NEWS SCM WORLD KNOWLEDGE CLASSROOM ACADEMIC ADVOCACY February 2015
Vol. 3- No. 1 Rs. 150
EDITORIAL
On the Wings of Wishes T
GIRISH V S EDITOR
he baby that we delivered in February 2013, has turned two. And what a sense of pride and happiness it brings to see it being welcomed by you our readers. We are indeed thankful for your support. It has been a hectic year for us. SCMPro and our Editorial Partner – Institute of Supply Chain Management (ISCM) decided to collaborate in multiple ventures. Over the span of three months, we organized four events – beginning with the ISCM – Great Lakes Supply chain convention in September 2014, the ISCM – OPPI Pharma conference in October 2014, the Master Class by John Gattorna and the ISCM-SCMPro Supply Chain Strategy Summit in December 2014. It was hectic. We are thankful to our readers who supported us. And we did carry the synopsis of these events in our subsequent issues. And this year promises to be a packed one – we start with our Demand Planning Forum, where ISCM and we join hands to felicitate the best demand planners in India – in February. This will be followed by a Masterclass by Dr. Rakesh Singh in April, am Agri Supply Chain and Rural Summit in May, followed by the Pharma conference in November and the ISCM – SCMPro strategy summit 2015 in December. The agenda is set. And while we do this, the Indian economy is waiting to take off. The hopes and aspirations of a billion people are focused on one man – our prime minister – and each heart has the same prayer – may the torpor of the past be buried, and may we take new wings. We wait with bated breath for the winds of growth to lift us up. Happy Reading
3
February 2015
CONTENTS FEBRUARY 2015 February 2015
06 SCM NEWS >>
40 SME CORNER >>
Analysis of latest Supply Chain and Logistics happenings.
08 ISCM WORLDS >> Dr. Rakesh Singh, Managing Editor, SCMPro on impact of GST on Supply Chain and logistics industry.
13 LEAD STORY SCMPro dedicate this edition to professionals who spared their valuable time to pen down their thoughts on Industry with our readers.
4
SCMPro explores the role of supply chain management in SMEs.
44 KNOWLEDGE >>
Supply Chain Management Professional
EXECUTIVE PUBLISHER
This is concluding part of six part series on Managing and sustaining high performance in supply chain.
Jayaram Nair Jayaram.nair@scmp.in Mobile:9821732929
EDITORIAL MANAGING EDITOR Rakesh Singh rakesh.singh@scmp.in EDITOR Girish V S girish.vs@scmp.in RESEARCH EDITOR Piyush Shah Piyush.shah@scmp.in
48 SCMPro CLASSROOM >>
ADVERTISING Soney Mathew Soney.mathew@scmp.in Mobile: 9987272050
Dr. Rakesh Singh explains the concept of Bullwhip effect.
B2B Media Group D-204, Riddhi Siddhi Complex, Off. S.V. Road, Prem Nagar Road, Off. S.V. Road, Opp. Patkar College, Goregaon (West), Mumbai 400062. INDIA.
Dr. Rakesh Singh
50 ACADEMIC ADVOCACY >>
Printed and Published by Jayaram Nair on behalf of B2B Media Group. Printed at Printrade Issues (India) Pvt. Ltd, Unit No. 10, Pragati Indl. Estate 316, N.M. Joshi Marg, (Delsie Road), Mumbai 400011. And Published at D-204, Riddhi Siddhi Complex, Off. S.V.Road, Prem Nagar Road, Off. S.V.Road, Opp. Patkar College, Goregaon (West), Mumbai 400062. INDIA. No part of this Publication may be reproduced or transmitted in any form or by any means including photocopying or scanning without the prior permission of the publisher. Such written permission of the must also be obtained from the publisher before any part of the publication is stored in a retrieval system of any nature. No liabilities can be accepted for inaccuracies of any description, although the publishers would be pleased to receive amendments for possible inclusion in the future editions. Opinions reflected in the publication are those of writers. The publisher assumes no responsibilities for return of unsolicited material or material lost or damaged in transit. All disputes are subject to the exclusive jurisdiction of competent courts and forums in Mumbai only.
An insightful on research on how firms survive violent and unexpected disruptions.
Annual Subscription Rate: (INDIA)- Rs. 1500/Editorial Partner:
5
February 2015
NEWS
SCM WORLD
KNOWLEDGE
CLASSROOM
ACADEMIC ADVOCACY
It is not just drivers!
Slower Delivery Norms – the Need of the Hour
A
T
sk any carrier – the number one problem they have is driver shortage. A few years back, the problem was cargo availability. It is estimated that 15 percent of the trucks in India are idle at any moment in time due to lack of drivers. And we are not alone. Even the US of A seems to suffer the same problem. For years the US trucking industry too is faced by a driver shortage. And the problem seems to be getting wore even in the US. Driver shortage is the key constraint in trucking company's expansion plans. Drivers are leaving the profession in droves – and the culprit is – of all things – the lack of parking! The US can't find place for the truck to stop while on the road! A survey revealed that 70 percent of truckers found the truck stop full when they tried to stop! Apparently trucks there have to find a stop by 4.00 PM if they want to rest. The US of A should learn from India - we will park it anywhere – so what if the road gets blocked! And we will expect the driver to guard the consignment too!
he one big lesson that e-commerce firms have learnt is that spike in demand is a fact of life. We saw it during the Flipkart discount sale, the Christmas sale in UK, the Bachelors day sale in China. Service delivery firms cannot afford to invest in huge capacities that will be used once a year. And sellers cannot afford to disappoint their customers. Is there a way out? Dick Stead, the Chairman of Yodel, the UK delivery firm which was forced to stop picking up new orders for delivery before Christmas feels so. According to Mr. Stead, firms will need to understand that delivery capacity has a limitation. And peak delivery numbers cannot be the basis of capacity planning. His advice – and a reasonable one – is to do away with the same day deliver during such peak periods – possibly have a 48 or 72 hour delivery model. Simple but effective!
The Bullwhip effect
M
ore than 50 years ago Jay Forrester identified the issue of the amplification of the consumer demand along the supply chain. It was called the Forrester Effect. But since supply chain was not a separate science, it died a natural death, till Dr. Hau Lee of Stanford and P&G re-discovered it. At a townhall meeting by Supply Chain Digest in December, Kevin Smith, a consultant and faculty at Depaul University presented the following chart.
February 2015
6
NEWS
SCM WORLD
KNOWLEDGE
CLASSROOM
ACADEMIC ADVOCACY
GST will change the Supply Chain Landscape
The Budget 2015-2016 is expected to announce the rollout of the much awaited GST. GST will transform the landscape of doing business in India. It promises gains in terms of supply chain redesign. The 3 PLs are also going to gain in terms of reduced paper work and lower overheads as well as opportunity arising out of
Dr. Rakesh Singh
warehousing rationalisation. Indian
Visiting Professor of supply chain strategy and economics, Great Lakes, Chennai and Chairman, Institute of Supply Chain Management, Mumbai, Managing Editor, SCMPro
February 2015
8
firms need to pull up their socks and be ready for this change.
SCM WORLD
T
he better regulatory changes are definite to happen. In fact the countdown has already begin. The main being Goods and service tax (GST). The new government is serious in implementing GST and thus paving way for a more rational and realistic supply chain structural changes, which will help Indian firms operating in India become productive and competitive globally. In this column we will explore the need for GST. Post GST what will be challenges for both user and service providers in supply chain domain. The few questions that arises are: What is the structure of taxation in India currently? What has been the impact of this tax structure on supply chain design? What has been the net impact of supply chain profitability of the firms and at what costs? Why rolling out of GST will be a great opportunity for the Indian firms and logistics companies? How will procurement strategies, networks design, shifts in 3 PL service patterns and leveraging information technology to help maximise the gain will change the economics of post GST era. Indirect taxes as the basis of supply chain decision The current tax structure in India is complex and multi-layered both at union and state level. It has led to a complicated supply chain design and an inefficient network. There are central level taxes in form of excise custom duty and Cenvat and there are different state level taxes like VAT, Octroi and State level cess
February 2015
etc. These state level taxes are levied on top of these central taxes. This complex indirect tax structure meant that manufacturers base their inventory and distribution decision on tax avoidance rather than operational efficiency. They all have created stock transfer between inventory stocking points within states. This complex state wise indirect taxation has created an inefficient supply chain network and forced firms to take inefficient route of mapping inventory, transportation and manufacturing costs. For them cost benefit analysis between efficiency and taxation is in favour of taxation. The network instead of matching demand supply focuses on minimising the impact of indirect taxation. Most manufacturing companies and even logistics service providers have warehouses and offices in each state. With 33 states in India most large consumer durables companies have around 25 to 50 warehouses. If we compare this with advanced countries we find that they just have 6 to 8 warehouses which serves a geography of India size. Even developing countries have only around 10-15 warehouses with similar geographical expanse. The net impact on supply chain of Indian firms have been requirement of more space and inventory and thus leading to an increase in both capital and working capital requirement. These fragmented warehouses are small and inefficient, distribution cost is high, and material handling cost is also high. The cost of implementing IT
10
infrastructure is also high. Thus both manufacturing organisations and logistics service providers are caught in this inefficiency trap. GST will change the landscape How is GST going to help companies plan their logistics better? What is GST? What are the taxes that are going to be subsumed in GST? Will all this lead to a more efficient and competitive landscape? To say that India's tax structure has a significant impact on supply chain design is an understatement. Products in India are taxed twice first by the central government and then by the respective state governments. CST forced many companies to set up warehouses in their state of operation rather than pay CST. Excise duty with a culture of selective regional exemption has forced firm to choose locations which may not be the best choice leading to a huge logistics cost. With different forms of value added tax and custom exemption in Special economic zones have made supply chain design a challenge and eroded supply chain profitability. The planned GST system seeks to replace around fifteen state and federal taxes and tariff for a single point of sale. It is a comprehensive form of a tax based on a uniform rate of tax for both goods and services and GST is payable at the final point of consumption. The fundamental issue with GST still is the revenue neutral rate of GST which will be acceptable to both centre and state governments.
