problems in Orissa (India) can be seen in this context. And governments and pan-national groups come into play as well as natural resources like oil come into focus: the Iraq invasion and the subsequent insurgency provide a sobering example. Both developed and developing countries report growing disparity of wealth between the rich and the poor so it is in

everyone’s interests to ensure that supply chains are devised in a way to create value-adding activities for the poor as well, thus giving them a stake. Regardless of what companies do and don’t do at the local level, we can expect the need for demonstrable supply chain security to grow: hence C-TPAT (Customs Trade Partnership against Terrorism) in the US and EOS (European Organization for Security) in Europe that impact exporters worldwide.

What are leading companies doing? The diverse forces in the two main categories above have different timescales

It is always tempting for a company to choose urgency over importance. But leading companies have sought ways to tackle both sets of forces simultaneously

which makes it difficult for companies to make tradeoffs or to align supply chain efforts to both, and it is always tempting for a company to choose urgency over importance. But leading companies have sought ways to tackle both sets of forces simultaneously: Combining ” lean” and “green” efforts: Lean means less waste and less waste means fewer resources used. Toyota Europe applies its lean manufacturing methods relentlessly not only to reduce costs but also to reduce water consumption, waste-to-landfill, and volatile-organiccompound (VOC) emissions resulting in a 10%, 44%, and 22% drop in 2007 relative to 2006 on a per car basis. UK-based retailer Marks & Spencer switched from 90W bulbs to 75W bulbs in its 600-plus UK stores. US-based retailer Walmart is following suit by promoting its Sustainability Index by working with key suppliers to develop lean-and-green supply chains that sustain communities and the environment and to help consumers with more transparent choices regarding the history of the products they will buy from its stores. Creating flexible supply chains to serve different needs and markets: Hindustan Unilever Limited (HUL) in India has brands spanning the entire affordability spectrum from top-end cosmetics to extremely low

priced sachets of shampoos and other goods affordable to all in India, its supply chains being able to support this diversity. Companies like Spain-based apparel maker Zara focus on short supply chains: Zara makes apparel in European plants for its European market rather than in China or India. Shorter supply chains mean more agility, more robustness against disruption, lower transportation impact on the environment, lower exchange rate risk, and, in the long run, lower overall costs as well. Other companies simplify products and processes for younger as well as older consumers: Apple’s iPad is far ahead of the usual computers and operating systems in that sense, not only in terms of use by people of any age but also in the delivery of new software through iTunes. Moreover, to meet the constantly changing needs of different consumer segments in a responsive and cost effective manner, Apple continues to leverage its App Store that sells applications developed by independent developers while earning a handsome 30% commission. Marks & Spencer sells food products without hydrogenated oil or chemicals so healthconscious consumers don’t have to read the ﬁne print for ingredients. Flexibility also applies to pricing in tune with

the supply chain: Dell adjusts prices dynamically to inﬂuence customers’ product selection based on what its supply chain can provide. Becoming part of the social ecosystem: HUL has relatively small plants and distribution centres to overcome transportation challenges but also to create valueadding opportunities for entrepreneurs at different level, including the famed Project Shakti with women micro-retailers called Shakti Ammas. The Shakti Amma initiative provides not only revenue growth but also tangible social beneﬁts such as women empowerment and distribution of wealth. Coca Cola’s efforts in some African countries for micro-distributors are similarly motivated. Procter and Gamble’s innovation business model “connect and develop” reduces product development time and cost by reaching out to other companies and academia for ideas for new products. In an ever-changing world, change is the only constant with a dynamic interplay of forces. We have listed forces and trends in two categories and have given examples of what leading companies are doing with their supply chains. Other companies will do well to consider these forces and trends and pay heed to what leading companies are doing. LOGISTICS TIMES August 2010

WAREHOUSING

The vital cog

Vineet Kanaujia GM (Marketing) Safexpress

LOGISTICS TIMES August 2010

In the coming years, warehousing would play a very critical role as serious efforts are being made to usher in the era of advanced SCM practices. In fact, as supply chain industry gets ready to become the sunrise industry of the future, warehousing would deﬁnitely emerge as the basic engine of this envisaged growth process. The reasons are not few and far between. As we grow up as an economy and manufacturing growth unfolds in a robust manner, there is a huge opportunity of new dimensions being added to supply chain businesses. As the economy moves to the next level, there would be a lot of requirement which is going to come for non-traditional supply chain logistics services. So transition of this industry from traditional set of services to a value added mode is going to happen now. At this moment, the value added supply chain logistics services are at a very nascent stage. But I am fairly convinced that it is a huge inﬂection point on which supply chain industry is presently standing. And from hereon we are going to witness a subtle evolution of a scenario where this service would be extremely critical and pivotal to the growth of the economy with warehousing playing a role of paramount importance. If we look at the entire gamut of value added supply chain logistics services, warehouses are simply a vital cog. And going ahead we would need very high quality of warehouses with the trigger coming from some top supply chain logistics companies making an endeavor to create huge warehousing infrastructure. Such units would help the manufacturers and create the avenue for them to entirely outsource their requirements of logistics and supply chain to specialists operating in the market. GST regime is going to unfold very shortly and this would come as a shot in the arm for warehouse operators. It

would result in two things. Firstly, companies would change their business models and secondly companies would even change their supply chain models. Presently, most of the large companies in the country typically operate with 25-30 depots with warehouse units spread across all the states and UTs. But after GST is implemented, there would be a sea change in this scenario. These companies will not have to show the ﬁctitious movement of goods from one state to the another in order to save the CST. So you will have a scenario wherein companies which have a fairly larger network will transit from what they are doing right now in terms of setting up their depots at 25-30 locations. They will consolidate that network and shrink them into a lesser number of units. Additionally, companies which have infrastructural presence, let’s say somebody is operating traditionally with four DCs, they might change their model and consolidate further to one central distribution center. So on overall basis, we are likely to see consolidation of warehousing industry on the client side. From a service provider aspect, because manufacturers are going to shrink their brick and mortar presence, the service provider will have to spruce up their own warehousing network. Manufacturers would prefer to align with a service provider which has pan-Indian presence and can help them with the storage of the goods. Given the fact that the geographical spread of the country is so massive, the need to manage the physical distribution of goods through a strong storage network would be imperative. This is bound to provide that muchneeded boost to the warehousing business in the coming future with established LSPs being in the forefront of expanding the storage network throughout the country.

In present competitive world, businesses that achieve success work seamlessly in tandem with customers and suppliers. Since all functions may not be within their core competence, many firms consider various options in order to handle their logistics activities effectively and efficiently – providing the function in-house by making the service, or owning logistics subsidiaries through setting up or buying a logistics firm or outsourcing the function and buying the service, opines Prof. Samir K Srivastava of Indian Institute of Management, Lucknow.

Are we ready? Currently, there has been a growing interest in the third option, i.e. outsourcing of logistics functions to logistics service providers (LSPs). Generally, outsourcing takes place at four levels: transportation (level1), packaging (level2), transportation management (level3), and distribution network management (level4). Globally, the range of effective logistics outsourcing includes, apart from transportation, warehousing and custom clearance a whole range of other activities such as express package, freight bill payments, auditing, contract manufacturing and assembly operations, packaging and labeling, freight consolidation, spare parts inventory management to name a few. Outsourcing logistics services is a strategic decision and hence it is necessary to perceive and quantify the impact it has on business performance. The purpose of engaging in third party relations is seldom cost reduction alone, but a combination of service improvements and efﬁcient operations. The LSPs today must be able to offer highly integrated and ﬂexible seamless solutions that take into account the increasing cyclicality and volatility in supply chains.

3PL & 4 PL Historically, logistics services started with what is commonly known as 3PL service. The logistics company acts as a ‘third party’ facilitator between seller/manufacturer (the ‘first party’) and buyer/user (the ‘second party’). The most common piecemeal solutions 3PL providers offered, often on a short-term contractual basis, have been related to warehousing, transportation, pick/pack operations and fleet management. The operational efficiency of 3PLs dictated their competitiveness and thereby survival and growth. With time both the competencies of 3PLs as well as the customer requirements grew. This led to the evolution of 4PL service providers. These supply comprehensive logistics systems and supply chain solutions by sub-contracting most of their operations to other logistics service providers and overall manage and co-ordinate these. They often use ICT tools to effectively manage such complex systems. However, sometimes this may also lead to poor service levels due to non-ownership of resources. To make up for this, the 4PLs then often acquire more assets. Trucks, distribution centers, warehouses and ICT infrastructure and tools used in supply chain management are typically such

assets. In the process, these 4PLs actually become large 3PL s. Thus, the primary way to distinguish between 3PL and 4PL is percentage asset ownership. Observing the success that some 4PLs achieved by deployment and leveraging of IT software provided to them by certain IT ﬁrms, these ﬁrms themselves set up their own arms as 4PLs which they marketed as 5PL. The IT capabilities in this case were that of the service provider.

Indian Challenges Each country has its particular challenges and opportunities, when it comes to logistics. The de-regulation of the Indian economy in the 1990s has attracted global players in every industrial sector and has unleashed a new competitive spirit. Changing business environment has pushed organizations in India to concentrate on their core activities and ofﬂoad a host of logistics functions to LSPs. The annual logistics cost in India is estimated to be 13% of the GDP. Out of this, almost 98% is accounted for by the unorganized sector (such as owners of less than 5 trucks, afﬁliated to a broker or a transport company, small warehouse operators, customs brokers, freight forwarders, etc.), and only about 2% is LOGISTICS TIMES August 2010

SEAMLESS LOGISTICS

contributed by the organized sector. India is ranked 39th in terms of the logistics performance index and indicators in a recent World Bank Survey. The industry suffers from inadequate infrastructure, fragmentation, complex tax laws and insufficient technological aids. The intra-state tax regime has been a significant issue for logistics operators along with India’s known red tape. For example, the current procedural delays in getting MTO (Multimodal Transport Operators) licenses approved impede the ability of true international players to operate and provide Indian importers and exporters with cutting-edge and competitive logistics service. Current practices in Indian industry reveal that warehousing, inbound and outbound transportation, custom clearing and forwarding are the most frequently outsourced activities. Packaging, fleet management and consolidation are also gaining attention and growing in popularity. Further, companies are looking to use outsourced logistics services in the future as an integrated set of services rather than for simple material movement. In order to gain competitive advantage and handle the logistic activities efficiently and effectively they are considering outsourcing activities like domestic transportation, international transportation, customs brokerage, warehousing, order entry, processing and fulfillment, forwarding, cross-docking, product labeling, packing, assembly, kitting, reverse logistics, freight bill auditing and payment, IT services, fleet management, spare parts management and supply chain consultancy services. The customers of LSPs place significant value on the services they provide, technologies they use and objectives that transcend just low cost. Indian LSPs lag significantly below end-user expectations on key performance criteria such as attitude of staff, process improvement capabilities and material safety. Another interesting fact is the lower preference of end-users for long-term contracts with LSPs. A majority of the companies either had no contracts with LSPs or had just one year LOGISTICS TIMES August 2010

contracts, indicating a tendency towards frequent change of LSPs. Customers are worried about the safety of goods during transit and warehousing, inefﬁciency of LSPs in adhering to timelines and the low skill levels of logistics personnel. Inability of LSPs to keep pace with evolving volumes of end users and the lack of multimodal transpiration capabilities are other impediments. Further, the risk of information leak is a cause for angst among end-users.

Globally, there are many companies who have shifted focus from courier and cargo to logistics and supply chain; from being freight forwarders to integrated shippers; and from customs clearances to consultants. Indian SCM service providers are also evolving in the same

for solutions, examples being Satyam, Wipro, Infosys and TCS. Ashok Leyland is promoting a new company called Ashley Transport Services Ltd. for exchange of information and integrated services related to logistics in order to tackle the business of freight contractors. Blue Dart, the top ﬁrm in air logistics business has been acquired by DHL. Container Corporation of India (Concor), the largest listed ﬁrm in logistics in India is diversifying. Yet others, like Gati, XPS and Safexpress, are expanding to countries like UAE, Sri Lanka, Singapore and Bangladesh. Demand for seamless integrated logistics is likely to grow as companies in textile, automotive, pharmaceutical, manufacturing, retail and FMCG sectors increasingly opt to outsource their logistics requirements to specialized LSPs. In fact,

fashion. The shift in service providers evolving from just movers of material to logistics to supply chain services has quickened in the past few years. Truckers are moving up into integrated haulers; large Indian companies with multi-million spends on logistics are hiving off entire divisions into service providers who handle not just the parent’s logistics but also of others; others are forming joint ventures to leverage skills. IT companies now provide not just the hardware and software, but consultancy

the logistics industry presently employs about 50 million people in comparison with approximately 5 million people in the IT and ITES sector. All these facts are catching the Governments attention. Indian government plans to spend heavily in the coming years on supply chain and logistics infrastructure is estimated to reach Rs.200 billion in 2012. With India becoming the factory of the world, establishment of hubs and spokes with quick international connections will only increase. Blue Dart and DHL have

The Titanic Shift

already set up several hubs. Significant money is being pumped into new and improved infrastructure: the golden quadrilateral, airports, terminal expansion. India’s soon-to-be-expanded national highway network needs to be supplemented by an efficient rail cargo network. Indian railways are already in first phase of constructing a double-decked dedicated freight corridor. Government has already permitted 15 other players (private train container operators) to run container trains. The key challenges identified include infrastructure congestion, lack of trust and awareness, service tax and above all need for integration. There is a vital need for integration so that customers can achieve their transportation requirements while maximizing the value of money spent in getting their goods to market. This requires better use of existing assets and industry cooperation, and greater competition. Companies aiming to be seamless integrated solutions provider have to tackle this by extending their supply chain capabilities.

Golden Opportunities So, opportunities for LSPs in India exist in developing technology solutions and infrastructure (logistic parks), as well as providing quick and cost-effective multimodal transportation. There has been reasonable progress too. Softlink Logistic Systems, India’s major logistics software provider, conducted a survey titled Adoption of Technology in Indian Logistics Sector-2009. The survey was conducted amongst 700 Indian logistics software providers (LSPs) operating as customs clearing, freight forwarding, non vessel operating common carriers (NVOCCs) and others. According to the survey, the number of larger LSPs making technology investments up to Rs.10 millions has doubled to 14 percent in 2010 compared to 2009. New technologies such as RFID, standardized data processing formats and new supply chain tools and e-commerce capabilities will, undoubtedly, open up new ways to mange movement and storage of goods.

LSPs should work toward improving their performance on criteria where they currently lag below end-user expectations, apart from adopting advance methods and technologies in supply chain and use them to offer better services to end-users, which is likely to reduce the challenges and concerns of end-users’ observes the analyst. Seamless multi-modal integrated logistics is the call of the hour. Every point of service along the chain must have the capacity for cargoes to ﬂow through efﬁciently—at the lowest cost and greatest velocity—or it will become a bottleneck and has a cost or time impact on customers.

Policy Initiatives The GST tax regime from April next year will bring changes in terms of network designs for companies distributing in India. This will lead to a sea change in the domestic distribution landscape due to neutralization of inter-state taxes. We can expect a major impact on warehousing and distribution. In future, suppliers and manufacturers will pick out the most central and convenient warehouses/DCs for their needs, as opposed to having one in each state/location. There will be economies of scale

derived from the DC scenario, allowing rationalisation of logistics and supply chains. The consolidation of smaller warehouses means transport companies will begin to take advantage of the Pan-India coverage that will become possible. There will be some buy-out of existing clearing and forwarding agents by larger logistics companies, possibly by MNCs. Along with improvement of the physical aspects of logistics services, there is an ongoing need to rationalise and improve the regulatory environment. GST is already in the ofﬁng. Government should reduce policy hurdles and red-tape. It should foster Public-Private-Partnerships and Modal Concession Agreements for growth of seamless integrated logistics. At practice level, a technology driven and infrastructure supported integrated approach for logistic and vendor managed inventory in supply chain can be very useful. Similarly, innovative practices and better technology will be great enablers. Last but not the least, Chinese infrastructure and policies may be used as benchmarks. •By an oversight, the previous month’s column by Prof. Samir K Srivastava carried a wrong title in the print edition. We regret the error. -Editor

LOGISTICS TIMES August 2010

AUTOMOTIVE

Determined drive

Bill Olver VP – Automotive Global Customer Solutions DHL Asia Pacific

LOGISTICS TIMES August 2010

The experience with automotive supply chains in India started over 10 years ago when approached in the UK. At the time, an Indian Original Equipment Manufacturer (OEM)/ Parts manufacturer wanted to share an integrated parts solution concept involving part design, manufacture and global supply, and in turn needed an international logistics partner to work with. At that time, this seemed a bit far-fetched given the un-substantiated scale to be attractive, but it illustrated the vision, creativity, and determination emanating from India. This first project was quickly followed by involvement in a joint venture in India for an international OEM managing their external and plant logistics. Again, the Indian partner was very proactive and leveraged the connections to develop the team in many of the latest methodologies and applied them to good effect in the operation. Moving to Asia eight years ago and taking a more direct involvement in automotive supply chain activity in India have resulted in a lot of meetings to develop opportunities with Indian companies. Amongst the willingness to outsource, there was inquisitiveness on methodologies. Since then, a real self belief has occurred with a marked change in Indian companies, who have become as impressive as the influx of foreign OEMs have grown and perhaps because of it. Local companies have greatly evolved and now looking to compete on a global stage. Based on a reflective review of the enquiries DHL was receiving in India last year, there are some very clear trends, which cover the following three major areas: inbound to manufacturing, aftermarket service and international supply chain. The supply chain requirements are closely linked to the trends within the automotive

industry in India – (a) increasing competition, (b) being a global hub for small cars, (c) increasing recognition of India’s parts quality, (d) higher volume plants, (e) increasing product varieties, (f) proliferation of the dealer network as cars are more affordable to a wider client base, (g) competition for skilled staff, (h) the Indian automotive industry going global. So, the Indian automotive supply chain has come a long way and quickly, and there is a determination to drive it forward. Based on a discussion at the recent Confederation of Indian Industry Logistics conference in Chennai, there is still much to be done to really compete on the global stage, which is where India is now playing. In response to and in order to meet these trends, India’s automotive supply chains must continue on its path of rapid change. A speciﬁc is addressing the external logistics through the formation of integrated collection services, using dedicated vehicles under tight control and probably adoption of new vehicle designs. Additionally, it is also important to view the supply chain as a horizontal process and not sourcing it in vertical silos, making it a full end to end supply chain that truly links in from demand through to 2nd tier and raw material suppliers, transparently accounting for and driving out the hidden costs. Another crucial aspect which needs addressing is the wholehearted embrace of the carbon challenge. Clearly this means systems, properties, new processes, investment, training, deployment of true supply chain managers etc all based on value. Importantly though, it is about further change management that is often best achieved through external forces. This is another paradigm shift - the Indian automotive supply chain has to, and no doubt will make in the coming months and years.

Unique India Traditionally, supply chain has been a neglected area in Indian organizations. Most organizations gave importance to production and sales only, and logistics activities were largely neglected. There are many reasons that have contributed to this neglect of supply chains within organizations, writes Professor Janat Shah* of Indian Institute of Management (Bangalore)

igher logistics costs definitely affect the competitiveness of the Indian industry. Firms often argue that inefficiency in the transport and warehousing sector makes it difficult for them to compete in the global market. For example, the cost of sending an export cargo to Mumbai from Punjab, and that of shipping it further to London from Mumbai, are the same. Further, variable transit time and in-transit damages make transportation in India a very expensive affair Logistics, being a neglected area in traditional organizations, did not attract the best talent in the industry. It is only since the last couple of years that firms have realized the importance of this function and have started inducting qualified people to handle supply chain management. With the induction of new blood and greater re-organization at the boardroom level, we are likely to see a lot of innovations on this front. Indian firms obviously need to learn from the progressive companies operating in developed economies. But at the same time, a country like India has its own unique problems and challenges. Thus, ready-made solutions that have been tried and tested in the developed economies

may not work. For example, complex distribution structures, large numbers of customers in the bottom of the economic pyramid, poor infrastructure and complex taxation structures are issues unique to India and would require innovative solutions. Most of the firms do not see SCM as a strategic weapon. Except for few progressive firms like Hindustan Unilever Limited, Airtel etc. (these firms have created positions such as Director-SCM), one does not see SCM issues being discussed at board level. Partly the problem is with supply chain professionals. They have focused mainly on cost and have not focused on lost opportunities (Lost sales etc). I am sure in next five years, we would see greater importance to the SCM role. But to make this happen, SCM professionals will have to link SCM decisions to business and find innovative solutions to problems which are specific to Indian environment. Blind applications of ideas borrowed from developed countries would not work in India.

infrastructure are well documented. It is no secret that we have not invested enough in road & port infrastructure. Average Kms Travel per day by Indian truck is almost one third of that in developed countries. Turnaround time at ports are in couple of days compared couple of hours at Singapore and other competing ports. Adequate attention is not paid on soft infrastructure. Investment in soft infrastructure would have to be made by Industry and Government.

Government •

•

Industry •

Focus Areas India will have to focus on both hard and soft infrastructure. Problems on the hard

* Prof Janat Shah is a professor of Production and Operations Management at IIM, Bangalore. His interests are in the ﬁelds of

• •

Supply Chain Management, and Design of Manufacturing Systems. After graduating as a mechanical engineer from the Indian Institute of Technology, Mumbai, he worked with industry for about ﬁve years. He has obtained his Fellow in Management from the Indian Institute of Management, Ahmedabad.

Review provisions of Motor Transport Workers Act and Motor Vehicles Act. Streamline inter-state and intra-state movements by avoiding regulatory check points. Facilitate the build-up of quality human resources infrastructure through education and research.

•

Evolve standards and certiﬁcation systems for practices in transportation, warehousing, handling and contracts (for each vertical). Insist on members complying with the law and standards. Benchmark for tracking progress on logistics maturity (by using a Capability Maturity Model) . Facilitate the sharing of best LOGISTICS TIMES August 2010

GROUND REALITY

•

practices and benchmarking against performance indicators (including costs) by supporting research on a sustained basis. Better use of IT in Logistics

Trends & Implications Infotech: Traditionally logistics sector has been a laggard in the usage of information technology. Even the most basic version of track and trace technology like a vehicle tracking system is still in the infancy stage and only a very small percentage of

taxes would change the way ﬁrms mange sourcing and distribution. An integrated goods and service tax which is likely to be in place would result in fewer and larger warehouse. But as observed in the past, given the nature of the federal structure and the democratic set up, the pace of desired changes may be slower and can be frustrating for global players.

Integrated Logistics Outsourcing: Currently integrated logistics outsourcing is practiced in a few areas like the automobile, personal computers and

to outsource non-core activities and logistics is an obvious candidate. But Indian 3PL players have been traditionally operating in narrowly focused functional areas of logistics and are in the process of developing capabilities to handle integrated logistics services. At present, most of them do not have the bandwidth to offer these services in a cost effective manner and are not geared to handle this. In the long run, an integrated logistics service business is going to be signiﬁcant but in short run, diffusion is likely to be slow unless logistic ﬁrms

Over next five years, we would see greater importance to the SCM role.

vehicles on road are equipped with the necessary hardware and software. But this is likely to change in the coming times with greater focus on domestic market by Indian global IT companies such as TCS, WIPRO and INFOSYS who have been supplying IT services to global logistic players and have built strong capabilities in this area. Now that they have decided to focus on the domestic industry, we are likely to see explosion of IT in logistics and supply chain in next decade. Regulatory: Regulatory changes would affect logistics in different ways. Changes in regulations pertaining to motor vehicles, waterways and indirect LOGISTICS TIMES August 2010

consumer durables where the logistics cost is a small fraction of total cost or in a time sensitive business like fashion retail. But in most of the other sectors, outsourcing is limited to narrow functionally focused logistics activities. Recently India has seen some very successful examples of outsourcing in the telecom industry: the largest telecom player, Bharti outsourced major activities like network management and IT services management enabling them to grow at an exponential rate. Based on Bharti’s successful outsourcing experience many of the manufacturing ﬁrms with global aspirations may like

expand their capabilities at faster pace. Further, India which was traditionally dominated by domestic industry is seeing a surge in imports and exports. The domestic industry is likely to grow at 8% per year, while international trade would grow at more than 20% in the coming years. Global players would expect global standards of logistics service involving containerization and multimodal services. Currently Indian ports and logistics players are not geared to handle this growth. This would provide opportunities for investments by both ports and 3PL players for creating the required infrastructure. For example JNPT, the leading Indian container port, is unable to handle 14-metre draught vessels that can carry 6,000 TEUs. In summary, Indian logistics is at an inﬂection point.