SCM WORLD
This tax according to the empowered committee is 27 percent. This rate is exceptionally high when compared with other developed economies and competitive emerging economies. However the earlier rate of 12 percent suggested by the empowered committee was abysmally low. The empowered committee of state finance ministers and the government of India needs to work out a rate which will be acceptable, minimise conflict between the state and the centre and pave way for development of a common domestic market at the same time resulting in revenue buoyancy and higher growth of the economy. Towards more rational SCM landscape A common market with a uniform tax structure will help firms improve their physical and information supply chain resulting in a massive gain in financial supply chain. It will free organisations to locate their distribution and warehousing centres purely based on tax consideration. Rationality will emerge in supply chain design, location and structures. Intraand inter-state transactions will incur equal tax liability and tax considerations and will no longer hamper operational efficiency. Companies will be able to optimise their end to end supply chain with more rational choice of design and locations in supply chains.
February 2015
A study by Accenture clearly indicates that there will be reduction in number of warehouses with the same service levels, reduction in freight cost due to consolidation of freight. The growth opportunities for 3 PLs is expected to come prominently from warehousing and end to end supply chain opportunities. Reduced documentation and lower overhead will also make them more efficient. Indian transport firms will also find relief as they will save around 24 to 48 hours that they lost in dealing with formalities and paperwork at various check post. GST will also improve the cash flows. It is too be paid at the point of sale and not manufacturing. It will also open up broader availability of credit in interstate transaction. GST will help to enrich the information in the supply chain. The CFAs will no longer be required as businesses will no longer be worried about taxation due to interstate transfer. This seamless flow would bring more transparency into the supply chain and reduce the waste lying
12
at each level of supply chain. Challenges Ahead A common market with common tax will pave way for the firms to restructure their supply chain. In the new GST era, the firm will have to think what should be the manufacturing location. What should we manufacture at each point? Which distribution center do we need? Where do we locate the regional distribution center? What is the optimal flow? Direct shipments or transfers? Should warehouses be consolidated how are our working capital requirement going to change? How do we design our logistics network? How will firms realign their information technology with the new supply chain design? How and with whom do we partner to create a seamless supply chain? Managing this restructuring and transition will be crucial for organisations and it calls for a complete new strategic direction. Are Indian firms ready for this transition?
A VIEW FROM THE TOP
H
um Do…….
For the past two years SCMPro has sought to inform and engage with you – the supply chain professional with a wide variety of articles, news and features. At each step we asked ourselves – what can we do to make SCMPro the magazine of choice to you. What will make you reach for it? This has been our driving force. And as we look back on these two years, we believe we have been to redeem ourselves credibly. We realize, it is you who matter. From you who matter it was a small jump to those who matter. As we were searching for a theme for the anniversary edition, we had an idea – why not invite a wide cross section of professionals – CEOs, Supply Chain Heads, Academicians and practice heads to contribute one or two pages to the magazine on any matter they feel is of relevance and importance to the supply chain sector. We are warmed by the response we got. We dedicate this issue to those professionals who spared their valuable time to pen down their thoughts for our readers. We hope you will lie them. Happy Reading
A VIEW FROM THE
TOP 13
February 2015
A VIEW FROM THE TOP
Debjit Roy Associate Professor in Production and Quantitative Methods at Indian Institute of Management, Ahmedabad
I
often get the question from senior management executives in supply chain and logistics domain – is there a magic mantra or a strategic tool that I can use to vet my decisions? While there is no magic mantra to eliminate decision risks and guarantee an optimal decision choice, but a structural framework may help decision makers to guide their decision making process and take a more informed choice. ? I usually say “Use PAID to get paid!� What am I referring to? The four letter acronym PAID refers to-
Performance measure ? Analysis of ?
decision trade-offs
Integrated ?
view across all functions and decisions
Design of ?
organizational structure and incentive systems
Let us try to understand the PAID framework by analysing a two-stage retail
February 2015
14
supply chain. The supply chain company has a strategic mandate to cut down costs. The company is in a dilemma whether they should supply products to the retailer from a single DC (option 1) or supply products to retailers from multiple DCs (option 2), see Figure 1. If the supply chain performance measure (P) is costs then an isolated analysis of the costs may not lead to an optimal decision. For instance, if we only analyse (A) the costs at the DCs in isolation then clearly option 1 results in lower DC inventory costs (due to risk pooling effects observed at a centralized DC), see Figure 2. However, the lead time from a central DC (one DC case) to the retailers may grow leading to larger inventory holds at the retailers. Such an integrated (I) cost analysis needs to be done and the overall supply chain costs need to be studied, see Figure 3. Functions generally work in silos and due to the large
A VIEW FROM THE TOP
scale of a supply chain network, the decision analysis is often limited to a particular level or a function. Such barriers need to be broken and the managers should have a foresight of their decision implications both upstream and downstream. The job of a manager does not end with a decision on the network reconfiguration. Managers need to design/ re-design (D) the organizational structure and develop the appropriate incentive mechanism to support the organizational change. The incentive mechanism should be tightly connected with the performance measure (P) that was driving the analysis in the first place.
Option 1
Option 2 R 1
DC 1
R 2
Lead Time
Low
R 3
R 3
DC 2
R 4
Figure 1: Two options for retail distribution (option 1: with one DC and option 2: with two DCs)
Lead Time
An Integrated View High
Supply Chain Inventory Costs Lead Time
Low
Low?
High
DC 1
R 2
Low
Low Safety Stocks at Retailers
R 1
R 1
R 2
DC
DC 1
R 1 R 2
DC R 3
R 4
R 3
R 3
DC 2
Figure 2: Analyzing the cost trade-offs by only considering one echelon (the DC's)
February 2015
Supply Chain Inventory Costs Lead Time
High Safety Stocks at Retailers
R 1
R 2
R 4
DC- Distribution Center R- Retailer
DC Inventory Costs
High
R 2
DC
An Isolated View DC Inventory Costs
R 1
R 4
R 4
R 3
DC 2
R 4
Figure 3: Analyzing the cost trade-offs by considering both echelons (the DC's and the Retailers)
16
High?
A VIEW FROM THE TOP
Arun Rao General Manager – 3PL & Warehousing Services; All Cargo Logistics Ltd.
T
Logistics & Supply Chain Management in India will be stretched beyond its limits in the next year or two.
he Indian economy is possibly at its best in terms of creating a positive sentiment to all stakeholders current and prospective. The Government is showing a renewed vigor in framing policies that have a bearing on the Indian market, and there is an increasing commitment from the industry in building the economy. Given this scenario, Logistics & Supply Chain Management in India will be stretched beyond its limits in the next year or two. There will be efforts put in by the industry to ensure that the supply chain performs as per expectations. Supply Chain Performance will continue to be driven by demands from consumer and investor / stakeholder. The dominant elements in the Supply chain that will be focused on
February 2015
20 18
in the next few years are: Sensing: The consumer will continue to demand for customized products and for features that will cater her taste. Sensing demand, supply, consumer needs, trends, competition, prices, performance etc. will need increased sophistication in the way data is being captured, analyzed and interpreted. Supply Chains will be far more segmented than ever. Internet, Communication Technology, Big Data, Cloud Computing will be technologies that will pay a big role in sensing. Companies will move away from having one single massive inflexible ERP to more specialized & focused tools to help them in these areas. Manufacturing: Manufacturing in India has evolved over the years. We still do not believe in ourselves and
A VIEW FROM THE TOP
systems to shorten lead time). Safety and Security systems will be strengthened. Digitization will gain a strong foothold and will be the differentiator especially in telecommunication and Printing/ Media industry. For example: There will be very little to differentiate between mobile handsets but the apps provided as downloads will be the line between acceptance and rejection.
in our capability to manufacture world class products. The most neglected aspect of Manufacturing - design will have to be brought to the fore front if we want to make India a manufacturing destination. When it comes to areas of material science like alternative methods of manufacturing (additive manufacturing) we have yet to build competencies to make a significant contribution to enhance supply chain performance. Robotics, 3-D Imaging, Digital Imaging, 3D- Printing are some of the technologies that will emerge as differentiators in the industry. Execution: This by far is going to be crux of India's economic resurgence. Infrastructure, Policies, and optimization will be the drivers in Supply Chain execution. Every step we take in the right direction in executing / delivering customer expectations is going to be crucial to performance. Supply chain networks will be redesigned, transportation constraints addressed in a collaborative manner. The transportation / logistics services will move towards being more organized. Last mile delivery (e-commerce) mechanisms will be stretched (will probably see use of newer methods of tracing, tracking and delivery
February 2015
20
Sharing / Collaborative Services: There are a few areas where in industry; companies collaborate albeit with very little conviction. This will change. There will be many more “Ubers” surfacing at various points in the supply chain. This will be a phenomenon that is just waiting to be caught up across the world. Reverse Supply Chain: It will not be just the chemical / hazmat supply chain that will be the ones who will shoulder the responsibility to ensure that there is not much damage done to the environment. Sustainability will be the responsibility of every company whether in manufacturing or services. Anything that has the potential to damage the environment will be carefully looked into and the supply chain designed to minimize the impact. Carbon mapping, carbon foot prints will become all pervasive. Finally, for us in India it is going to be “EXECUTION”, “EXECUTION” and “EXECUTION”. It's just that a large part of India still remains a challenge in terms of execution. We will see investments in making that link of the supply chain stronger than ever.
A VIEW FROM THE TOP
K Shankar Safety Head – CF Castrol India Limited
Indian Economy It was in early 17th century, trading expedition of East India Company arrived in India. Subsequently the economy of the Indian sub-Continent dwarfed that of British Isles. The strength of India was then, a huge, educated & motivated population! And today yet again, India is reclaiming its traditional role as economic power, with its strength of a huge, young, educated and motivated population to march forward in the next decade or more! The second fastest growing economy in the world, by 2025 is likely to be a global economic powerhouse. One study shares that the nominal GDP estimated around $ 7 trillion (against $ 2 trillion today), catapulting India into third place amongst the economies. Increasing awareness, greater per capita income, online visibility and social networking will lead to further micro segmentation of consumers. E
February 2015
commerce retail is already demonstrating its usefulness and it is expected to reach 25% of the total retail trade by 2025.