LOGISTICS

Challenges ahead

Akash Bansal Head (Logistics) Om Logistics

I strongly feel that the supply chain regime in India has now grown a bit more than what we call the nascent stage. We are now in a growing stage of evolution and the credit to this growth goes to the customers and their varied demands. The expectation and demands of customers are getting increasingly deﬁned and we as logistics companies are pulling in all available resources to ensure that the expectations are being met. The rule of the game is simple for us and we do not have much option other than that to sustain and consolidate our presence by meeting the requirements of our customers. The change in demand dynamics is also resulting in consolidation in the industry which would be a dynamic process in the near to medium run. The change in demand dynamics of the customers is for obvious reasons. Indian economy is to projected to grow at a faster pace that the developed countries. So why should industry not expect logistics service standards at par with international levels? Needless to say such kind of expectations is leading us to scenario where new, innovative

solutions are emerging. We, always want to put our best foot forward to support our customers with the desired service levels. At times, the process of matching customers’ expectations become a bit difﬁcult. Covering the length and breadth of the county is such a mammoth geographical unit is not an easy task. If we can overcome these challenges, then I am sure that the logistics companies would always be in a position to deliver expected results. In my opinion, the evolution of advanced SCM wherein service providers can place themselves in the driving seat to manage and control efﬁcient SCM models would take about a decade. Those who would not change themselves with the emerging trends would not be in a position to sustain and would be forced to become subcontractors to organised and professionally managed logistics companies to exist and survive. The writing on the wall is clear: companies which want to grow with the economic pace should be ready with best available resources to handle the business opportunities arising due to consolidation.

Toyota recall “The supply chain and its associated logistics is all about customer service. When considering the Toyota recall a number of issues need to be considered. Firstly from a customer perspective at what stage in the “value adding journey” does the recall occur. For some vehicles the recall could be seen as part of the standard service schedule for the vehicle and is therefore has little impact on the customer, for others a special trip may be required, and for others who no longer have a speciﬁc relationship with a Toyota Dealer it may ihaving to make a special visit to a new location. Secondly, once the

impact on customer is understood the supply chain then needs to be activated to supply the necessary components to correct the issue, training of technician and technical literature needs to be distributed and if components need to be returned a process needs to be put in place to manage this also. In summary for an effective product recall that has the minimal impact on the customer or actually enhances the relationship with the customer both marketing and logistics need to be aligned. If all functions in the organization are not coordinated in their recall then the brand can be damaged thus resulting in reduced competitive advantage”

Professor Richard Wilding Professor of Supply Chain Risk Management Cranfield School Of Management Cranfield, U.K

LOGISTICS TIMES August 2010

GLOBAL BEST PRACTICES

Don’t implement blindly

Global SCM best practice can be a way forward for us, however, we sometimes have to take it with the pinch of salt and fine tune it to the Indian context. We can learn from managing even the most basic of risk management principles for the protection of our personnel and society at large and we should work towards best practice in Supply Chain visibility and B2B collaboration for offering significant improvements in our business practice for the benefit of our employees, managers and company as well as for the clients that we serve, proclaim Howard James-Scott (Left), Chief of Supply Chain Management and Chitra Shinde (Right), Chief Business Chain Officer of Gati Limited

usiness success is increasingly linked to effectively managing logistics. Growing low-cost country sourcing and rising sales to international customers are triggering companies to seek new ways to manage the costs, complexities, and uncertainties of moving goods. Most companies are woefully inadequate in their automation and staff support for global trade. To keep up with global trade growth and increased competitive pressures, corporations are ﬁnding they must make signiﬁcant changes in how they run their global supply chain operations. According to Aberdeen best practice

LOGISTICS TIMES August 2010

research, among the most critical areas that companies are revamping are: • Supply chain visibility to increase the transparency and velocity of Supply Chain activities • Business-to-business collaboration to improve supply/demand synchronization • Legal & regulatory compliance to ensure undisrupted movement across borders, or otherwise, and operate, before, during or after the movement, in a safe and compliant manner to the beneﬁt of society and business alike. • Risk management to ensure resiliency in face of supply chain disruptions of any kind, whether internal or

external.

Supply Chain Visibility A lack of automation and visibility is handcuffing companies with longer lead times, bigger inventory buffers, budget overruns, and continued demand-supply imbalances. On average, large companies report that their global supply chains are only 50% as automated as their domestic supply chains. Ninety per cent of all enterprises report that their global supply chain technology is inadequate to provide the corporate finance organization with the timely information it requires for budget and cash flow planning and management.

In Indian context, the key drivers and restraints in the supply chain domain are Taking the above example and hoping it will solve one of the woes in a company’s SCM which is SCM Visibility, there are many challenges facing the Indian scenarios, some of which are – # Poor Infrastructure Connectivity # Lack of trained manpower on software usage # SMEs are still low on technology adaption Even today, India has 81 million internet users and stands 4th after USA (220 million), China (210 million), Japan (88million) and the highest reason for internet usage is for email (87%). In a survey conducted by F & S in 2009 toward the use of Logistics technologies the following were the findings – The Table A (see next page) represents low penetration of technology in SCM visibility. However, those who are using such technologies are very satisfied and see a lot of benefits. To address these inadequacies, companies are moving away from building in-house applications and toward using commercial applications from a varied set of vendors, ranging from software specialists to managed service vendors and logistics service providers. In fact, custom-built applications rank first in current usage for global supply chain technology but drop to last place in popularity for new IT implementations.

By comparison, on-demand applications (also called “software as a service”) are used today by the least number of respondents but rank second in popularity for future adoption. Globally, companies are outsourcing: Non-core business to entire supply chain operations. There is a process shift Away from local management to close global interaction & collaboration. The result is a fundamental shift in Business Technology & IT Platforms. There is strong need to move from Inter Enterprise based Synchronization to Intra Enterprise - Multi Network Synchronization, need for integrated Business Process Platforms & Finance Intelligence.

B2B Collaboration Again in Indian context, Traditional supply chain practices and traditional technology platforms are not viable option for true ecosystems. SMB companies that form the majority of the Supply Chain community are being excluded. There

has been a perceived need for this shift, but until recently the acceptance and adoption of the Internet for mainstream business processes was limited. The shift needs to happen from point to point integration to Integrated Cloud based eco-system for the Indian scenario. It does bring a lot of advantages to the Indian SME segment through (non exhaustive)– # Lower capital outlay # Faster implementation of IT systems # Multiplier effect involved in supporting multiple customers with hundreds of users engender scalable applications and databases Cloud solutions leverage the preconnected networks of suppliers, customers and other partners, and aim to improve routine process collaboration. In a survey, the cost to manage software is four times the purchase price of the software in a year. In Indian logistics scenario, Logistics is still not considered the core function. There is no distinct logistics department in most of the companies. Logistics functions are not dynamically linked to business strategy. Most decisions related to supply chain are still reactive. All these are resulting in mismatch of needs vs actual status. Our Industry is still facing low awareness levels on all aspect of logistics, there are infrastructure bottlenecks and project delays causing network and capacity constraints. There is acute shortage of trained drivers and we have large numbers of small players who own less than 5 trucks. There are frequent changes of LSPs by the manufacturing companies, close to 70% contracts are for 1 year, in comparison, only 48% of contracts in North America are for 1 year. About 45%

LOGISTICS TIMES August 2010

GLOBAL BEST PRACTICES

outsource warehousing activities to LSPs and over 75% use multiple LSPs.

Some basic best practices Legal & Regulatory Compliance Under this title you might expect to see an array of legal and technical jargon relating to trade compliance, legal contractual obligations, Labour and industrial laws, personnel laws such as the PF and ESI regulation etc, however for the sake of this paper I have chosen to look at some fairly basic issues that are seriously effecting the business of the day! Recently a news article was published by Haryana government, which is implementing a plan in all the districts of the state. It will ensure implementation of traffic rules on national and state highways with the help of technology, identify accident-prone areas and undertake consequent remedial measures, besides regulating traffic where maintenance or road widening work is in progress or encroachment exists and remove road engineering defects. The government also plans to curb the menace of overloading of material and passengers in commercial vehicles, ensure quick response of concerned PCRs/riders, medical aid and units and site photographs. However to a large extent road traffic accidents are preventable and can be influenced through a rational national Table A: Low Penetration

LOGISTICS TIMES August 2010

policy on road safety, stricter licensing policy especially for heavy vehicle, and a greater awareness of different kinds of road-users about trafﬁc rules and use of protective gears like safety belts and motorcycle helmets. Of course, construction of well planned road systems, safe vehicle design implementation of road safety measures and curbing intoxication and drug abuse amongst drivers are the need of hour to check the rising graph of fatal road trafﬁc accidents. Though safety norms in the western and developed economies are way ahead there are heavy penalties on not abiding them. The Indian way is very much different. We have our own work around on these issues.

Lastly, on Risk Management Once again, for this article we have chosen basic matters pertaining to risk rather than the big arena of business risk which includes operational, management, ﬁnancial and business continuity. Many very simple and basic risks are ignored which bring around daily business failures and are also to the detriment of our personnel and managers. Such matters are now becoming business imperatives and need serious consideration.

important part of their operation. These may be very busy places at all times (such as in a logistics operation) or they may be quiet for many hours a day, but have periods of intense activity. Warehouses are dangerous places and people do get hurt in them in several ways. Many of the injuries suffered can be avoided by taking some simple steps; all derived from simple risk assessments. General risk assessments must be comprehensive and thorough:

Slips, trips and falls •

•

Ensuring good standards of housekeeping – keep walkways clean, clear and unobstructed Ensure that spillages are cleaned up immediately that they occur or when they are noticed Ensure that banding tapes, packaging materials and polythene, etc are not allowed to collect on the ﬂoors Ensure that leaky roofs are repaired and period review with log to be maintained Ensure that all staff are provided with (and wear) appropriate safety footwear Ensure that the ﬂoors are maintained in good condition and that defects are repaired

Warehouse Operations

Manual Handling

Many businesses have storage and warehouse facilities as an integral and

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Arrange work such that the needs for manual handling are reduced

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(such as by the use of fork lift trucks, (powered)-pallet trucks, dock lifts, etc) Ensure that the risks associated with all manual handling operations are assessed and minimized, giving consideration to: the task the load the working environment individual capability, and other factors Ensure that there are always a sufﬁcient number of employees to deal safely with the loads that need to be handled Arrange suitable training in manual handling for all warehouse staff (including temporary and agency workers)

# India has just 1 percent of the world’s vehicles, but accounts for 10 percent of the world’s road accidents. # 30 percent of all fatal semi truck accidents are caused by driver fatigue according to some experts. # About 27% of all large truck drivers involved in fatal truck accidents had at least one speeding conviction compared to 19% of the passenger vehicle drivers involved in fatal crashes. Other indirect factors resulting in higher accident rates – # Low driver pay scale…results in drivers driving for longer time # Tight deadlines imposed by the employers result in rash driving # Poor maintenance of vehicle # Lack of safety training – use of reflectors, indicators and even lights in general! These are just some of the factors resulting in not following the legal guidelines set by the authorities. There is no fool proof method to ensure that drivers, transport brokers, employers, etc follow strict legal laws ensuring driver safety and compliance to legal laws.

Work at Height • • •

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Avoid the need to work at height were possible Avoid climbing on the top of loads where possible Provide suitable, practical protection to areas from which people may fall (such as loading bays, etc) Provide suitable means of access for any elevated work area, such as racking locations, etc Arrange for all access equipment to be checked regularly by a competent person Instruct workers not to use inappropriate or defective access equipment (avoid the use of the forks on a fork lift truck or the use of a pallet on the truck, etc) Provide safe working platforms for accessing the back of vehicles (such as tankers or ﬂat bed trucks) if accessed routinely

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Vehicles •

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Manage the vehicles accessing the site – where possible, provide delivery drivers with relevant health and safety information about your site (times for deliveries, one-way system information, etc) before they arrive Display suitable warning signs and

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notices Consider have safety information available in different languages if regularly dealing with drivers from different countries Provide clearly designated vehicle and pedestrian routes (where possible) Ensure that areas are adequately illuminated Provide warehouse staff with high visibility clothing Control the reversing of vehicles (consider the use of CCTV systems on your own vehicles) Provide workers with suitable and sufﬁcient vehicle movement awareness training, banksman training, etc Implement suitable controls for vehicles on site – such as warning signs, site speed limits, mirrors on “blind” corners and bends, etc Ensure that all loads are safe before attempting to unload a vehicle Ensure that all loads are secure before allowing a vehicle to leave site Implement procedure to prevent vehicles from driving off prematurely (such as a key collection system or chocked wheel system) Ensure that the use of fork lift trucks is restricted to trained and authorised users Restrict access to the warehouse to authorised persons and display suitable notices to this effect

Falling Objects • • • •

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Ensure that all loads stored at height (such as on racking) are secure Avoid working under other people Assess the safety of loads before attempting to unload a vehicle Ensure that all racking systems are adequate for the loads that will be stored on them Display the safe loading limit of all racking systems Carryout regular inspections of the racking and of the goods stored on the racking Check the condition of wooden pallets and do not reused damaged pallets Arrange for loose items to be secured (such as by shrink wrapping) before storage

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Ensure that all plant and equipment provided for use in the warehouse (such as shrink wrapping equipment, conveyor systems, etc) is suitable for the task and is in good condition Arrange for all equipment to be checked and inspected regularly by a competent person to ensure that it remains in good condition, to ensure that all guards are in place and that all emergency stops and other safety features and controls work Restrict the use of plant and equipment to authorised persons only.

Source - Frost & Sullivan, Aberdeen Reports, eyefortransport, various reports / articles from internet, LRB Consulting Limited

LOGISTICS TIMES August 2010

TECHNOLOGY

Adapt smart solutions

Sanjeev Kathuria Country – Sales & Marketing Director TNT

LOGISTICS TIMES August 2010

The present business environment has a core trend – there is a significant upshot in customers’ demand and the complexity at companies’ end is growing in meeting them. Needless to say, supply chain is an integral part of the process and future demand would redefine them in the country. In my view, supply chain is not going to remain limited to the main cities and main centers. Its ambit would grow both geographically and qualitatively. Within the supply realm, forecasting is going to play a critical role. If you have to be at the right place, right time and with the right quantity, you will require technology. You can’t do it on your own and you won’t be able to do it on excel sheets. Technology, I feel, will help in doing three things. Firstly, it will vastly change information sharing equation. Every time when something flies off the shelf and when its billed, the real time information will be available that so much stock has gone out of stock and if you want to replenish it or what is left. As the cost of bandwith goes down and as internet connectivity becomes faster, all things would become real time. Simply put, information sharing will become much faster in the future and coupled with the power of connectivity, platforms will start converging. Secondly, today everybody has a proprietary warehousing management system. But over a period of time, convergent cloud computing kind of system would replace them. Vendors, suppliers and customers everybody will start converging on to one platform. And the third thing is related to decision making process. Despite automation, somebody still has to take decisions when to buy, what to buy and how to buy, etc. So you will require tools. You will have data warehousing, data mining, and analytics will become part and parcel of running supply chain decision making tools. That’s how things will become smarter. Quite naturally, these changes would not fall in place suddenly. It would take some time. There could be cyclical setbacks which can force you to take cost saving measures

which could mean adopting smarter supply chains. But more prominently, businesses will be governed by the customers needs and demands. Where are customers going to come from?, that would set the equation. Take the case of telecom. If telecom has to grow in tier-II, tier III and rural areas, then new supply chains would have to be set up which should be in accordance with service providers cost consideration and their assessment of revenue generation in these pockets. You won’t ﬁnd a large chunk of willing customers for blackberry products in a tier III market. You need to sell there a Rs 4000 handset with a torch and FM radio. You will have to supply that kind of product and then ensure a quality service management system. We are often asked how Indian market is different in terms of adopting new supply chain processes? My response is: every market has its own nuances and ways of doing things. Change is not easy in any market. For instance, hard copy of POD is still a norm for many customers in India. But changes are unfolding and technological adaptation is happening in the country even as the pace is slow. In such a scenario, we can’t just bring global practices and shove them into India. The major challenge which companies like ours face is: while bringing in the quality difference, we have to remain rooted to local market conditions. Everything can’t be direct cut and paste from the successful global models. My own observation is that supply chains need to be rather taken a bit more seriously by the Indian companies. At the management level here, its mostly taken for granted that their supply chain units would somehow do the task set by them. Supply chain is yet to emerge as part of core planning and decision making. But as the business complexities increase in the future, supply chain would get its due importance. For many industries, it will be inevitable if they are keen to ensure availability of product at the right time, at the right place and in at the right quantity.

Cutting cost In today’s fast changing global market, logistics have become very important for the companies and increasingly it has become very vital and complex. An ineffective logistics process can hit the companies’ bottom-line. As per industry studies, logistics cost varies between 4 to 8% of sales across industries. But the part of logistics that is increasingly becoming an area of concern is transportation, opines Rathinakumar Vaidyanathan, Director of SCM, PLM & Logistics Applications, Oracle Asia Pacific.

ransportation is the single largest and direct contributor to Logistics cost. This is why transportation cost management is now seen as one of the key supply chain areas where organizations should explore opportunities to drive down significant cost. A boardroom concern today, organizations are increasingly looking at developing effective transportation processes. Information Technology (IT) can definitely help in managing and creation an effective transportation process, which can cut down the huge costs, associated with the unplanned logistics industry. A process or solution to be effective needs the following key capabilities: • Visibility: It allows an organization to have a complete picture of the current status of an order throughout the entire supply chain. It enables users to proactively respond to unforeseen exceptions, issues or opportunities based on rules that they have defined. It allows for process improvement and cost efficiency. • Speed: It is important to create an adaptive transportation process that responds to the ever-changing needs of the customers. However, an adaptive and responsive transportation process needs to have access to real-

time information. • Freight Settlement: It is usually one of the ﬁrst processes that is outsourced, due to its complexity and nature of transactions involved. However, over a period of time many realize that the costs associated with outsourcing are far too expensive than in-sourcing. The factors leading to this change is due to following: Increased Service problems like slow turn-around times for imaging and data entry as well as missing documentation, leading to overall delay. Inability to collaborate with Carriers and Customers effectively, which results in customers seeking services elsewhere. In some cases, it is the time taken to rectify errors in the ﬁnancial documents. • Collaboration: Key players in the ecosystem need to be able to share real time information. Doing this leads to a more responsive and agile distribution network, resulting in lower distribution cost and better customer service. • Connectivity: Given that there are many different players in the ecosystem, it is vital to have the

ability to connect these different key players. An open system lowers the costs of entry or exit, reduces the system complexities and reduces the transaction time. • Execution: Complete control of the entire transportation process is vital as it helps to minimize the amount of manual process; tie execution to strategy and ensure that shipments arrive at the right place and at the right time and the right cost. • Optimization: The primary objective of optimization is to develop a least-cost transportation plan that balances the requirements of customer service against the cost of distribution. An optimized transportation plan not only reduces the total cost of transportation by about 10-15% per annum due to better asset utilization and less distance travelled, but also helps to reduce the amount of fuel use and the level of emissions.

TMS Can Cut Down Costs TMS (Transportation Management System) has been designed to meet the demands of the logistics industry and can help manage and cut down the transportation costs to a large extent. Keeping the above factors in LOGISTICS TIMES August 2010

TRANSPORTATION

mind, there are many transportation management systems available in the market that provide some or all of the capabilities mentioned above. However, while evaluating the right solutions, it is imperative for organizations to keep in mind that the solution should be scalable and be able to support all users in the global collaborative supply chain without sacriﬁcing system performance or security. Therefore, the implementation of an effective transportation system will help organizations to swiftly identify and rectify transportation problems and also manage their customers’ needs and demands globally. TMS solutions like Oracle Transportation

signiﬁcant growth (22%) during 2007, and that growth continued in 2008, largely because of the increased recognition among shippers of the need for better cost management and better management of their transportation assets. Currently, the market penetration of TMS solution is quite low in comparison to its potential. But companies are slowly adopting the TMS as a means to ﬁght the operating cost as well as the exploding fuel costs and other similar business reasons.

Increasingly, organizations today are opting to outsource their logistics operations to logistics service providers

losing customers to high costs resulting from errors in shipment. The study also concludes that there is a signiﬁcant IT gap that has been in the system for the last seven years . In India, as per Datamonitor, Outsourced Logistics, at just above one-quarter of the entire $90 billion Indian logistics market, is slated to grow at a compounded annual growth rate (CAGR) of over 16 per cent from 2007-10. The study further states that, “The logistics cost of the Indian economy is over 13 per cent of GDP, compared to less than 10 per cent of GDP in almost the entire Western Europe and North America.” This is why transportation cost management is

Management provide transportation planning and execution capabilities to shippers and third party logistics providers. It integrates and streamlines transportation planning, freight payment, execution, and business process automation on a single application across all modes of transportation, from full truckload to complex ocean, air and rail shipments. Using such solutions can help improve customer service, lower transportation costs, enable better asset utilization, and provide ﬂexible and global fulﬁlment options. TMS segment has a huge growth potential. As per Gartner11, TMS experienced

in order to manage the various complexities involved. . A recent 3PL (third party logistics) Study conducted by Georgia Institute of Technology shows that in Asia Paciﬁc, logistics outsourcing expenditures in areas such as international transportation, forwarding and customs clearance, will grow from 57% to 64% within the next 3 to 5 years. As more and more organizations become dependent on 3PLs to manage and control their logistics, there are many players in the ﬁeld that do not have the capability to provide their customers with management, control and visibility of the logistics process. Due to this 3PL providers are not able to provide an agile and integrated process thereby

now seen as one of the key supply chain areas where organizations should explore opportunities to drive down signiﬁcant cost. As Outsourced Logistics grow and importance of 3PLs increases, TMS can help a lot in cutting cost, managing performance and monitoring and controlling all aspects of logistics. Logistics is an important part of the supply chain, and transportation mismanagement can ultimately cost a lot and provide a dent to effective supply chain management. TMS solutions from companies like Oracle can help create an effective transportation process that would in turn cut cost and enable better management.

1Gartner’s Magic Quadrant for Transportation Management Systems by C. Dwight Klappich, 6 April 2009

LOGISTICS TIMES August 2010

TMS Helps 3PL

PHARMACEUTICALS

LSP trust deficit The Indian pharma growth story has been a very vibrant sub-plots of India growth story in the recent past. If we look at statistics, the value of Indian pharma industry was estimated to be over $6 billion in 2005 and by 2015, the forecast is it would jump by over three times - $20 billion of annual sales. By then, the country would break into the top ten pharmaceuticals market in the world. The MNCs are increasingly enhancing their share in the domestic markets’ pie- from 24 percent in 2007, their share is likely to shoot up to 35 percent by 2015. In next ﬁve years, the share of public health care spending as the ratio of GDP would also grow from seven percent recorded in 2007 to 13 percent. The crux of the matter is: the pharma industry is all set to grow by leaps and bounds. However, one of the key concerns of the stakeholders is not so encouraging state of supply chain solutions presently in practice. From the perspective of the pharma industry, there is too much fragmentation in the logistics industry. Outsourcing like for an example, picking up materials from my storage unit and delivering it to the end user in the market place, today there is hardly any company in India which can provide an unblemished service. The companies in India are primarily offering transportation solutions. But even that is not up to the mark. Our pertinent requirement is reﬂected in these simple questions - why do we keep medicines in a refrigerator and why are they kept away from the sunlight? The logic is simple. Medicines are basically chemicals and they react. In warehouse, pharmaceutical companies and service providers do take care of ensuring sustenance of their quality by creating right kind of preservation environment. But once it is out of there, there are chances of the dilution in the quality of the products. The product might be moving from Mumbai where temperature is at 30 degree celsius and going to Andhra where the temperature would be over 40 degree. But the medicine has to be preserved at both

places while transportation. Unfortunately, we don’t have a formidable operational mechanism to ensure the preservation of medicines in the country today as they move from one place to another. From our perspective, there is no single window for the entire supply chain. In such a scenario, the solutions offered to the pharma industry are costly in nature. Due to lack of viable options, we are often forced to undertake our own research and development even in logistics management. For example, I want to transport certain set of tablets from one place to another which are temperature controlled sensitive items. So what do I do? The simplest solution is to put them in thermocol packages. But this is sheer adhocism, to say the least primarily because of absence of effective solutions. The industry is certainly expecting the evolution of cost effective pharma centric supply chain solutions over a period of next few years. Going ahead, supply chain industry has to look into these issues. We will need a commendable network of effective cold chains. The existing chains are not sufﬁcient nor do they offer right kind of facilities for pharma products. Secondly, there is an urgent need to bring applications which can ensure delivery on time. Time is a critical factor for us as it takes care of the inventory as well as quality of the material. Pharma manufacturers can’t keep their material in a warehouse for a long time waiting for someone to pick it up and deliver. Those who are providing timely solutions are charging exorbitant prices. But they would need to look for more value proposition for us. I can’t think of getting into collaboration with a single LSP who will take care of all my logistical requirements. In his chain also, he would probably be outsourcing something. And in this scenario, I can’t completely trust him. However, going ahead I am optimistic that things would change because in the past the information was not shared. But today industry stakeholders have begun discussing it.