Supply chain Management process of end to end will continue to remain as basic requirement! But the expectations of service and assurance may change in the minds of consumers.
Increasing awareness, greater per capita income, online visibility and social networking will lead to further micro segmentation of consumers.
Just as product conformance, Delivery conformance will be of critical importance. Customer delight is apparent only when it meets his expectations in terms of quality, traceability and assurance of delivery in a sustainable manner.
Supply Chain for the New Environment Will the traditional five elements of supply chain process such as Design, Plan, Procure, Produce, and Delivers till hold well in the emerging scenario?
22
Any organization that will pursue a systematic process on all the three aspects will capture the imagination & loyalty of its consumers. While significant efforts have been pursued by most of the organizations in terms of product conformation and adopting technologies in terms of its traceability, the focus on assurance of delivery has been left to the discretion of unorganized third party transport
A VIEW FROM THE TOP
contractors and not integrated as part of the design!. More often than not it is by chance than by choice! As a consequence, 34.3% of the Unnatural death occurs on account of the Road Accidents. Incidentally India contributes to the highest fatality crashes in the world today. Truck & Lorry contributes the most in terms of the casualties and injuries. This is more on account of lack of design in the process of delivery by the corporate world. While when India emerges as strong economical leader, the situation will pose a greater challenge if it is not recognized and addressed. , As a responsible corporate organization, the mobility of its resources (both People and goods) will have to assume significant importance and should consider as its responsibility. It has to integrate it as part of its process and strive hard for its compliance in terms of its own expectations. While the expectations are clear, the process of managing the uncontrolled environment is easier said than done! This author shares his perspective and suggests a program gained from his working experience in this sphere. How do we address the assured delivery? A systematic approach and focus on the following will enable reliable transportation operations: ? Reduction of distance travelled ? Eliminate Spot Hired Transport
Operations ? Consolidate the transport operations ? Fit for purpose( Equipment) ? Dignity of labour ? A standardized and robust process ? Continuous improvement
February 2015
? Other benefits
Briefly we try to understand the expectations in terms of each and every aspect spelled above. Reduce distance travelled- The expectation here is to focus upon the reduction of distance travelled to reach the consumers. It is a continuous process of reviewing the network of the operations &de bottle neck the inefficiencies in terms of production, Inventory, Distance travelled & safer movement of goods to be the key considerations.
The growing vehicle population should worry all of us in terms of damage that it will cause to environment! Eliminate spot hired transport operations- Traditional transport model of operating through Middle men sourced trucks (spot hired) to be discarded and to encourage the ownership amongst transport contractors. Transport contractor who owns his truck has an ownership of his assets/ drivers and the support system. Consolidate the transport contract operators- Fewer the transport contractors, better the control and it helps in effective process management and controls and drive the message. Fit for purpose (equipment)- not all vehicles are fit for carrying all the loads. The equipment used for transhipment must be fit for purposes. This has to be a collaborative study between the equipment manufacturer and the users. Distribution of load, ensuring that the loads are secured and
24
vehicle that protects the load and its passengers should be the pre-requisite for delivery. Dignity of Labour- Drivers has already become sparse resources. Few studies suggest that at least 15% of vehicles are off the road due to driver paucity. It is important to value their services and responsibilities that they carry on our behalf. It has to be recognized as a job that needs a specialized skill, right attitude and behaviour. Such awareness program does not exist in the market, corporate should take it as its responsibility in imparting those skills and monitor their performances... This helps to build loyalty amongst driver fraternity. Standardized and robust processwhatever has been spelled as expectations above, should have been standardized aided by a robust process to monitor, evaluate, review and improve. Technology support may be required here to capture the equipment standards, Driver deployed, trips made, journey planning, adherence and monitor compliance. Continuous improvement- whatever is monitored can be measured and whatever can be measured will only improve. This is a continuous process and focus is required in terms of strengthening the standards. Other Benefits Carbon emissions are a cause of concern to the environment. The growing vehicle population should worry all of us in terms of damage that it will cause to environment! However the efforts that we put in place through the above process will help to mitigate the damage that may be caused.
204D,Ri ddhiSi ddhiCompl ex,Of f .S.V.Road,Opp.Pat karCol l ege,Gor egaon( West ) ,Mumbai400062. Tel :+912260020157/ 159
Mobi l e:+919821732929
A VIEW FROM THE TOP
GROWING IMPORTANCE OF
LOGISTICS Vijay Wadhwani Head (Supply Chain Management) Relaxo Footwears Limited
I
ndia spends nearly 14 percent of its GDP on and other allied industrial sectors have been logistics, as compared to an average of 8-9 working since the last six to seven years, reaping percent in developed economies. With high dividends. Across industries, firms are now globalization and shortened product life cycles, facing the need to fulfil the never ending 'value for Indian Industry is focusing to re-engineer its money' demand from end user and the ever supply chain and logistics activities to achieve increasing 'threat' of product supplies from lowcompetitive edge. Indian cost, small-sized players. Thus, companies are increasingly the stage is now set for logistics In a buyer's market, a integrating their supply chain to perform as an amazing change well-positioned and outsourcing their Supply agent and provide competitive Chain Management edge to companies. Logistics, by product may face requirements. This has virtue of being a function that rough weather in created the need for a range can work across the chain, will absence of proper of Logistics and now emerge from the shadows of Transportation solutions for other functional areas, as supply service to customers. the industry, ranging from chain coordinators and ensure solutions for multimodal better service to customers by transport, freight forwarding, material handling, means of phenomenal changes in the corporate warehousing, shipping, air cargo, packaging, mind-set aimed at quality delivery. inventory management and, more importantly, in The requirement of appropriate logistics system to integrating logistics and supply chain any enterprise begins with the concept of an Logistics is an area in which leading corporate integrated total movement and storage. Firms need enterprises, especially, automobile, FMCG, steel, a synergistic approach between different inter-
February 2015
26
A VIEW FROM THE TOP
department logistics functions, to deliver ample opportunities for cost saving, accelerate productivity and profitability by means of making just-in-time supplies and deliveries, minimizing inventory. In Relaxo Footwears, inventory cycle time was 35 days, But after implementation of detailed logistics system specifying uninterrupted flow of raw materials at each stage of production for different products, it has now been reduced to 14 days.
another country and sold in third country at a competitive price. For instance, in the leather footwear industry, leather for soles moves from Argentina to developing countries like India and the Far East; is converted to shoes; and then shipped to markets in the US and Western Europe. Efficient logistics allows a high level of international trade with comparative advantages of factors of production and distribution to different markets.
From the beginning of last decade, Indian economy is zooming towards market orientation in which customers are considered supreme in almost all sectors. Rarely do companies enjoy a monopoly and find themselves in positions to create brand patronization or keep loyal consumers waiting even for a few days. Logistics management prevents firms from facing these embarrassments. Furthermore, drastic changes have been taking place with regard to lifestyle, awareness and alertness of people, probably due to the expansion and innovations in mass media networks. The ever-expanding size of market from local to national to global due to liberalization of the economies like China, transporting goods with greater speed and economy have become vital. Raw material from one country is processed in
Logistics may further be used as an effective weapon to combat competition, which leads a firm towards non-price competition. In a buyer's market, a well-positioned product may face rough weather in absence of proper service to customers, who add value by pushing it, if properly motivated. On the basis of the foregoing points, it is clear that the fragrance of logistics has been pervading due to mounting pressure on firms to reach the market at the most opportune time and place at a least cost. In other words, we can say that logistics not only leads a firm towards productivity and profitability by elimination of wastage, curtailment of cost and acceleration of sales but can also be used as an instrument of core competency to offset competition.
27
February 2015
A VIEW FROM THE TOP
Rakesh Shah Director Supply Chain & Strategic Dealer Management, Merck Limited Go beyond Supply Chain: Before Supply Chain concept, in early day's company's MD was playing a vital role to manage many departments and managing overall business. Supply Chain concept started and many departments (Demand Planning, Supply Planning, Mfg Planning, Purchase, Business Development, Contract Manufacturing, Sourcing, Distribution, Warehousing, Logistic and International Logistic) comes under one roof. Supply Chain becomes a link between Marketing/Sales and all other service department to run the smooth operation/business. Supply Chain function becomes a challenging function to meet the dynamic marketing requirements, to match the service level, control overall business, control overall working capital, rationalize the cost and meet all the government rules and regulation (FDA, Excise, Custom, Regulatory, Taxation, NPPA, and DCGI). Slow growth and overall economic downfall is also effecting the operation. Also meet the expectation of chairman/MD/Board of the company to minimize the supply chain cost (Product cost including service cost) without effecting the service level is the key challenge for Supply Chain. Continuously starving and facing current challenges by Supply Chain: To meet CGMP, GDP, Label claims environment for the product, Cold Chain Management and services, Price cutting for essential products by Govt (for India), State wise different tax structure, Internal and external audits, Logistic infrastructure, Inflation, Oil prices, Currency fluctuation, Huge variation in the products
February 2015
pricing between countries, unpredictable molecule band in the country, Track and trace system imposed by Govt to pharma industries, right vendors and association influence (India) in the business. Also many companies have not consolidate their sub department under one roof Supply Chain and struggling to give the best services to customer, rationalize the cost and overall ownership is missing in the company. With all the challenges Supply Chain department is managing and providing the best services, managing cost very well and having huge influence in the business in the company. Key initiator on Innovation in the process, business, services and cost rationalize is way of life for supply chain head. Continues improvement in area of: process, cost, service level for the organisation is key mantra for Supply Chain person. Supply chain department is going beyond the reach and now managing generic (domestic and international) business, involved in the strategic business change management, proactively involved for how to expand the business, approach Govt to have public private partnership model for the society and brand, partnership with insurance/bank and helping customer and now playing a role as a VUCA (Handle any Volatile situation, Uncertainty, face the Challenges and Ambiguous situation) leader. Supply Chain has to play Entrepreneurial role in the company and collaborate with all the departments. To create a value and to have a visibility of Supply Chain in the company is the role of supply chain head. Supply Chain department is heart of the company with many issues, challenges and hopes.