D S Parikh Sr. Manager (Logistics) Lupin Limited

LOGISTICS TIMES August 2010

CONTRACT LOGISTICS

Taking off... Vibhu Prakash*, Vice President, SCM with Panalpina World Transport, peeps into his crystal glass and offers his insights from Bangalore

n simple terms, contract logistics can be defined as “All those activities farming part of the Supply Chain that is outsourced by a company with an exception to forwarding and customs clearance”. The scope would therefore include: Order management; Storage without any value addition; Storage with some pick & pack activity; Storage and distribution; In-plant warehouse management. And specific SCM products such us VMI, Inbound to manufacture, After market storage and distribution (FG & spares); and Milk-run operation. It is a combination of warehousing, transportation, and value-added services to ensure a custom fit for the customer’s needs.

Indian Scenario India GDP is projected to grow over the next years from 6.1 per cent in 2009 to 9 per cent with a maximum inﬂation rate of 5 per cent per year. The 3PL industry in India is still nascent, with only the past decade witnessing the emergence of multinational players and major consolidations in the logistics industry circuit. The total revenue generated by major 3PL players surpassed US$ 1.5

billion in 2008, from US $ 890 million in 2005 and is slated to grow to US $ 4 billion by 2012 as per industry reports. Complete rationalization of taxation laws in India by 2011 end, triggering the need for consolidation of state warehouses to the regional DC model, coupled with the need to improve infrastructure in the near future poses multiple opportunities for 3PL players to expand their footprint multifold in order to gain dominance and secure their position in the industry. Constant market pressure to improve the performance of the logistics processes and at the same time keeping the costs low is the challenge for the SCM players in the Indian market. To increase production space, companies are looking for Supply Chain solutions outside the production area to provide value added services (f.e. postponement etc.). Today I am unable to see any one industry doing poorly! Reliance’s Mukesh Ambani has his vision of doubling the enterprise value from $80 billion to $160 billion. The market is huge and potential to grow is unlimited. Cost cutting, resource rationalization, maximizing productivity is a continuous process for ages. New concepts evolve only when there is a

* Vibhu Prakash is an accomplished SCM professional with 15 years of experience in manufacturing, trading and service Industries with National and International organizations. Strengths in process analysis, developing strategic Supply Chain solutions, managing tactical execution, negotiation, systems optimization, preparing/ analyzing project ﬁnancials and project management/implementation. Based in Bangalore, his responsibilities include preparation of strategic Business development plan, drawing an independent structure, setting-up facilities and management of SCM business in South Asia Area.

LOGISTICS TIMES August 2010

pressure and compulsion. SCM is no alien to this! This country has some inherent economic, political and infrastructure issues! The cost of change in a low cost economy is very high. It is also important to note that majority of Indian companies are very conservative and work on a traditional models. The assets are stretched way beyond its life. Penetration into these minds means tangible beneﬁts offered with no risk of business loss. Needless to say that personalized services are bare minimum expectation. This obviously leads to the question of standardization in the industry – we are yet to be there. SCM is taking “off ” beating all the above hurdles – new sea ports are developed, airports see bigger volumes, road infrastructure is improving, new promoters with quality construction is evolving, multi-national companies are bringing norms and standardization, quality standards are being deﬁned, educational institutions have started degrees/diploma in SCM. All these are good indication of the trend and offers baits for companies to consider outsourcing and utilizing SCM specialist companies.

Top management involvement In my opinion, SCM is a technocommercial function. The interest of the

top management in a company is basically on two areas – one, “where money can be made”, and the other “where money is spent”. The cost spent on SCM ranges anywhere between 4 per cent to 7 per cent. In a country like India, there is always good scope of reducing this cost. Therefore, CEOs/CFOs have to directly involve. The market is changing and very dynamic and the laws are changing; therefore, I wouldn’t say this is with the perspective of controlling, but taking appropriate decisions in strategically positioning the company’s Supply Chain. Please note production or procurement alone is not all – distribution and time to market is the key that decides the ﬁnal performance!

Takeaways so far Panalpina India started its contract logistics operations in 2006 – 2007 with the aim of aligning its business strategy towards the corporate strategy and market requirement. Detailed market analysis was done in the areas of contract logistics/consolidation hubs/ domestic transportation. The favorable outcome of the study, supported by the constant

enquiries from existing customers, prompted the management to make a decision to open a Distribution Center in Bangalore. In order to set a strong footing in the country and also create a showcase, we worked on accounts/projects from different key industry verticals. The success rate in the years 2007 to 2009 was very good and today we have top clients from various industries. SCM concept is sold to create value to these customers. As a business plan, Panalpina will focus its growth under two folds: Distribution Centers (multi-client/multi-product) and Customer speciﬁc operation. This is besides our plan to expand the existing SEZ operations. Currently we operate DC’s at Bangalore, Chennai and Mumbai and client speciﬁc operations in various parts of the country. This model will continue.

have satellite warehouse to ensure “time to market” and frequent replenishment from mother warehouse /factory. Tier “A” cities will need big expansion and the demand for warehouse space will increase considerably. This is general perspective and to a large extent the direction we see the companies are moving. However, implementation will happen very cautiously. Timing is another factor! India is, again, very big and the market is scattered. Logistics is a challenge in this country. From the SCM point of view, companies will have to analyze the following before taking a decision: Market shift due to GST – price and competition; Infrastructure availability and cost; Beneﬁts of consolidation – visibility and inventory control; Cost savings; Lead time requirements and Time to market – possibility to improve this further; Availability and choice of Service providers.

GST Rollout This has been long spoken and now we are very close to see this. There is deﬁnitely an impact. Here is what I foresee: Big time consolidation will happen; Distribution Centers in smaller cities - Tier “C” and “D” - will not be there. Tier “B” cities will

Fragmentation & Consolidation The Logistics Service providers in India are more of regional players and it is very difﬁcult to ﬁnd companies having a good country level presence. Currently,

LOGISTICS TIMES July 2010

CONTRACT LOGISTICS

there is multiple level of outsourcing witnessed. In my opinion, consolidation will happen only when companies tend to think on building up assets in various forms. Multinational players are normally solution- based. The logistic market segment will still continue with the following layers broadly: Infrastructure providers; transportation companies; Typical solution and service based companies. The market is very big and the concept of SCM is just taking off. I don’t see any consolidation happening in the next 7 to 10 years!

HR Challenge The human resource challenge is very severe! In the absence of formal education in school and colleges, this gap will still continue. The expertise is derived

out of experience. Organizations have to take raw hands and train them for a few years before they can expect any sort of returns. Market is tempting and trained ones wish to make their quick bucks and, therefore, attrition is anywhere around 20 per cent to 30 per cent in the Industry. Further, young people will be motivated to join IT, Manufacturing, Retail etc. than in the contract logistics ﬁeld due to the starting remunerations are very low in logistics industry compared to other industries! Therefore, the pressure is always there on a few experienced staff LOGISTICS TIMES August 2010

filling the gap. Business is growing day by day. Customer expectations are increasing. Investments are not at par as companies wish to capitalize in short run. India has the human resource, but channeling is missing! We, at Panalpina, have clearly defined HR policy. Different methods are adopted by us including the following: Productivity norms to define Full Time employees; Clearly defined organization structure that support our business; Outsourcing policy; Internship programs; Periodical assessment and retention of skilled and experienced staff We have faced situations where the growth could not be managed and at times when we had to consolidate and streamline the resources. However overall, the company policy seamlessly implemented has

produced good results.

The 13% debate The cake is very big. We don’t look at our competition size to approach the market. We have our products and our forwarding and logistics strength. We have our structure that supports different industry verticals. Some of the products and concepts are very unique that no one has ever done in this market. Strategy for Panalpina India for the next 3–5 years is clearly deﬁned. Our year on year growth is encouraging and targets are met. Timely

investments are/will be made in areas that we think is making true business sense. Our strong marketing function does constant market analysis and business plans are made to completely align the market and our corporate policy.

Panalpina’s gift Panalpina is present in this country for more then a decade. As a global organization, the structure, people and process have to be in sink with our global practices. Quality in operations, customer service and client management has been our strength. We have been delivering compelling solutions to our customers every time. Our Oil&Gas and Project division ranks top in the world and we have a very good set-up for the projects which needs high technical, tactical and execution skills. We have chartered and own operated aircraft landing this country at times of need. We also have our scheduled aircraft touching ports to support our customers’ imports and exports volumes. Our systems are very powerful and can provide complete track and trace visibility real-time. They are further capable of performing order management till, barcode, RF technology, WMS etc. These are global systems implemented under highly secured environment. We have done project integrating our system to our global clients thereby providing seamless integration. We believe in developing skills and on a routine basis our staff is provided with training on the job and other soft skills through our PAN academy. The most important of all is the best business practices. Panalpina globally and Panalpina in India is 100 per cent compliant to all laws and statutory regulations.

Way forward: 2020 Ten years from now, SCM should have its recognition at par with any other profession. The potential for growth will always be high in this industry. I hope along these years, we get a new degree Bachelor of SCM and so as the Masters and a Doctorate! Its all worth it in this ﬁeld.

Maturing, but slowly The word supply chain is still a bit ahead of times for the Indian market. We don’t have supply chain as a formidable discipline in the country as yet. People who are practicing it or managing supply chains have come from different fields. They are not hard core supply chain professionals as such. They have primarily learnt the tricks of the game over the years while being on the job. And they prefer to do it the way which works for them. Many of the supply chain professionals here are not well exposed to best practices and models available in the world market. But in last few years, some institutes have begun providing courses in supply chain and gradually a better understanding of the supply chain related processes is evolving in the country. However, we need to analyse this management concept in its entirety. The definition of supply chain was given by CSCMP – the council of supply chain management professionals. Look at CSCMP’s journey itself. Its very interesting for the kind of parallels we notice in the Indian market. This agency was earlier called council of distribution management. Then they were rechristened as council of logistics management before assuming the new nomenclature which is council of supply chain management professionals. So they have also evolved from distribution, to logistics and finally to supply chain over a spell of 40 odd years. What has happened in India is that from 1991 (when the economic governance of the country took a decisive turn) till now, in 20 years we practically have 40 years of growth and learning compressed. But learning takes a while to absorb. The supply chain actually encompasses many logistics companies. If you look at an auto manufacturer, the company would be concerned about its own logistics. But if you look at the larger picture of the supply chain involved, it would include the logistics needs of the manufacturers, the suppliers to the company as well the last mile logistics requirements to cater to the customers. So in the source to consumption process, its many supply chains intermingled

together. That is the basic premise. And the information sharing network between all supply chains has to be vibrant to make the entire process robust. This kind of understanding has to evolve. And this will evolve only when there is better relationship and co-ordination with suppliers and customers. Today I would say automotive companies are at least ones which are in constant touch with dealers’ network. They can see dealers inventory at any point in time. But look at a kirana shop. An FMCG manufacturer would not know what kind of inventory is lying there. And ﬁlling these gaps would be a challenge here. To draw the larger perspective to ﬁll these gaps, understanding the difference between logistics and supply chain is paramount. Supply chain goes beyond logistics into the planning stage. It goes beyond one company to multiple companies. It also creates the platform for all stakeholders in a manufacturing or distribution process winning together. The best example available today is probably of Japanese companies who have managed to make this concept work on a larger scale because they forge long-term relationship with their suppliers. On the contrary, the Europeans and American companies have this habit of seeking RFP from their suppliers every two-three years. In India, the experience is mixed but its an acceptable fact that longer partnership paves the way for robust supply chain mechanism. Coming back to the Indian scenario, automotive is one segment where a certain degree of maturity has been attained in terms of adoption of advanced SCM. Retail was touted to be the next one but unfortunately the organized retail did not shape up the way we had anticipated earlier this decade probably because of slowdown pressures. However, it certainly is next in the line. We are noticing major FMCG players like HULsprucing up their SCM models in association with their dealers. Consumer durables is another vertical where advanced SCMs can make big-ticket penetration.