28
Initiative
February 21, 2015, 'The Orchid', Mumbai Demand Planning Forum celebrates the demand planning and forecasting function in Indian companies, by recognizing and sharing the best practices adopted by both individuals and companies. ISCM invites top companies to share with it the demand planning process. 09:30am to 09:40am Welcome Address: Girish V S – Executive Director ISCM, Editor SCMPro. 09:40am to 10:10am Keynote Address: Managing Demand Planning in Uncertain Times by Dr. Rakesh Sinha, COO, Godrej Consumer Product Ltd. 10:10am to 10:55am Track 1: Understanding Variability and Tackling it through S&OP by Pratin Vete, Associate Director, Performance Improvement, Ernst & Young. 10:55am to 11:05am Tea Break 11:05am to 11:35am Track 2: Forecasting Model Error and Performance Management by Dr. Rakesh Singh, Chairman, ISCM 11:35am to 12:05pm Track 3: Forecasting and Demand Planning in Agrochemicals by Susheel Mittal, Supply Chain Management, BASF 12:05pm to 12:45pm Track 4: “New Product Forecasting- The Next frontier’ by Nilmadhab Mandal, Practice Manager, SAS India. 12:45pm to 01:45pm Lunch 01.45pm to 02:05pm Track 5: Big Data & Predictive Analytics by Dr. Neeraj Hatekar, Director Department of Economics, Mumbai University. 02.05pm to 03.20pm Track 6: Panel Discussion- Way Forward 03.20pm to 04.05pm Presentation by three selected Companies followed by Award Ceremony 04.05pm to 04.35pm Valedictory Address
Who Should Participate?
Why Should You Participate?
The Forum is open to product managers, marketing
£ Benchmark yourselves against the best in the Industry.
managers, corporate planners, market researchers, or
£ Hear what Demand Planning and forecasting will look like 3 to 5
professionals who prepares or analyses forecasts as part of their job responsibilities.
£ Improve your company's forecasting accuracy and the value and
All corporates who have a formal demand planning and forecasting function are encouraged to participate under the corporate platform.
years from now. effectiveness of your forecasting and planning team. £ Get your team to learn and make your Demand Planning more
productive.
Supported By
Registration fee: Rs. 7500 + Service tax 12.36%. For registration, contact info@iscmindia.net or call 022 60020157/ 59
A VIEW FROM THE TOP
S. A. Mohan CEO , Maini Materials Movement Pvt. Ltd.
S
upply chain management primarily enables a company to satisfy its customers' needs. Current logistics complexity in the form of fragmented channels, increased product variations, and growing customer expectations for customized solutions, traditional measures often fail when pursuing strategies to satisfy customers. Key Trends Today's networked economies, forces companies to collaborate with partners both vertically and horizontally in their Omni-supply chain network, and these partners expect them to integrate their processes and systems and hence adopting network thinking rather than company thinking. As global footprints expand, logistics performance as measured by delivery reliability has deteriorated, due to increasing customer requirements, greater volatility and market turbulences, problems with infrastructure and talent shortages at both the operational level as well as the planning. Companies are now recognizing the growing need for investments in new
February 2015
technology. Investment in “big data” analysis tools is on the cards within the next five years, seeking increased planning and control outcomes through developed capabilities around the comprehensive handling and intelligent connection of data. New wave of decentralized automated network technologies is in their infancy. In SCM, trends and strategies for managing risk around demand and planning are now ramped up. This is of course, to mitigate of internal and external risks. Supply chain domain - future expectations In the recent future we can expect that mainstream supply chain activities embedded with artificial intelligence to be design ready for serving the base of the pyramid, increased importance of service chains over product chains and more and more adoption of proactive rather than reactive strategies to tackle the upcoming challenges constantly questioning the company's logistics/ supply chain capability. The increased importance of pre- and post-sales service, the ability to recognise the micro-segment with a
30
supportive supply chain footprint, and to hone in on the consumer targets are deemed to be most relevant across the largely manufacturing-centric group. Technology to support SCM will primarily be “on tap.” As we step back and decipher the implications for supply chain practitioners, it is abundantly clear that the ability to create differentiated and multiple supply chains and to embrace a service-based culture is of paramount importance. These capabilities, coupled with the need to service unique micro segments in a profitable manner, continue to be high on industry leaders' agenda. Fostering open collaboration with trading partners, improving enterprise supply chain risk management processes and incorporating in real time local regulatory measures will definitely impact the perception of supply chain. Growth and progress will come from anticipating and capitalizing on the emerging mega trends and creating incremental value. Standing still is not an option in this dynamic industry. Firms will need to align with the evolving needs of the industry, if they are to be relevant.
A VIEW FROM THE TOP
Noshin Kagalwalla Managing Director, SAS Institute (India) Pvt. Ltd.
I
specified constraints such as required lead times, costs and targeted service levels.
ndian manufacturers have a golden chance to emerge from the shadow of the country's services sector and seize more of the global market. With the government's 'Make in India' initiative and focus on congenial policy for the industry gaining momentum, manufacturing is poised to take center stage. Indian manufacturers have so far lagged behind their global peers in key operational areas including production planning, supply chain management, quality systems and process. However, this is set to change as the supply chain leadership in India is poised to unlock the value hidden in the data and leverage big data analytics to address the bottlenecks and drastically reduce operating costs.
On the quality front the manufacturing industry has made tremendous strides toward higher quality, all thanks to the contribution made by gurus such as Deming and Juran, and initiatives like TPM. However, with the adoption of Internet of Things (IOT) and social media, the quality bar is being raised faster than manufacturers can keep up. Here too analytics can help. For instance, quality-centric predictive analytic and visualization technologies can provide a holistic view of quality across the enterprise and throughout the entire product life cycle.
However, for an effective use of analytics, businesses need to have an enterprise-wise analytics framework in place. This makes it easy for them to use their data assets for value creation which in turn contributes to the strategic transformation of the organization. Additionally, they need to focus on data management, which takes the information from multiple sources and prepares it in such a way that analytics can be applied and insights derived. These insights can be reported on the web and mobile devices to get information for decision makers when decision makers need it.
Advanced analytics plays an important role enabling companies to increase quality, improve reliability and get higher yields. Furthermore, with tighter controls and more efficient processes the rework and scrap rates can be reduced. For example, by deploying Statistical Process Control (SPC), a process manufacturing organization can identify the reasons for large variations in end product quality by plant, item and specification. By identifying the reasons for these variations and isolating the factors, cost of production can be reduced which in turn can significantly improve profitability. Predictive models can be used to achieve advanced process control (APC). Moreover, by predicting events that can cause outages, the solution can help reduce the amount of unplanned maintenance and maintenance costs.
Today, there is a growing popularity of data driven forecasting, where data from all demand and replenishment planning processes are collated and analyzed to generate accurate weekly forecasts for setting sales goals, production levels and distribution plans. However, the sign of a true demand forecasting tool is when it has the capability of also incorporating the effects of various factors such as sales promotions, marketing events, and other external events (e.g., holidays, severe weather, government policy etc).
Analytics have also the capability to integrate text and structured data across the service chain to issue early warnings of problems, reduce time to identify root cause and minimize the size and scope of recalls. It can also help in addressing downstream quality issues, which can significantly reduce customer satisfaction rates especially when problems appear after the product has been manufactured and sold.
Another area where analytics can add value is delivering higher accuracy in new product forecast. Intelligent data mining methods are used to build a forecast using the historical data of groups of existing products with similar attributes. Additionally, to ensure an efficient supply chain and increased customer satisfaction, mathematical constraint based optimization can be used, which calculates optimal inventory levels and replenishment policies based on user-
Going forward, an integrated approach towards analytics will make manufacturers more competitive by enabling them to exploit existing value chains to the greatest extent possible, generate new value chains that can drive substantial profit or significantly cut costs.
31
February 2015
A VIEW FROM THE TOP
Ravind Mithe Partner, Management Consulting KPMG Advisory Services Private Ltd.
I
n my view India is a melting pot of several supply chain issues. As a developing economy our manufacturing plants are not well designed, as most have evolved over the years through haphazard capacity expansions. This leads to bottlenecks, scheduling challenges, unplanned downtime and rework leading to unreliability of manufacturing output. Most of the manufacturing companies have a large vendor base that is not very compliant on delivery schedules. We don't have a mindset to go for single source as it is seen as too risky hence we live with large number of inefficient suppliers who always feel threatened. Indian logistics industry is still fragmented and road infrastructure is poor adding to delays in inbound and outbound. For distributor lead B2C segment, the network is mostly consisting of unorganized CFAs and distributors who still remain at arm's length. Indian managers are still using Excel spread sheets even though many companies boast of their ERP environment. To top it all the domestic demand is unpredictable due to complexity of our markets. Indian manufacturing companies have been
February 2015
32
focusing on supply chain improvements for last 25 years from early nineties. Initially focus was on manufacturing capability followed by ERP solutions and now supply chain integration is the buzz word. But all this has always been like seasonal flavors. That needs to change if we have to move from just slogans to making manufacturing in India a competitive edge. Looking from supply chain functional view, barring a few, it is largely siloed as Procurement function, production planning and dispatch with sales team responsible for last mile availability. Thus for managing a supply chain in Indian context one has to be a “Godess Durga” with all hands fighting with more enemies than the hands. No wonder that the supply chain managers are the most hassled lot fighting multiple fires at the same time. For “make in India” to be successful and to make manufacturing as the backbone of economy we have to invent our own “Supply chain model”. Given that many of the issues will remain for foreseeable future the Indian supply chain models
A VIEW FROM THE TOP
have to be designed in terms of following important dimensions. 1. Lean Manufacturing: Use of basic Lean concepts in manufacturing specially concepts like Kanban, dedicated small value streams, TPM, 5S, Kaizen and multi-skilled work force. All aimed at making manufacturing fewer complexes. To my mind “Lean” thinking and capabilities have to be the foundation of our supply chain For “make model.
service providers who bring superior capabilities than them. Good news is that such players are emerging fast and soon we will have industry specific expertise.