Jasjit Sethi CEO TCI Supply Chain Solutions

LOGISTICS TIMES August 2010

MANAGEMENT

EXCERPTS

Supply chain

disruptions Like it or not, supply chain management is here to stay. For that matter, it was always there, but not in those precise terminology. Take it for granted that it will continue to hold its sway forever because it is a bread and butter case for anyone who wants to provide value proposition in the form of goods and service irrespective of political system in vogue. Two academics – Vinod Singhal and Kevin Hendricks have carried out a study of 800 supply chain disruption announcements and put their observations in the form a report under the title, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility”, a few years ago. Their observations are relevant even now. LOGISTICS TIMES brings an excerpt: LLOGISTICS OGISTICS TIMES August 2010

EXECUTIVE SUMMARY Senior executives are devoting increasing attention to effective supply chain management. Although much of their focus in the past was on wringing efficiencies and cost out of supply chains, more recently they are becoming worried about supply chain disruptions as security concerns, terrorist attacks, and the transformation of supply chains into lean, complex, and globally dispersed entities has increased the risks of disruption. While most executives can see the value proposition of improving efficiencies and reducing costs, many executives are having a hard time getting a handle on the economic consequences of supply chain disruptions. This may have prevented many executives from making investments and changes that could have mitigated the risk of disruptions. This report presents the findings and evidence on the long-term effects of supply chain disruptions on corporate performance. The findings are based on a study of nearly 800 instances of supply chain disruptions experienced by publicly traded firms. It provides estimates on the effect of disruptions on long-term shareholder value, profitability, and share price volatility (a measure of the risk of the firm). This report presents the most comprehensive and detailed analysis published to date on the performance effects of supply chain disruptions. The analysis uses objective data and rigorous estimation methodologies to isolate the effect of disruptions on different measures of corporate performance. The key results are: • Firms suffering from supply chain disruptions experience between 33 to 40% lower stock returns relative to their benchmarks over a three year time period that starts one year before and ends two years after the disruption announcement date. • Disruptions increase the risk of the firm. The share price volatility in the year after the disruption is 13.50% higher when compared to the volatility in the year before the disruption. • Disruptions have a significant negative effect on profitability. After adjusting for industry and economy effects, the average effect of disruptions in the year leading to the disruption announcement is: • 107 % drop in operating income • 7 % lower sales growth • 11 % growth in cost

• Disruptions have a debilitating affect on performance as firms do not quickly recover from disruptions. Firms continue to operate for at least two year at a lower performance level after experiencing disruptions. • Disruptions have a negative across the board effect on stock price, profitability, and share price volatility. It does not matter who caused the disruption, what was the reason for disruption, what industry a firm belongs to, or when the disruption happened - disruptions devastate corporate performance. The evidence discussed in this report has major implications for senior executives: • It underscores the need as to why senior executives must be aware of the primary sources of disruptions in their supply chains, what can be done to mitigate the risks of disruption, and take proactive actions to mitigate risks. Disruptions, even if infrequent, have the potential to destroy value that might have been painstakingly created over years. • Recent corporate governance legislation makes senior executives more responsible for forecasts of performance and protection of shareholder value. Since supply chain disruptions are often unforeseen and unexpected and can have a material impact on performance, senior executives can open themselves to litigation from disgruntled shareholder as well as questions from regulators. • Although the focus on making supply chains more efficient and lean makes economic sense, senior executives must recognize that lean and efficient supply chains face higher risk of disruptions. There is an direct relationship between efficiency and risk. Firms can no longer afford to focus solely on cost reduction. Major supply chain investments and initiatives must also take into consideration how these investments and changes affect the risks of supply chain disruptions. • In many instances supply chain investments and initiatives should beundertaken not because they reduce costs but because they increase the reliability and responsiveness of supply chains. Such investments and initiatives should be viewed as insurance against avoiding destruction of corporate performance should disruptions happen and they should be justified on this basis and not cost savings.

LOGISTICS TIMES August 2010

EXCERPTS

Drivers of SC disruptions The historical view of corporate performance destruction due to supply chain disruptions is valuable because it provides ﬁrms with a sense of the economic effect of poor supply chain performance. The evidence clearly indicates that ignoring the possibility of supply chain disruptions can have devastating economic consequences. As one reﬂects on this evidence, a natural question is what are the primary drivers of supply chain disruptions? Given the recent heightened awareness of the risk of supply chain disruptions many experts have offered insights into the factors that can increase the chances of disruptions. Some of these major factors are discussed next with the intention that these factors can serve as guideline for managers as they assess the chances of disruptions in their supply chains. The chances of experiencing disruptions are higher now and in the future than in the past because of some recent trends and practices in managing supply chains: Competitive environment: There is no doubt that most industries are facing a vastly different competitive environment today than a decade or so ago. Today’s markets are characterized by intense competition, very volatile demand, increased demand for customization, increased product variety, and short product life cycles. These trends are expected to intensity in the future. These conditions make it very challenging to match demand with supply. In particular,

firms are facing increasing difficulty in forecasting demand and adjusting to unexpected changes in product life cycles and changing customer preferences. Increased complexity: The complexity of supply chains have increased due to global sourcing, managing large number of supply chain partners, need to coordinate across many tiers of supply chains, and dealing with long lead-times. This increased complexity makes it harder to match demand and supply, thereby increasing the risk of disruptions. The risk is further compounded when various supply chain partners focus on local optimization, when there is lack of collaboration among supply chain partners, and when there is lack of flexibility in the supply chain. Outsourcing and partnerships: Increased reliance on outsourcing and partnering has heightened interdependencies among different nodes of the global supply networks and increased the chances that a disruption or problem in one link of the supply chain can quickly ripple through the rest of the chain, bringing the whole supply chain to a quick halt. While many experts have talked about the virtues of outsourcing and partnerships, for these to truly work well it is important that supply chain partners collaborate, share information and plans, and have visibility in each other’s operations. Such changes require major investments in connected information systems, changes in performance metrics, commitment to share gains, and building trust among

THE chances of experiencing disruptions are

higher now and in the future than in the past because of some recent trends and practices in managing supply chains

LOGISTICS TIMES August 2010

supply chain partners, all of which are not easy to achieve. Single Sourcing: Single sourcing strategies have reduced the purchase price and the administrative costs of managing the supplier base, but may have also increased the vulnerability of supply chains if the single-source supplier is unable to deliver on time. Limited buffers: Focus on reducing inventory and excess capacity and squeezing slack in supply chains has more tightly coupled the various links leaving little room for errors. Just-in-time delivery and zero inventory are commonly cited goals but without careful consideration of the fact that these strategies can make the supply chain brittle. Focus on efficiency: Supply chains have focused too much on improving efficiency (reducing costs). A December 2002 report from Forrester indicates that 24 of the 26 senior supply chain executives indicated that improving operational efficiency is their top supply chain priorities while only 2 out of 26 indicated that making supply chain more flexible to manage risk is their top priority. Firms are responding to the cost squeeze at the expense of increasing the risk of disruptions. Most firms do not seem to consider the inverse relationship between efficiency and risk. Strategies for improving efficiency can increase the risk of disruptions. Over-concentration of operations: In their drive to take advantage of economies of scale, volume discounts, and lower transaction cost, firms have over-concentrated their operations at a particular location, or with their suppliers or customers. Overconcentration reduces the flexibility of the supply chain to react to changes in the environment and leads to a fragile supply chain that is susceptible to disruptions. Poor planning and execution: Poor planning and execution capabilities result in more

‘‘More prone to disruptions”

Vinod Singhal (Left) and Kevin Hendricks give Ramesh Kumar an update on supply chain research that began almost a decade ago. Excerpts: Your research report was published in 2008. How long it had taken you to research and put them together? We started this research in 2000. Since then we have updated the research. The first academic paper was published in 2003 and since then we have published 6 or 7 papers. The report reflects the work we have done over eight years. How big was your backend in terms of research assistants etc.? We - Kevin (Hendricks) and I - do not use research assistants. We pretty much do everything ourselves as this allows us to become very familiar with the data and ensures consistency and quality. What kind of impact your research has on the industry? The impact has been quite significant. More than 200 practitioner publications have cited our work including Wall Street Journal, Financial Times, CFO Magazine, Business Week etc. Many managers use our results in their presentation; many academics share the results of our research with the students; and we have presented this research in 20 different countries, and given more than 100 presentations at universities and practitioner conferences.

Can you share some of the kudos received for this research report? We have distributed more than 2,000 copies of the report. Many managers and academics have written to us indicating the value of these results. SupplyChain Digest (January 2009) recognized our research on supply chain disruptions and shareholder value as a key driver of the growing focus on supply chain risk management in 2000-2010. I was listed as the 4th most inﬂuential scientist is Supply Chain Management by Supply Chain Magazine. Netherlands, April 2009 If you were to revisit this research report, what kind of update you would incorporate? I would simply update the sample to include more recent disruptions. I do not expect the results to change. In fact the impact may be more negative. How different today’s supply chain world is compared to when you did the research? The supply chains have become more complex, have to deal with more uncertainty, and have actually become more prone to disruptions. Interestingly some of the best known companies like Toyota,

Boeing, Microsoft, Nokia etc. have also faced major supply chain disruptions. Bottom line–managing supply chains have become more challenging, and is more critical to a firm’s success. Without a good and robust supply chain, a firm cannot outperform their competition. What is new happening on the SC sphere from your perspective? Supply chain risk management is become very important and firms are paying attention to this issue. Firms are also realizing that the top supply chain executive needs to be part of the top management team. Firms are creating positions like Chief Supply Chain Officer to recognize the growing importance and criticality of supply chains. Any fresh research into this arena jointly or individually? Supply chain disruptions is a form of demand-supply mismatch - that is, a firm is unable to match demand with supply. We are looking at other forms of demandsupply mismatches and have done work on the economic consequences of other forms of demand-supply mismatches such as delays in introduction of new products and excess inventory. LOGISTICS TIMES August 2010

INTERVIEW

EXCERPTS

incidents of demand-supply mismatches. Plans are often too aggregate, lack details, and are based on inaccurate inventory and capacity information. Lack of good information systems hinders the ability of the organization to be aware of what is happening. Lack of forward looking metrics affects the ability of firms to anticipate future problems and be pro-active in dealing with these problems. Firms also have limited visibility into what is happening in upstream and downstream supply chain partners. Most firms have limited abilities and capabilities to identify and manage supply chain exceptions. This is further compounded by the lack of synchronization and feedback between supply chain planning and supply chain execution. What can firms do to mitigate the chances of disruptions? There is no doubt that many of the above-mentioned practices and trends have led to improvements in supply chain performance and profitability. Nonetheless, they may have also contributed to supply chains becoming more susceptible and vulnerable to disruptions. The challenge therefore is to devise approaches that can deal more effectively with disruptions, while not sacrificing efficiency. Some of these approaches are briefly outlined below: Improving the accuracy of demand forecasts: One of the primary reasons for demand supply mismatches is inaccurate forecasts. Bringing some quantitative rigor to forecasting can certainly help improve the accuracy and reliability of

forecasts. Firms should consider not only the expected demand forecast but also the demand forecast error (variance) in developing plans. This would give planners an idea of what kind of deviation may happen from the mean value. Firms should also recognize that long-term forecasts are inherently less accurate than short-term forecasts as well as the fact that disaggregate forecasts are less accurate than aggregate forecasts. These considerations will enable planners to look more carefully at the forecasts they receive from sales and marketing. Forecasts often go bad when firms do not dynamically adjust forecasts, ignore background noise, and fail to consider events outside their own organizations that could have a material effect on forecasts. Furthermore, firms often make forecasts assuming static lead times, transit time, capacity, and transportation and distribution routes. These assumptions must constantly be questioned to make adjustments as and when needed. Long planning time horizons that are frozen also makes it harder to develop accurate forecasts. Integrate and synchronize planning and execution: Firms have become sophisticated in their planning activities. But plans are often insulated from execution reality. In many cases plans are tossed over the wall for execution. Managers responsible for execution make adjustments to these plans to reflect current operating conditions. Such adjustments can grow over time but are seldom communicated to the planners, resulting in lack of integration between development and execution

LACK of good information systems hinders

the ability of the organization to be aware of what is happening.

LOGISTICS TIMES August 2010

of plans. By better coordinating and integrating planning and execution many of the problems with supply demand mismatches can be avoided. Reduce the mean and variance of lead time: Forecasting inaccuracy and disconnect between planning and execution can be particularly devastating when lead times are long and highly variable. Reducing the mean and variance of lead time can help reduce the level of uncertainties in the supply chain. Some of the following practices can help reduce the mean and variance of lead times: ► Remove non-value added steps and activities ► Improve the reliability and robustness of manufacturing, administrative and logistics processes ► Pay close attention to critical processes, resources, and material ►Incorporate dynamic lead-time considerations in planning and quoting delivery times Collaborate and cooperate with supply chain partners: Although the concepts of collaboration and cooperation among supply chain partners have been around for a long time, achieving this has not been easy. The evidence presented in this study provides an economic rational why supply chain partners must engage in these practices. The precursor for collaboration and cooperation is developing trust among supply chain partners, agreeing upfront on how to share the beneﬁts, and showing a willingness to change from the old mindset. Once these elements are in place, supply chain partners must do joint decision making and problem solving, as well as share information about strategies, plans, and performance with each others. These activities can go a long way in reducing information distortion and lack of synchronization that currently plague supply chains and contribute to

disruptions. Invest in Visibility: To reduce the probability of disruptions, firms must be fully aware of what is happening in their supply chain. This includes internal operations, customers, suppliers, and location of inventory, capacity, and critical assets. The following may be needed to develop visibility: ► Identify and select leading or forward looking indicators of supply chain performance (suppliers, internal operations, and customers) ► Collect and analyze data on these indicators ► Set benchmark levels for these indicators ► Monitor these indicators against the benchmark ► Communicate deviations from expected performance to managers at the appropriate levels on a real time basis ► Develop and implement processes for dealing with deviations Build flexibility in the supply chain: Firms must make careful and deliberate decisions to build flexibility at appropriate points in their supply chains to enhance responsiveness. There are multiple dimensions of flexibility and what will be appropriate for a firm depends on its operating environment. ►Building flexibility on the product design side: Standardization, modularity, and use of common parts and platforms can offer the capability to react to sudden shift in demand and disruptions in delivery in parts. ►Building sourcing flexibility: This can be achieved by using flexible contracts as well as use of spot markets to purchase parts and supplies. Spot markets can be used to both acquire parts to meet unexpected increase in demands as well as dispose

of excess inventory if demand is below expectation. ►Building manufacturing flexibility: This can be accomplished by acquiring flexible capacity that can used to switch quickly among different products as the demand dictates. Firms should also consider segmenting their capacity into base and reactive capacity, where the base capacity is committed earlier to products whose demand can be accurately forecasted and reactive capacity is committed later for products where forecasting is inherently complex. Such would be the case for products with short product life cycles as well as products with very volatile demand. Late differentiation of products can also be used as a strategy to increase manufacturing flexibility. Postponement strategy: Postponement or delayed differentiation is a strategy that delays product differentiation at a point closer to the time when there is demand for the product. This involves designing and manufacturing standard or generic products that can be quickly and inexpensively configured and customized once actual customer demand is known. By postponing differentiation of products, the chances of producing products that the market may ultimately not want are minimized, thereby reducing the chances of demand supply mismatches. Key crucial success factors for implementing this strategy include: ►Cross-functional teams that represent

the design and manufacturing functions ►Product and process reengineering to increase standardization ►Modularity ►Common parts and platforms ►Collaboration with customers and suppliers ►Performance measures and objectives that resolve conﬂicts and ensures accountability Invest in technology: Investment in appropriate technology can go a long way in reducing the chances of disruptions. Web based technologies are now available that can link databases across supply chain partners to provide visibility of inventory, capacity, status of equipment, and orders across the extended supply chains. Supply chain event management systems have the ability to track critical events and when these events do not unfold as expected send out alerts and messages to notify appropriate managers to take corrective actions. This enables the ﬁrm to identify supply chain problems earlier rather than later and operate in a proactive rather than reactive mode. RFID technology has the promise to improve the accuracy of inventory counts as well as provide real time information on the status of orders and shipments in transit and what is being purchased by customers. Such access to real time information alleviates information distortions and provides true demand and supply signals, all of which can reduce the chances of demandsupply mismatches.

FIRMS must make careful and deliberate

decisions to build flexibility at appropriate points in their supply chains to enhance responsiveness.

LOGISTICS TIMES August 2010

COUNTER POINT

Don’t need SC experts! In 1985, I stood on the threshold of change. But a bigger change than I had ever bargained for. I was leaving the Indian Navy and joining a business. Not only that, a company and its shareholders were trusting me to deliver a `5 crore project which was never before put up in India and which I had no clue on what it meant to deliver. The only language I knew was “Ahoy, Harry S Lagad There” and “Yes, Captain”. Now, I had to learn Executive Director TQM, GNAT charts, Project Timelines and Gati Ltd. Balance Sheets etc. A saviour in the form of my college professor presented me with three books. The Goal, by Elihayu Goldratt, Projects and surprisingly, Management Ethos by Swami Vivekananda Foundation. These books became my MBA school. Most of the time, when leaders such as you and I, are asked a simple fundamental question as to “What is our goal?”, the most typical answers I have received are “Customer Satisfaction”, “Budgets”, “Quality” and in a rare case “ supply chain excellence”. The book taught me that we should only measure our business goal as “Profits”. And in years to come, I realised, that in essence, if we don’t make profits, we have failed. It’s as simple as that. Of course, in making profits, we still have to achieve Budgets, Customer Satisfaction as well as TQM, but those are secondary. A company’s goal is always to “Make Profits”. Period. How then do Indian companies make profits, year after year? In a market which is so much dominated by distribution, and the future being at the bottom of the Pyramid, as the pundits say, how can companies continue to innovate or find ways to cut costs and increase efficiencies, so as to make sustainable profits? India continues to amaze me. This is a country where companies are making profits even with a hugely inefficient system. How long will this last ? And is this inefficiency controllable? If so, how? To find the answer, we really don’t have to look too far out. Lets take our airports. You and I have travelled there many a time but have we noticed something glaringly obvious? Our airports are grossly inefficient. How many airline staff does it take to have passengers board the aircraft? How many handlers and ground staff are required to berth a plane? Why is it that our airports are a constant canopy of sound, specifically with constant loud announcements LOGISTICS TIMES August 2010

on departures? Ever stood in the security queue and wondered just how inefficient a bottleneck that is? Have you wondered if the security guard who checks your ticket and your ID at the airport entrance really read anything or is just pretending and leading to a chaotic bottleneck? And what if we take away these bottlenecks and bring in some supply chain efficiency within the airport operations? Wont people be more relaxed and spend more time and possibly money at the duty free shops or restaurants? How many headcounts would be reduced and what is the calculated gain from saving 10-15 minutes of every aircrafts fuel by bringing in these efficiencies overall? Come to think of it, we spend more time in traffic these days than in meaningful business meetings. The air is thick with the noise and the ominous gas belching out of the vehicles. Caught in the same traffic jams are trucks which are taking vital supplies to retail or ambulances with a patient dying and unable to move an inch. Such is the traffic condition and yet, every Indian blames this on the road or the fact that we now have too many cars ! Yet, looking closely at this each day through my jaundiced supply chain eyes, I find that I can still make things much more better and yes, we may still have some jams somewhere, but we can bring in a huge amount of efficiencies. Getting people to adhere to the “Lane rule”, i.e., sticking to your own lane. Keeping the cycles and motorcycles to one side and above all ensuring that there are no pedestrians crossing and stopping the traffic at every point. Having a simple format of staggered working time as per areas also makes a huge difference. Simple things but effective in making our economy move and above all the huge amount of savings on the fuel bills as well as the future of our environment are good stimulants to drive this change. So, where do we start? We all are a part of this nation, its problems as well as its future, our future. Where do we look to find these supply chain experts to find solutions to these common problems? Where does India find these experts? Do we have them here or do we look overseas? I found the answer last night. I hope all Indians do the same. Last night, I looked into my mirror and realised that what India needs is not supply chain experts but Indians with a sense to do something and to work in a systematic and disciplined manner. Thats all it takes.

VESTED OUTSOURCING

Unpacking Oliver Ten Lessons to Improve Collaborative Outsourcing KATE VITASEK tells Ramesh Kumar that she and her team “worked hours on the Unpacking Oliver and it was painful to ‘unpack’”. But the messages (ones you beat your brain in the extract) are very, very powerful. “Well, by the way, Kate is not unfamiliar with India. She had Outsourcing for SP Jain’s Global MBA in Supply Chain. “I think the Indian outsource service providers are primed for this model. I was hugely impressed by MBA students at SP Jain,” she adds. LOGISTICS TIMES has immense pleasure in bringing the Executive Summary of “Unpacking Oliver” to our esteemed readers as part of this Supply Chain Special. LOGISTICS TIMES August 2010

he bottom line on Dr. Oliver Williamson’s work is that the bottom line is not always apparent at ﬁrst look. You have to look at the hidden costs of doing business as well as the price of what you are buying. Dr. Williamson focuses on the contracting process itself – looking through the “lens of the contract” and how organizations behave when it comes to the contract and how people behave during contract negotiations. Williamson’s thoughts on outsourcing go beyond the numbers and substantiate the value of a collaborative, win-win approach to outsourcing and strategic relationships. In our opinion, it is some of the best academic work we have seen that shows how contract and governance structures need to be addressed in developing these types relationships.

About the Authors

VESTED OUTSOURCING

A Nobel Prize is rare, recognizing signiﬁcant achievement. Dr. Williamson’s work is impressive because his work aligns with best practices observed in leading edge companies. It is one thing to have theory; it is quite another to see it in practice. His lessons are simple and profound when you look at their core essence. We hope more people will understand his work after reading this “unpacked” translation. We’ve identiﬁed ten key lessons that should be applied when developing strategic business partnerships. Our challenge to the reader is simple: apply these 10 valuable lessons to the outsourcing relationship and see how performance will improve. The purpose of this white paper is to explain how managers in the supply chain can use Dr. Oliver Williamson’s ideas to create better outsourcing agreements.

Kate Vitasek is a nationally recognized innovator in the practice of supply chain management and outsourcing. Vitasek’s approaches and insights have been widely published with more than 100 articles in respected academic and trade journals such as the Journal of Business Logistics, Supply Chain Management Review, Harvard Business Review, and Outsourced Logistics. Her latest book is a must read for practitioners on how outsource better – Vested Outsourcing: Five Rules that will Transform Outsourcing. Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education. She has served on the Board of Directors for the Council of Supply Chain Management Professionals and has been called a “Rainmaker” for her tireless effort in educating the supply chain profession. Karl Manrodt is a professor in the Department of Management, Marketing & Logistics at Georgia Southern University. Research interests revolve around the role of information in logistics systems, metrics and performance measurement, and strategic sourcing. The author of three books and over 50 scholarly articles, his publications have appeared in such journals as the Supply Chain Management Review, Transportation Journal, the International Journal of Physical Distribution and Materials Management, Interfaces, and the Journal of Business Logistics. His annual study on trends in logistics is now in its 19th year, making it one of the longest continuous studies in the discipline. His study on warehousing metrics is in its 7th year. Manrodt was recognized as a “2004 Rainmaker” by DC Velocity Magazine and in 2005 was awarded the Eugene Bishop Award for Sustained Academic Excellence by the College of Business at Georgia Southern University. He served on the Board of Directors for the Council of Supply ChainManagement Professionals as well as other leadership roles with the Warehouse Education Research Council.