5. CEO Focus: Traditionally Indian CEOs have focused on markets and finance. But now the CEO focus clearly has to be on supply chain. There is a need to have a longterm view on supply chain which today remains restricted to cost in reduction and availability in short India” to be term. Promoting supply chain 2. Supply Chain Synchronization: successful and to culture will be the key focus area For years CEOs are looking for for manufacturing CEOs. make “click of a button” solutions to Focused efforts are needed on planning and have ended up manufacturing as inculcating right behaviors across having very complex models the backbone of the business that will promote forecasting or scheduling which economy we have supply chain thinking. have not helped. What we first Dismantling silo mindsets and need is a robust and integrated to invent our own turfs, job rotations, enforcing planning process with well-defined “Supply chain collaboration through KPIs, supply chain vision, clear and developing “whole system” view model”. simple rules & policies, wellanalytical ability and customer structured SNOP Meetings, orientation are the key tasks in correct & connected KPIs, clear front of the manufacturing roles followed by a good ERP solution. company CEO to make the company successful in “Make in India” environment. 3. Supply Chain Structure: An integrated supply chain function reporting to the CEO that takes While the task looks complex and daunting it is end to end responsibility of product availability at not that difficult. Fortunately today's CEOs have farthest end of downstream. great abilities and are dreaming big. Especially when Indian is dreaming big under the new 4. Bring in experts: Companies have to aggressively leadership. handover the down-stream distribution to 3PL
33
February 2015
A VIEW FROM THE TOP
Pirojshaw Sarkari CEO, Mahindra Logistics
I
ndian industry spends a high 14% of its GDP on logistics, compared to 10-11% in Europe and 9% in USA and nearly 22% of aggregate sales is tied up in inventories in the supply chains. The cost of logistics remains high due to various factors including a dearth of large specialized, integrated third party logistics firms, using effective technologies and also inadequacy of infrastructure. This indicates that there is ample scope for Indian companies to streamline their supply chain process and become more competitive.
unwilling to invest in technology and share data with their logistics service providers. I think the government should have a committee for encouraging IT-integration in logistics and supply chain. Lack of visibility and transparency of operations is one of the biggest hurdles this industry is facing. Automation of logistics processes can bring in standardization, predictability & accountability in the industry, thereby making it more professional. Digital supply chain, has the potential to meet increasingly complex demand requirements with light speed and low costs by 'shipping' software or other digitised product to the point of consumption. In recent past some of the 3PL logistics players like Mahindra Logistics have invested significantly in technology to provide integration of all logistical activities.
The Indian industry is yet to match the supply chain standards of developed countries and tremendous potential exists for national level integration of supply chains. There is also a need for external support to the industry by way of supportive government regulations and policies and development of infrastructure.
The role of supply chain has shifted from reducing operating costs and overall inventory levels, to improving customer service and speed of product delivery to markets. This has necessitated revolutionary changes like collaboration with stakeholders for consolidation, asset utilization, network optimization etc. We, at MLL, have practiced collaborative logistics by partnering with other third party logistics providers in order to minimize the capacity constraints in transportation through backhaul flows and vehicle utilization. This collaboration has empowered us to leverage each other's strengths in transportation management.
However, with the onset of the new economic reforms like the 'Make in India' initiative, and infrastructure development projects like DMIC (Delhi-Mumbai Industrial Corridor), there seems to have been a revival of hope and excitement about the growth trajectory of the Indian Supply Chain industry. It's not just the domestic market which is in focus. The establishment of ICEGATE, the Customs EDI Gateway Portal of Government of India which provides a single window integrating customs, excise, and all other relevant agencies involved in EXIM clearances has opened a new 'gate' for international trade & commerce.
Apart from collaboration, there has been an increase in the perception of innovation as a service differentiator. There is also increasing awareness on carbon footprint & sustainability. Many logistics players have undertaken driver welfare initiatives.
However, one core concern that still needs to be addressed is that the adoption of technology in most supply chains in India is still very much in its infancy. Although there is a high awareness among Indian Tier-1 companies, the usage of productive-enhancing tools such as data analytics, ERP, RFID etc are still at low levels especially among Tier 2 companies due to challenges such as cultural, financial, organizational and technological barriers. Many companies, till date, are
February 2015
Hence, though the Indian logistics industry still has a long way to go, it is, according to me moving in the right direction. And with the pace at which we are witnessing developmental reforms in India, I am confident that we will definitely reach global standards of service & quality in the years to come!
34
A VIEW FROM THE TOP
Suunil Dabral CEO SSI Schaefer
N
ew Year is the time both to glance back and to look ahead, and that has always helped us to comprehend the path we all are heading towards. The year 2014 has definitely been a basket of mixed occasions; however 2015 may be considered as the year for Indian Logistics'! Cold Chain Industry will speed up in the coming years In spite of being the second largest producer of fruits and vegetables, India has seen tremendous loss of these produce due to spoilage and poor cold storage facilities. I think a big lesson from 2014 is that despite of the government trying to introduce initiatives and policies for this sector, the gap between the total produce and the storage facility available for the same has been huge. With the demand at an alltime high, along with a growing number of incentives, many companies are
expected to move towards venturing into the cold chain industry in the coming years. On a positive note, the introduction of certain direct tax benefits related to warehousing and supply chain management were provided in the last budget, which facilitated reduction in the duties and taxes related to the equipment's/ machinery used in the cold stores. We hope that companies will make use of the government support to have a state-of-the art cold store with personalised warehouse solutions along with innovations to best use the space available. This should be one of the trends to look out for in the year 2015. As E-commerce matures in India, supply chain industry will emerge as a parallelgrowing industry
Having the best product is definitely a need; however whose product reaches the customer first becomes a competitive advantage.
2014 was a promising year for the Indian E-commerce industry with the biggest deals and investments from the
35
February 2015
A VIEW FROM THE TOP
Indian E-commerce industry with the biggest deals and investments from the top players of this industry. Various initiatives and promotional activities undertaken by the market players witnessed a tremendous surge in the E-commerce platform and marked an increase in online shopping. Having the best product is definitely a need; however whose product reaches the customer first becomes a competitive advantage. New generation consumers are very demanding and they have the “I need it right now� attitude in order to suit their lifestyle. The speed at which the E-commerce industry is growing is quite evident. Changing trends in consumer demand and behaviour will soon call in for Just in time and quick response inventory management. As far as 2015 is concerned, companies will have to strategically design their supply chain in a way to meet the unpredictable demands of the future requirements. This will be the time when the expertise of the Intralogistics solution providers will come into picture! Automotive Industry has come a long way Several factors are going to decide how the automotive industry is going to perform in 2015. After a downward spiral in 2013, car sales gradually picked up in mid-2014 due to several factors like the decrease in excise duties on small cars from 12% to 8% and the formation of the new government. Vehicle sales across categories registered an increase of 5.68% as compared to 2013. The big challenge that emerged in the year 2014 was the diesel deregulation, wherein the customers started migrating back towards petrol cars and several carmakers which recently bumped up diesel engine production capacity are in for a serious setback.
February 2015
36
The sector has witnessed slow but sustained growth and by 2015, India is set to be the 4th largest automotive market by volume. This will entail a sustainable domestic demand and initiatives like 'Make in India' which will drive more automakers to take up the export growth model and manufacture and export from India. Therefore there will be a need for further investment in increasing production capacity and warehousing capabilities to meet the growing demand in domestic as well as export markets. This will give tremendous opportunities to the Warehousing and Intralogistics business in India. GST implementation will have a strong impact on the logistic industry Looking at the progress and initiatives taken by the government in order to roll out GST is a clear indication that future holds a better picture. Implementation of GST will definitely reduce the tax burden and motivate manufacturers to focus on matters like facelift of the warehouse, up gradation in technology, Automation in Material Handling. With all hopes from the new Indian government under Prime Minister Narendra Modi, massive changes are expected in the coming year which should work in favour of the Logistics Industry. The business commitment and policies facilitated by the government for the foreign companies are clear signals inviting the international companies to support the economically friendly policy of the new government in order to implement their own business interest and support the country to becoming a modern industrial site. These developments will offer enormous opportunities.
A VIEW FROM THE TOP
Darryl Judd Chief Operating Officer, Global Operations Logistics Executive
I
t has been a privilege to be part of the SCMPro team in contributing to the dialogue on important supply chain issues over the last two years. In this short time supply chain and logistics has gone through some major changes in India and across Asia. There have been layers of complexity and customization added to the approach taken in manufacturing, logistics, and supply chain to meet the requirements of the Indian Continent and beyond. As a result, these sectors have grown in prominence, resulting in a deeper understanding of best practice and application to business. Looking at the year ahead, 2015 will continue the development of Supply Chain and Logistics in India as the country grows and strains to meet the ever more complex requirements of fast developing industries, changing wealth distribution and the need for greater efficiencies and performance with the supply chain. In order to keep up with these rapid improvements there needs to be a concerted
effort to develop people skills in supply chain and logistics functions. According to The World Economic Forum, India is not unique in having skill shortages. Around the world Human Resources and Recruitment professionals as one of their biggest challenges often tout the problem of the “war for talent�. It is not so much that there is a lack of staff but more that there is a lack of refined skill sets. These skills as required by Supply Chain professionals are also constantly changing and evolving. Rapid innovations in technology have rapidly boosted the supply chain and logistics capability. Larger, more geographically challenged workforces require greater soft skills in communication and leadership. This publication has performed a great service in increasing the awareness of these skill shortages so that we can address this issue. Greater collaboration between professional bodies, academic institutions, governments, and industry is required to create a new training paradigm that will provide an adequate solution.
37
February 2015
A VIEW FROM THE TOP
In order to keep up with these rapid improvements there needs to be a concerted effort to develop people skills in supply chain and logistics functions.
Education needs to move out of universities and training institutions and into the workforce by way of shorter, more flexible online modules that can be tailored to meet rapidly changing developments in industry. Moving away from formal university training and to an online solution that offers formal recognition but which has closer ties to industry would be of enormous benefit. This paradigm would up-skill staff at a faster, more cost effective rate. In addition, these benefits would make it easier to cascade down through the different levels of the workforce. In contrast formal courses such as an MBA that do not have the proximity to changing industry requirements cannot often keep up with the changes in technology and work design and do not move fast enough to cater to these changing demands. Online learning is providing a major way of solving this shortfall, by connecting
38
industry with learning institutions via real-time modalities. This new approach is giving private companies a more competitive advantage and will continue to do so in the year ahead. By creating a leaner, more focused approach to meeting skill shortages, online learning is revolutionizing the training space and emerging as a new, meaningful way of connecting. However, there is still a lot to do. Governments, industry bodies, and the private entities need to work together to solve the growing people issues caused by increased complexities in managing supply chain and changing market demands. Online training and other modalities that both promote training solutions and bring awareness to the growing gap in supply chain and logistics skill sets are desperately required in order to meet the challenges approaching us in the future.
A VIEW FROM THE TOP
K.U.Thankachen Managing Director Central Railside Warehouse Company Limited
W
arehousing is as a major game changer in the field of logistics. It is adding value to the transportation and also provides opportunities for additional value added services, while at the same time reducing the overall logistics cost. It is a crucial component of supply chain management and accounts for about 20-25 per cent of the total logistics industry. Indian warehousing players face multiple challenges and bottlenecks at various stages of their operation life cycle leading to fundamental issues of long term sustainability. Infrastructure is one of the most important components of the warehousing sector. An efficient warehousing operation hinges critically on high-quality supporting infrastructure. Escalating costs and challenges in land acquisition and development pose major challenge to the developers. A majority of the Indian warehousing players today have inefficient methods of storing, handling and monitoring of goods. They also suffer from stock visibility issues, stock traceability, higher pilferages and damages. There is an absence of standardised operating processes and procedures at warehouses. The material unloading, handling, storing and loading
are more often carried out in an ad-hoc manner. This not only builds in inefficiency but also leads to many mishandling problems including damages and subsequent increases in cost. The warehousing sector in India, with some exceptions, is characterised by low technology levels that act as a handicap in the emerging Indian and global market. Limited real-time visibility with manual inventory management, warehousing management, documentation, billing and reporting has raised doubts on the sustainability of a large number of warehousing players. The lack of training institutes adds to the woes of the warehousing sector. Evolving warehouse management processes and operations with more demanding customers, lack of attraction for new recruits arising from poor working conditions, relatively less attractive incentives and benefits, and the emergence of attractive alternate career options are reasons that contribute to the skill shortage in the Indian warehousing sector. The sustainable growth of the warehousing sector will rely heavily on how effectively industry players and the government can work together to
39
address challenges in the long term. Many positives are emerging in terms of policy and practices which generates immense optimism for this sector. Proposed implementation of goods and services tax, relaxation in FDI norms, mushrooming E-Commerce ventures, growth in logistics parks and FTWZ segment, development of cold storages, increasing consolidation, growth in outsourcing are some of the key drivers that will give the necessary fillip to growth in this sector. Warehouses are now stressing on having efficient inventory management systems and adopting technology solutions to streamline operations, improve turnaround time and process consignments. Greater emphasis is being laid on value added services such as consolidation, labeling, packaging and re-packaging, bar-coding, distribution services, custom clearance service, customer service and reverse logistics. Increase in IT adoption and knowledge infrastructure is also seen to provide a boost to the growth and maturity of warehousing players in India. The momentum gained from ''Make in India' initiatives will translate to ''move in India' and help the industry to achieve its true status and recognition in the long term.
February 2015
SME CORNER
IT is for SMEs SMEs are in focus – banks financial institutions and governments are focusing on enabling the SME. There is a newfound love for the SME sector. A sector which generates 40% of exports and 40% of the manufactured output is sadly neglected. Across the spectrum, the SME has very little clout in the value chain. Their lack of resources and skills makes them some of the most inefficient and costly part of the supply chain. We at SCM Pro realized that the time has come for India to harness the potential of its SME sector. Managing editor of SCMPro, Girish V S explores the role of supply chain management in SMEs. he main focus of any firm is to provide right product to the right customers at the right cost, at the right time, with the right quality and right quantity. This is a challenge for a Small and Medium Enterprise due to a variety of reasons – from lack of a clear understanding of the customer requirements, to ability to source efficiently to produce and distribute in time, and at the same time fund the operations at an acceptable cost - all pose major challenges. The short-term strategic goal of SCM is to reduce cycle time and inventory and thus increasing productivity, whereas the long-term goal is to enhance profits through market share and customer satisfaction (Tan, 2002).According to a study, the quantified benefits of
T
February 2015
SCM include lower supply chain costs, improved productivity, inventory reduction, forecast accuracy, delivery performance, fulfillment cycle time and better fill rates.
In a survival of the fittest scenario, the SME will have to adopt technology help in their SCM processes. There are various studies that have evaluated the benefits of IT use in SCM among SMEs. Some of the potential benefits include increased customer service and responsiveness, improved supply chain visibility,
40
improved communication, risk reduction, reduced product development cycle time processes, reduction in duplication of interorganizational processes, inventory reduction and improvement in electronic trading. The structure and size of SMEs defines how they will use technology. A typical SME will have a few suppliers from whom they source material and even fewer customers – often a few large firms from the majority of SME customers. This makes them vulnerable and dependent on their large customers. To survive in such scenarios, the SME owner/manager will have collaborate closely with the customer and supplier. This close collaboration offers the SME an easy access to
SME CORNER
technology, best practices and processes as followed by the large enterprise. The SME and the large firm form a symbiotic relationship, where the SME will gain technology and best practices, while giving away a part of their profits. But SMEs suffer from quite a few challenges. Shortage of skilled personnel is a major constraint in an SME. Another major challenge is finances – loans are difficult to come by, alternate sources of financing are horrendously expensive and the payment terms from their customers are most often loaded against them. They lack the ability to drive a hard bargain and end up with payment terms that are not very attractive. This combination of lack of finances and skills leads to a slower adoption of technology. SMEs have been hit disproportionately hard by the severe squeeze in financing, but they have shown a resilience and flexibility that bodes well for their ability to capitalize on the innovation and evolution. Most SMEs have a huge dependence on their customers. To add to the problems, they are hemmed in by a tough external situation - such as changes in the economic cycle, policy shifts, geo-political developments, and changes in technology – all these have the potential to create problems for the SME. These barriers would impede the implementation of SCM in SMEs. There is a silver lining in the SME story – their flatter hierarchy – where most often the owner makes all the decisions – helps them be more responsive to their customers. This also helps them to adopt best practices easily. Once the owner is convinced, implementation will not be a difficult task. In such a scenario, how can Information Technology help an SME manage their supply chain?
The start of any IT program will be with reasonably accurate forecast of the product demand – if the SME can assess the demand for products and services better, they will be able to plan procurement and production in a cost effective way. The increased forecast accuracy in turn will lead to a lower inventory, which will free up precious finances. Improved forecast accuracy will also enable the SME to plan his supply chain activities better, leading to a lower total cost of the supply chain.
To effectively plan, monitor and control such a complex network, we need a set of information technology (IT) tools. But accurate forecast cannot be done without the use of a robust IT infrastructure. This is the first source of IT for SMEs. In a survival of the fittest scenario, the SME will have to adopt technology help in their SCM processes. If nothing else, the finances freed up from lower inventory alone should help the SME owner adopt better IT practices. If India has to continue to develop, if India has to provide jobs for an estimated 20 million youth a year, and if India has to gain competitive advantage, supply chain management practices need to be augmented by information technology. Innovations enabled by information technology (IT) are creating new ways for firms to manage supply chain relationships. Large firms are already using IT to co-ordinate their entire supply chain - from procurement to
41
production to sales and services and the reverse flow of good past their use by date, and also to share information flows, including financial information along the entire supply chain. In fact, recent academic research defines supply chain management as “a digitally enabled inter-firm process capability.” In the digital supply chain, the stake holders are linked through the flow of information as opposed to the traditional method of integration by ownership. This change has resulted in the shift from the physical process – warehousing, logistics, and inventory linkage to information flow based integration. The information system includes data, process, resource, organization, analysis tools, methods, techniques and algorithms which concern Inventory, Facilities, Transportations, Cost, Prices, and Customers. E-Supply Chain ¢ E-Supply Chain Management is the collaborative use of technology to improve the operations of supply chain activities as well as the management of supply chains, over the internet or mobile platforms. An e-supply chain is a potential gold mine for an SME. The business environment forces SMEs to improve the quality of their products and reduce their manufacturing costs. This makes e-supply chain a certain winner.
The potential E-Supply Chain Transactions could be:
¢
Providing information across the supply chain.
¢
Negotiating prices and contracts with customers and suppliers
¢
Allowing customers to place orders
¢
Allowing customers to track orders
¢
February 2015
SME CORNER
Filling and delivering orders to customers
¢
Receiving payment from customers
¢
The e-supply chain can enable the SME to reduce costs at the same time improve collaboration and service quality. Emerging technologies like cloud computing and the falling prices of bandwidth makes it possible for an SME to embrace the latest in technology at a fraction of the cost. Planning and Scheduling Systems Today's supply chain is multi layered, spread across geographies and complex. To effectively plan, monitor and control such a complex network, we need a set of information technology (IT) tools. These systems are called A Planning and Scheduling Systems or PS. PS is used for information integration, inventory management, order fulfillment, delivery planning and coordination across the entire supply chain. PS focus on a very challenging issue in supply chains - the need to synchronize thousands of decisions at strategic, tactical and operational level in the complex environment. Basically, PS are computer supported planning systems that put forward various functions of Supply Chain Management, including procurement, production, distribution and sales, at the strategic, tactical and operational planning levels The dynamic nature of today's business makes long-range forecasting difficult. PS helps supply chain deal with demand uncertainty, forecasting, inventory reduction and optimized transportation costs. PS use operational data to analyze material flows in supply chain using historical demand for forecasts.