LOGISTICS TIMES August 2010

Dr. Oliver Williamson is not a household name. In fact, it is rare to come across any business person that has heard of him. This is changing as practitioners begin to understand Williamson’s award winning contributions to the art of forging “credible” outsourcing business relationships and contracts. The 10 lessons are:

1 Outsourcing is a continuum, not a destination. Deciding to in-source or outsource is rarely a simple ‘yes or no’ decision. Most often the decision encompasses a tradeoff between safeguards and price. In other words, it is a hybrid of what tasksor responsibilities each party will complete. Choosing who does what can be determined by using the other lessons noted below. The goal is to reduce costs, and improve service while maintaining or increasing proﬁt margins for all partners.

Richard Wilding is the Chair (Full Professor) in Supply Chain Risk Management at the Centre for Logistics and Supply Chain Management, Cranfield School of Management U.K. Richard works with European and international companies on logistics and supply chain projects in all sectors. He is a highly acclaimed presenter and regularly speaks at Industrial Conferences and has undertaken lecture tours of Europe and Asia at the invitation of local Universities & Confederations of Industry. He has published widely in the area of supply chain management and is Editorial Advisor to a number of top journals in the area. At the European Supply Chain Distinction Awards 2008, Professor Wilding received the `Distinguished Service Award for Thought Leadership and Service to Supply Chain Management`. In 2010 his biography was entered into “Who’s Who” described as “Britain’s most famous reference book” for those who have “reached the pinnacle of excellence in their field” and “demonstrated lasting significance.” Richard’s special areas of interest include the creation of collaborative business environments, reducing supply chain vulnerability & risk, time compression and techniques for aligning supply chains to maximize customer value and reduce cost. Tim Cummins is the founder and CEO of the International Association for Contract & Commercial Management (IACCM), a nonprofit organization that has become the global forum for innovation in trading relationships and practices. IACCM offers cross-industry, crossfunctional, multinational insights to the complex world of business and negotiation at a time of unparalleled change. Tim’s interest in History, politics and social development are combined with a fascination for communication and writing which enable him to bring helpful insights and ideas on the evolution of business organization, motivation and management to the business community and the IACCM members.

2 Develop Contracts that create “Mutuality of Advantage.” Dr. Williamson shows that the contract itself can have negative impacts on business if an organization does not think through how to structure the contract properly. In short – don’t just say win-win – contract for win-win by committing to a ‘What’s in it for We’ approach.

3 Understand the Transaction Attributes and their Impact on Risk and Price. Companies should look to identify all costs, including transaction costs associated with asset speciﬁcity, uncertainty, frequency and work to develop solutions that can mitigate these risks and the costs associated with them. It is important to understand the true “Cost to Serve.” Don’t ignore the risks – but identify them and determine the best way to manage them. Failure to manage the risks will lead to one-sided agreements by pushing risks on to the service provider or the customer. Doing so will simply cause the service

provider to raise costs or the customer to want to reduce the price without trying to manage the real issues. Risks and costs need to be addressed from a “holistic” supply chain perspective. Remembering the sum of the local costs does not equal the global cost.

4 The Greater the Bilateral Dependencies, the Greater the Need for Preserving Continuity. Companies that are “promiscuous” frequently bid and transition work to new suppliers that are likely to experience higher overall costs than if they had developed a fair and equitable contract that preserves continuity and eliminated switching costs.

5 Use a Contract as a Framework – Not a Legal Weapon

Creating a detailed contract and associated statement of work puts the outsource provider and customer into a “box.” This limits innovation and encourages ﬁnger-pointing when there is inevitablescope creep and Ten Commandments changes. Instead of trying to “guess” 1. Outsourcing is a continuum, not a about the future, it is better destination. to indicate an outline of the 2. Develop Contracts that create work to be done, and provide “Mutuality of Advantage.” recourse for ultimate appeal. 3. Understand the Transaction For work yet to be determined, Attributes and their Impact on Risk focus on the process and tools and Price. to be used, not on the work to be done. 4. The Greater the Bilateral

Dependencies, the Greater the Need for Preserving Continuity.

5. Use a Contract as a Framework – Not a Legal Weapon 6. Develop Safeguards to Prevent Defection. 7. Predicted Alignments can minimize Transaction Costs. 8. Your Style of Contracting Matters; Be Credible. 9. Build Trust; Leave Money on the Table. 10. Keep it simple.

6 Develop Safeguards to Prevent Defection. It is important to recognize that business relationships may need to change due to changes in the market and for this reason contracts need a well thought out exit management plan. Due to thechanging market place, a perfect supplier (or customer) today might not be a perfect match in the future. For this reason, practitioners should clearly identify the costs associated

with terminating a contract. Create safeguards in the contract that are fair and equitable in terms of keeping either party “whole” in the event that a contract needs to be terminated prematurely.

7 Predicted Alignments can minimize Transaction Costs. Predicted alignments or what is sometimes thought of as “shared visions” can and does reduce transaction costs. When at all possible, create a shared vision that will guide how both the company and the service provider will work. Companies should create mutually beneﬁcial outsourcing agreements whereby the service provider is rewarded ﬁnancially for achieving the desired outcomes for the company that is outsourcing. Develop pricing models that reward and incentivize service providers for achieving the desired outcomes.

8 Your Style of Contracting Matters; Be Credible. Organizations that use their “muscle” to gain an advantage over suppliers may have a short term win, but they will lose in the long term. Companies will ultimately face higher market costs and transaction costs from switching or transitioning suppliers, or at a minimum from suppliers being forced to use conventional negotiations to put in myopic and costly contractual provisions and behaviors that simply drive up hidden costs.

9 Build Trust; Leave Money on the Table. Leaving money on the table may sound foolish, but when striking a strong business relationship it can signal a constructive intent to work cooperatively that will build an environment that is credible from start to ﬁnish. As the old proverb states “Give and it will come back to you, generosity gives rise to generosity.”

10 Keep it simple. Organizations should strive to keep its relationships and contracts pragmatic, plausible and correct: Those are excellent lessons in life and for a good business relationship and supporting contract. LOGISTICS TIMES August 2010

PROFILE

Abhay Edlabadkar(left) & Sitaram Geddam

The H’badi super duo

verything happens for a reason, believes Abhay Edlabadkar, CEO & President of 7Hills Business Solutions of Hyderabad. Rather Pittsburgh, US. No, he is no fatalist but a pragmatic futurist. If this sounds a bit oxymoron or inconceivable, can’t help it. Maharashtrian by birth, but domiciled in Andhra Pradesh, the short Abhay – in comparison with his business partner and an old school chum Sitaram Geddam (more about him a bit later) – did the usual rounds of Begumpet

LOGISTICS TIMES August 2010

Public School, professional courses before landing up in the land of dreams to pursue a Fellowship and finally joined the ranks of Motorola to dabble in semiconductor. A dream come true script, indeed. It was the ‘in’ thing those days. Then he moved onto Bell Labs to explore the next generation fibre optics. Yes, everything moved at lightening speed. Soon the ‘Hyderabadi at heart” Abhay with an MBA from Columbia University in finance got into business development. As luck would have it, Abhay’s desire to go the entrepreneurial

path got entangled in the aftermath of the 2000-1 Dotcom burst and the Wall Street collapse. His dreams lay shattered forcing him to take up a ‘job’ in the global merger & acquisitions arena to keep his body and soul together on the foreign soil.

Fateful night On a fateful night, he missed the connecting ﬂight from New York to Berlin and instead of spending time at the airport he tried his luck to touch base with some of his local friends in

vain. Except one call to Sitaram Geddam which changed his fate, so to say. “Luckily, he volunteered to pick me up from the airport. … Over a ﬁne glass of wine, we shared the path travelled over the years and that is when he sounded out about his need for someone to join and take the supply chain business forward,” elaborates Abhay in his conference hall over a hot cuppa on a July morning while we wait for Sitaram, founder and Chief Technology Ofﬁcer of 7 Hills, to join us. The more charismatic Sitaram glides in soon to take me through the path to success of 7 Hills. “Honestly, I was joking with Abhay. Not pitching for him to come on board,” says he matter of factly. Fresh out of college, Sitaram entered the portals of Johnson & Johnson in the US and began setting up processes and systems for its global supply chain in 1994-5. Lot of things were changing and supply chain was one of the new emerging areas. What the US companies did then, now Indian companies have begun to do, says he. Of course, the phrase ‘supply chain’ did not come into vogue or become fashionable but were commonly looked at as “inventory management and transportation”.

to plunge into setting up 7Hills and he has not looked back. With Abhay coming on board, the team is packed with the best brains focused on supply chain. “By the way, we are supply chain specialists – not IT service providers or server managers. We come with speciﬁc domain expertise. We are not system integrators or programmers. Nor we are into body shopping. Actually, we are as invisible as the ‘cloud’ platform,” chips in Abhay as I get busy

Their Indian clientele includes the likes of Reliance, Maruti, Reddington and many more. While 7 Hills provide supply chain consultancy, eBizNet Solutions handles products. Now their focus is on getting a ‘buy in’ from the top management – not the CTOs as it used to be in the initial phase. Good, they have learnt fast! The inﬂuence of consumers on supply chain is being appreciated in the corporate corridors and the cloud format – no heavy

with the second cuppa.

investment in hardware and software and no huge upfront fee and above all, no hassles over upgradation of technological support at regular intervals at a huge cost again! – where clients pay for service usage is helping them to make big inroads into the Indian corporate scenario. “Best of breed” supply chain practices is what the Hyderabadi duo offers. That too at an affordable price. Price-ﬁxated Indian bosses should have no hesitation saying ‘aye’ to the premium supply chain management service vendor. –Ramesh Kumar

Game changer What changed the game was the advent of internet in a big way. “Technology was not evolved to connect all bits and pieces until the web based platform emerged making interconnectivity a doable act,” explains Sitaram. His exposure to the Fortune 100 companies in setting up supply chain management processes made him a supply chain specialist over the years – that too endto-end in any discipline. No doubt, it was an expensive proposition and only cash rich companies could afford. But it was the SMEs who needed the most because they formed the backbone for all biggies as vendors. “Our quest was to make supply chain affordable and we are successful thanks to the ‘cloud’, adds he. This quest for affordability pushed him

Value proposition The value proposition 7Hills brings to table is the large company experience in a broad market place. A 175-member team is in place working from multilocations – India and the United States to cash in on the potential to be tapped in India and other global markets. CDC has reposed faith in them to join them not only in product development, but in sales and marketing as well. “We are truly global and looking for more such collaborations to spread our wings,” says Sitaram.

LOGISTICS TIMES August 2010

EVENTS TS

Frost & Sullivan’s

supply chain workshop

Noted global consultancy ﬁrm Frost & Sullivan organized a workshop on supply chain in Bangalore last month. The event was attended by some of the noted companies from both the client side as well as logistics services provider. During the two day event, Frost & Sullivan also presented a perspective paper covering different aspects of the supply chain industry. The perspective paper subtly underlined some of the critical supply chain gaps in terms of operational alignment between logistics services providers and end user industry. A major highlight of the event was the workshops wherein participants were divided into groups, given a critical problem related with their operations to analyse and then make on the spot recommendations. Logistics Times was one of the media partners of the event.

Auto SCM 2010 CII Institute of Logistics organized Auto SCM in Chennai last month. The well attended two days event saw the release of a McKinsey report titled ‘Transforming the nation’s logistics infrastructure.’ The report was unveiled by Rakesh Mohan, Chairman, National Transport Development Policy Committee. At the event, the captains of the logistics industry discussed doing away with the infrastructural bottlenecks in the country which are hampering the growth of the logistics industry. Meanwhile, a special highlight of the event was unveiling of a new certification programme in warehousing by CII Institute of Logistics. The institute will be offering certification in four categories – platinum, gold, silver and bronze. According to the institute, the specific certification programme will help in developing a roadmap for future growth in the warehousing sector. LOGISTICS TIMES August 2010

RNI No. DELBIL-07469/2010-TC