February 2015
The advantages of PS for SME's is that, PS helps in cost savings and price reductions, reduction or elimination of the role of intermediaries, shortening supply chain response and transaction times, gain a wider presence and increased visibility for companies, greater choices and more information for customers, improved service as a result of instant accessibility to services, collection and analysis of enormous amounts of customer data and preferences, creation of virtual companies and provide a level playing field for small companies who wish to gain global access to markets, suppliers, and distribution channels.
Cloud computing enables the SME to deploy IT resources – hardware, software, storage and network on a pay per use model, allowing them to scale up the IT systems and their requirements increase.
IT and the SME The operations of an SME are constrained by the lack of resources, managerial skills, finances and the ability to implement and use IT systems across their organization. However, competition and the squeeze on profits create a daunting challenge. As long as the SME looks at IT investment through the lens of cost reduction, they will find the ROI cannot be easily justified. As opposed to a ROI based approach, the
42
investment in information systems should be looked at more as value enhancers – the question that needs to be asked is not how much will I save, but, what value added services can I provide to the network that will help me improve my competitive position in the supply chain. Cloud Computing A typical user of cloud computing is the SME. Cloud computing enables the SME to deploy IT resources – hardware, software, storage and network on a pay per use model, allowing them to scale up the IT systems and their requirements increase. Cloud computing allows SMEs to reduce the upfront infrastructure costs, and focus on projects that differentiate their businesses instead of infrastructure. Cloud computing allows enterprises to get their applications up and running faster, with improved manageability and less maintenance, and enables IT to more rapidly adjust resources to meet fluctuating and unpredictable business demand – essentially putting the power of advanced computing in the hands of even the smallest player. There are multiple technology pieces that an SME can adopt for streamlining their supply chain operations. One significant issue that SMEs should keep in mind is – never buy technology because it is the latest or is available. The golden rule of IT for SME is – “Appropriate Technology” – technology that will help the SME maximize the money spent on IT, without sacrificing usability.
NEWS
SCM WORLD
KNOWLEDGE
CLASSROOM
ACADEMIC ADVOCACY
Managing and sustaining high performance in the supply chain, is the last part in this sixpart series. If you missed the previous publications and would like to receive copies of any article, or discuss any of the concepts and ideas that the authors have raised, then please contact the email address at the end of this article. Stephanie Krishnan, Joe Lombardo and Raymon Krishnan conclude the series. Introduction This is the final part of the six part series on Supply Chain by Stephanie Krishnan, Joe Lombardo and Raymon Krishnan. The previous articles in this series were: Part 1- Why do some find it so challenging to manage their Supply Chains?
Managing and Sustaining High Performance in the Supply Chain
Part 2- Understanding the Value of a Supply Chain Structure Part 3- Building and Sustaining an Enterprise Supply Chain Model Part 4- People and Competencies in the Supply Chain execution model Part 5- Understanding and Managing Risk in the Supply Chain Company and business performance are always at the forefront of the CEO's objectives and the targets set are usually around financial and marketing goals. As a support function, the supply chain's targets are often “enveloped” within these overarching goals, resulting in few specific targets for this key area. In part 3 we made reference to key performance indicators (KPIs) and quote: “It is relevant to note at this juncture that we should not confuse business KPIs with supply chain KPIs, which may appear to be similar but are not always the same. Supply chain KPIs measure the capabilities and performance of operational processes and flows. Supply chain KPIs would, generally, revolve around KPIs that measure “time”, “cost” and “quality” of supply chain activities and processes.”So how does this translate into high performance?
For more information on the articles or to contact the writers please email info@lscms.org
February 2015
44
KNOWLEDGE
How do we define performance of the supply chain? As illustrated in our enterprise structure diagram used throughout the series (Fig 1), it is the supply chain execution model that delivers the goals defined by the business strategy. The business model can change and be adapted to the various market and industry conditions, but it is the supply chain that executes the strategies of this business model.
To better understand these dynamics, we should delve deeper into the definitions of performance and of high performance. A simple definition of performance is executing what is expected, which implies aiming fora target or goal. The most common and most practiced performance goals associated with the supply chain are that of Time and Cost.
Having established this principle, we are able to formulate what are the expected performance factors of the supply chain. In part 3 we defined the KPIs of the supply chain as those revolving around “time”, “cost” and “quality”. If these are the basis of the supply chain deliverables, then we can define the supply chain performance as the optimization of company resources through a structure of Supply Chain Capabilities.
Figure: 2
The illustration in Fig.2, we see how the performance measurements of Time and Cost of the supply chain are derived from the Supply Chain Model. Time is defined as and Cost, defined as a percentage of sales of cost of goods sold. We could consider this as the optimized performance measurement of the supply chain model, if the parameters were applied across the whole organization and managed with an equal intensity.
Figure: 1
Managing capabilities to achieve high performance It all seems quite easy then: manage the resources and capabilities in the supply chain and in return you can expect a high performance. In principle that is absolutely correct, but this would only be possible if the surrounding conditions remained constant and nothing changed. However we all know that this is not the case in supply chains. The daily challenges are to deal with many variables in the business environment and the resulting resources flows.
However, this kind of optimized model and measurements of performance are not sufficient to guarantee the deliverables expected to achieve the business strategy goals. But as we cannot be satisfied on performance targets alone in the supply chain, we must aim for a high performance. So what does high As a support performance really mean?
The Adaptive High Performing Supply Chain A dynamic CEO is continuously anticipating changes in the business environment, leading his team to work on innovative solutions and enhanced product
45
function, the supply chain's targets are often “enveloped” within these overarching goals, resulting in few specific targets for this key area.
February 2015
KNOWLEDGE
offerings that will achieve and exceed the strategic goals of the business. The challenges of anticipation changes often requires a flexibility of priorities and an agility of execution. This approach could only be sustainable if the organization's business culture is able to adapt and proactively respond to changes within the shortest time horizon. An optimized supply chain model, would not be able to respond effectively to the challenges of anticipation without re-defining the model. To meet the new dimensions of the business environment, the supply chain model will need to also be adapted to the new parameters and conditions.
challenges and deploy the necessary capabilities, the current supply chain will need to be re-configured to an adaptive model. This means that not only must the model manage the new variables and intrinsic resource buffers, but it must also achieve the same or better performance levels from the expected deliverables, appropriately expressed in Speed, Agility, Time, Costs and Quality. But how can this are achieved?
Managing the adaptive high performance supply chain The performance characteristics dominant in the adaptive supply chain model, can seem to be contradictory to each other and it could be questionable as to how they could effectively work together. The key characteristics of this model (fast, lean, flexible, agile, cost effective) are the ones that need to be managed so as to deliver the high performance capabilities of the business.
Figure: 3
Being adaptive also means being flexible. However any degree of flexibility can only be achieved by allowing and managing variables and buffers in the supply chain. Introducing new elements in the optimized model will change the dynamics of the time and costs. In Fig. 3 we illustrate that by adding variables into the pipeline, will increase the supply chain time and by adding additional buffers in resources will increase costs.
However, the supply chain model has to meet the CEO's challenges of anticipation and respond to business changes, whilst delivering the goals of the business strategy.
February 2015
By allowing new dimensions into the optimized supply chain model, we are by default allowing and accepting a change in performance deliverables. This could lead to a recognizable degradation of performance compared to levels previously achieved. However, the supply chain model has to meet the CEO's challenges of anticipation and respond to business changes, whilst delivering the goals of the business strategy. To meet these
46
As supply chain performance deliverables become more demanding, they also become more complex. Managing the variables and complexities of the supply chain will require disciplined approaches and methodologies. Once performance targets have been set, continuous monitoring will be necessary and any deviations or excursions from the target performance indicators must be addressed as a matter of priority and immediate corrective actions implemented. It is such an attention to detail that will sustain performance and enable improvements and allow even more flexibility into the supply chain. The key is to learn to master and manage the flexibilities in the supply chain without any performance degradation. This can be achieved by following three simple, effective steps of defining and controlling performance. Adapting flexibility into the supply chain without performance degradation a. Define tolerance levels in relevant processes that will have small impact on KPIs b. Define process controls to manage KPIs
KNOWLEDGE
deviations and excursions.
line performance. In this case the overall delivery to the Customer will only achieve 85%.
c. Monitor & measure benefit ` flexibility model vs fixed structure.
A company supply chain performance is highly dependent on all contributors in the chain and the high performance of one function does not mean another weaker performance can be easily compensated.
This KPI chart calculation has been simplified to illustrate that a company supply chain performance is highly dependent on all the contributors in the chain and that the high performance of one function does not mean another weaker performance can be easily compensated. For example, poor inventory availability cannot be immediately rectified by increasing warehouse service level or transportation performance. The impact of having no stock on some items can be devastating in a key customer account.
Sustaining the High Performance deliverables Having defined all the parameters, monitoring the KPIs and controlling the deviations from the targets as described in the previous sections, will not be enough to sustain high performing supply chains. The successful supply chains are those that can achieve an integrated and collective overall performance. The CEO and his senior executives should typically define at least the Top 6 Supply Chain KPIs that will deliver the business goals. The KPI targets, actuals and deviations will be reported in the Performance Dashboard, available on a daily, weekly and monthly report for their review and management attention. In Fig. 4 are illustrated an example of the top 6 Supply Chain key performance indicators.
Supply chain performance deliverables would be most effective if they are designed and developed in alignment with the strategic goals and embedded into the contribution functions as part of the planning.
In this model the goal set is a 6 sigma target. Each function in the supply chain will have to achieve 98% of their target performance. In the blue column of the chart, most functions have achieved 98% performance and this would seem adequate.
Whatever the nature of your supply chain, understanding the interconnections and dependencies of each function in the supply chain will ensure clarity of vision of the business structure and require alignment of the execution capabilities required to achieve a high performing supply chain model. The full engagement of all stakeholders in supply chain performance management is a fundamental prerequisite to ensuring that supply chains are able to perform to the highest standard.
However the cumulative performance of each function will not be enough to achieve the business goal of 98% over all P performance. In the Overall Performance, it is evident that any deviation lower than 98% will degrade the bottom
For more information on the articles or to contact the writers please email info@lscms.org
Figure: 4
47
February 2015
NEWS
SCM WORLD
KNOWLEDGE
CLASSROOM
ACADEMIC ADVOCACY
The distortion of the demand data implies that the manufacturer who only observes its immediate order data will be misled by the amplified
Understanding
demand pattern.
Bullwhip
When a supply
chain is plagued with a bullwhip effect, results are quite paralyzing. These would include excess inventory, poor forecast products, and poor customer service due to unavailable products or long backlogs, uncertain
Dr. Rakesh Singh Visiting Professor of supply chain strategy and economics, Great Lakes, Chennai and Chairman, Institute of Supply Chain Management, Mumbai, Managing Editor, SCMPro
production planning and high costs of taking corrective actions. Rakesh Singh explains the concept.
he co-ordination function in the supply chain is measure greater than one indicates amplified order defined by the flow of information among the variability. members of the supply chain. Information is a very Holstrom in a study reports a supply chain where variability, important parameter of SCM and the noise in the as measured by the standard deviation of weekly demand, information flow contributes significantly to demand increases from 9 to 19, for two different variability. Information flows are required for product groups going from consumer deciding the production scheduling, The bullwhip effect demand to plant supply. Fransoo and inventory control and material flow between refers to increasing Wouters, in their study of four companies' the individual members of the supply chain. several retail stores found that the bullwhip variability of Distortion in the demand information as we effect was present significantly as one moved demand, further move up the supply chain levels is known as up from retail franchisee to distribution upstream in the the bullwhip effect. center to production. Levi, Kaminsky and supply chain as a The bullwhip effect refers to increasing Levi found that Barilla, the Italian pasta result of information major, was caught up in the trap of a variability of demand, further upstream in distortion in supply the supply chain as a result of information bullwhip effect. They found that variations distortion in supply chain, where company in distributors' order pattern had caused chain, where upstream does not have information on company upstream severe operational inefficiencies and cost actual consumer demand. Consequently, penalties for Barilla. The extreme variability does not have their ordering decision is based on incoming orders that Barilla received were surprising, information on orders from the next downstream company. considering the distribution demand for actual consumer This may lead to amplified order variability. pasta in Italy. Indeed, while variability in demand. aggregate demand for pasta was quite small, Demand coming from a lower company has orders placed by the distributors had a huge a lower variability than the demand to an variability. All The studies share a common upstream company. A measure of this bullwhip effect is the recurring theme: the variability of an upstream site is always variability of upstream demand - measured by the standard greater than those of the downstream sites. This deviation of demand, relative to mean demand - divided by phenomenon known as the bullwhip effect is due, in part, to the variability of the downstream demand. A value for this the effects of demand forecasting. In particular, they showed
T
February 2015
48
SCMPro CLASSROOM
that if the retailer, periodically updates the mean and the variance of demand based on observed customer demand data, then the variance of the orders placed by the retailer will be greater than that of the orders placed by the retailers and in turn, will be greater than the variance of demand. Whats the final implication on the firm? Bullwhip thus is amplification of demand at various level of supply chain, leading to variability and supply chain distortions. A firm may have shortages in some place, stock out in others and may be manufacturing to meet the demand in the third place. Let's explore the causes of bullwhip effect as a part of this classroom column. Causes of Bullwhip Effect The first research to extensively study the amplification of demand information in a supply chain was reported by Forrester in his seminal book Industrial Dynamics. He basically reduces the causes of this demand amplification to two types of delay, namely the delay of transferring demand information and the delay of transferring physical products through the supply chain (lead-times).The roots of bullwhip effect thus go back to systems dynamic theory. Forrester found that it was common for the variance of the perceived demand to the manufacturer to far exceed the variance of the consumer demand. Also, the seasonal impact was usually larger for manufacturers than retailers. Further, it was also found out that effect is amplified at each stage in the supply chain. A number of other studies have identified the following causes of bullwhip effect in an organization: Demand forecasting updating- links in the supply chain base their -expectations on the basis of the orders they receive from the succeeding link. An increase in orders leads to higher demand forecasts,
which is transferred to the next link by increased order quantities. That link also sees an increase in the demand, updates its forecast, and distorts information for the subsequent link. It works in the reverse when end-customer demand decreases. Lead-time- it is easy to see that the increase is magnified by increase in leadtime. The safety stock level depends upon average demand and its variability multiplied by the lead-time. Thus, with longer lead-time and a small change in the demand variability implies a significant change in the safety stock, the re-order level, and, thus, in the order quantities.
An increase in orders leads to higher demand forecasts, which is transferred to the next link by increased order quantities. Order-batching- demands come in; depleting inventories but the company may not immediately place an order with its supplier. If the retailer uses batch ordering, then the wholesaler will observe a large order, followed by another large order, followed by several periods of no order, followed by another large order and so on. Thus, the wholesaler sees a distorted and highly variable pattern of orders. Firms use batch ordering for a number of reasons. A firm facing fixed ordering costs, resorts to batch ordering. Secondly, as transportation costs became more significant, retailer may order quantities that allow them to take advantage of the transportation discounts. This may lead to some weeks with large orders and some with no orders at all. Finally, the quarterly or yearly sales quota or incentives observed in many businesses can also result in unusually large orders
49
observed on a periodic basis. Price fluctuations- price fluctuation can also lead to bullwhip effect. If prices fluctuate, retailers often attempt to stock up when prices are lower. This is accentuated by the prevailing practice in many industries of offering promotions and discounts at certain times or for certain quantities. Kotler (2000) says that the trade deals and consumer promotions constitute 47% and 28%, respectively, of the total promotion budget in the US and all of these causes bullwhip effect due to their impact on price fluctuation. When the price returns to the normal, the customer buys less than the needed to deplete its inventory. Sometimes, companies run promotion schemes in certain regional markets, which might give a downstream member an incentive to buy in bulk, when the promotion is held and then divert the products to other regions. This diversion can prove costly for the supply chain. Rationing of shortage gaming- when product demand exceeds supply, a supplier needs to ration its product to customer, knowing that, customer may order more than really needed. Later, when there are no shortages, orders disappear. Such orders are common when retailers and distributors suspect that a product will be in short supply, and, therefore, anticipate receiving supply proportional to the amount ordered. When the period of shortages is over the retailer goes back to its standard orders, leading to all kinds of distortions and variations in demand estimates Bullwhip is a common ailment present today in most of the organisation. Theory provides a framework for understanding the major issue in supply chain coordination. We will explore all the implications of bull whip effect in the subsequent column.
February 2015
NEWS
SCM WORLD
KNOWLEDGE
CLASSROOM
ACADEMIC ADVOCACY
How Do Supply Chain Networks Affect the Resilience of Firms to Natural Disasters? Evidence from the Great East Japan Earthquake -YasuyukiTodo, Kentaro Nakajima, Petr Matous
Supply chain disasters can have a devastating effect on firms. After the earthquake and tsunami in Japan, a large number of Japanese firms faced major disruptions in their supply chain. We need to learn from their experiences – especially how can firms survive such violent disruptions. We bring you an insightful article from a research undertaken at the Research Institute of Economy, Trade, and Industry.
P
ost the devastating earthquake, firms in Japan faced severe disruptions in their supply chains. The authors examine how supply chain networks affected the resilience of firms to the Great East Japan earthquake, particularly the time that passed before firms resumed operations after the earthquake and sales growth from the pre- to postearthquake period. The results indicate that the expansion of supply chain networks has two opposing effects on resilience of firms to disasters. On the one hand, when firms are connected with additional firms through supply chain networks, they are more likely to experience disruption of supplies and demands, which delays recovery. On the other hand, firms can benefit from diversified networks with suppliers and clients because they can substitute surviving firms in the network for damaged partners and receive support from surviving partners. The results indicate that networks with firms outside the impacted area contributed to the earlier resumption of production after the earthquake, whereas networks within the region contributed to sales recovery in the medium term, implying that the positive effects of supply chains on recovery typically exceed the negative effects. The authors conclude that diversified supply chain networks contribute to the resilience of firms to natural disasters.
networks with suppliers and clients in different locations in particular contribute to the resilience of firms to natural disasters. The positive effect of supply chain networks on economic resilience found in this study has not been well recognized in literature. The findings of this research suggest that simulation exercises on output losses from disasters, such as that conducted by Hallegatte (2012), should incorporate this positive effect into theoretical models, which may lower estimated output losses of firms indirectly affected by disasters through supply chain networks. One caveat of this study is that although the study found benefits from diversifying supply chain networks, the extent to which firms should diversify their supply chain networks remains unclear because the authors did not conduct any cost–benefit analysis. Clearly, diversifying suppliers and clients across regions is expensive, which is most likely the main reason why many firms have a limited number of suppliers and clients. It is expected that future research will investigate the costs of finding suppliers and clients explicitly. This type of investigation would make it possible to find the optimal level of diversification to maximize the net benefit, i.e., the long-term benefits from strengthened economic resilience less short-term costs.
To summarize, the results, supply chain networks facilitate recovery from natural disasters in many cases, although the effect varies depending on the locations of the suppliers and clients and on the time span of the recovery measure (shortterm recovery time or medium-term sales growth). The study did not find any effect of supply chain networks on recovery, except for a small positive effect of indirect suppliers and clients on the recovery time, which was mostly offset by the negative effects of other types of networks. Therefore, one can conclude that supply chain networks and diversified
February 2015
Yasuyuki Todo- Department of International Studies, the University of Tokyo and Research Institute of Economy, Trade and Industry. 5-1-5 Kashiwanoha, Kashiwa, Chiba, 277-8563, Japan. Kentaro Nakajima- Graduate School of Economics, Tohoku University. 27-1 Kawauchi, Aoba-ku, Sendai, 980-8576, Japan. Petr Matous- Department of Civil Engineering, the University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-8656, Japan.
50