SCMPro January 2015

FORECASTING RISKS KNOWLEDGE FOCUS ACADEMIC ADVOCACY January 2015

Vol. 2- No. 10 Rs. 150

An Anthology of Some of the Best

Feature

SME Corner

LSP Focus

Lean Management for Cold Storage

Financial Supply Chain for SME’s

Warming up to Cold Chains

page no. 35

page no. 38

page no. 48

EDITORIAL

The Season of Hope

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n behalf of team SCMPro and ISCM, I wish each and every one of you a wonderful, high growth and professionally satisfying year ahead.

GIRISH V S EDITOR

2014 was a defining year for India. After a gap of three years we dared to dream again. After a gap of three years, we are seeing the green shoots of industrial revival. A change of guard at the center and a few states heralded a new optimism to the industry. The Ease of Doing Business Index from the World Bank had placed us at 142 among 185 nations. And we need to correct it urgently. Unfortunately, the Indian opposition politician is still tied to religion, caste and conversions as issues. Development is anathema to them. Apparently, economy is not their concern. Fortunately for India, the Government is seized of the gravity of the situation, and have acted. Baby steps, but a cause for hope.

On a lighter vein, the master supply chain professional, Santa Claus has managed to deliver gifts across the world, in time with six sigma accuracy. But the delivery systems across the world collapsed once again. From Europe to UK to USA, Christmas deliveries were delayed because of capacity constraints. This is an interesting issue – we cannot build capacity based on volume spikes that last perhaps a few days in the year. Nor can we sit back and blame it on the supply chain. Can we not innovate delivery systems that can handle the spikes efficiently? Time for the Indian Jugaad to kick in.

With a prayer on our lips and hope in our eyes, we wait for the economy to pick up its growth trajectory.

Meanwhile, Happy Reading.

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January 2015

CONTENTS JANUARY 2015 January 2015

06 SCM NEWS >>

38 SME CORNER >>

Analysis of latest Supply Chain and Logistics happenings.

Financial Supply Chain Management (FSCM) deals with capital. payment terms, pricing and Inventory decision making by the firm, which plays a crucial role for SME's.

SCMPro looks at some of the innovations by the bank in managing FSC.

35 FEATURE >> Mr. Prashant Gubba speaks about their experience in Lean Management for Cold Storage.

42 SCMPro CLASSROOM >> Dr. Rakesh Singh explores the problem at forecast error.

8-33 LEAD STORY Keeping in mind the spirit of new year SCMPro brings its readers a collection of top most read and liked articles from last year. Each articles has been chosen by our editorial advisory team and the idea is bring the best of last year in nutshell.

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44 KNOWLEDGE >> Part 5 of the series the authors looks at managing Supply Chain Risks.

48 LSP FOCUS >> SCMPro brings you a review of work by Lisa Ellram and Martha Cooper on five academician and pracitioners perspective on Supply Chain management first published in The Journal of Supply Chain Management.

204-D, Riddhi Siddhi Complex, Off. S. V. Road, Opp. Patkar College, Goregaon (West), Mumbai 400062, INDIA.

50 ACADEMIC ADVOCACY >> This research addresses current gaps in the literature by investigating the buyer–supplier integration dynamics in a global context with a focus on the antecedents and outcomes involved in the process.

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January 2015

NEWS

E-Commerce Impacts Warehousing

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iwali in India, Christmas in Europe and US, and Bachelors Day in China – all suffer from one major constraint – the necessity to deliver an unprecedented number of parcels on a single day. And the e-commerce firms have not been able to live up to the hype. Apart from these special days, we have the same day and next day deliveries on offer. This is forcing retailers and distributors to rework their warehouse strategies. The traditional view of a warehouse as a large shed to hold goods till they are transferred to the store is passé. Before the e-commerce age, warehousing was focused on a few large hubs across Europe – the UK's golden triangle in the Midlands or the Benelux corridor between Amsterdam and Antwerp. The need today is for smaller warehouses closer to the population they seek to serve. And unlike the large warehouses, these small warehouses need to break up a large truck load of goods into smaller vehicles for faster deliveries within the cities and towns. This will in turn lead to a few problems – land, for one, is very expensive around these urban centers – leading to rising rents.This has one good fall out – across Europe, investors are pumping in money to build new facilities.

According to a report from Standard Life, European warehouse investments jumped to Euro 20 billion in the first nine months of 2014; and earned an 8 percent return.

There are good times ahead for warehouse investors. But, apparently we still need to learn from Santa Claus how he delivers so many gifts across the world in a single night!

We Cannot Deliver

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odel – one of UK's leading delivery services companies told its customers just that!

Yodel has clients like Tesco – the leading UK retailer and Amazon. In the run up to Christmas, Yodel said delivery of some parcels would be delayed by over 72 hours and that its sorting centers would not accept fresh deliveries till the 27th of December. And it seems UK too suffers from the same problem – a shortage of drivers – some estimates put it at 60,000 drivers. And just like Flipkartsale in India, the Black Friday – the start of the Christmas shopping frenzy and Manic Monday – the Monday following Black Friday – saw sales of GBP 810 Million and GBP 666 Million – with around 205 million home deliveries in Nov- December time frame. The result – most retailers suspended the next day deliveries. Unlike Flipkart where most products were not available, in UK, it was a case of delayed deliveries.

Causes of Supply Chain Disruptions in 2014 Q: How severely has your supply chain been affected by any of the following sources of disruption over the past 12 months?

The bottom line – Yodel was voted as the worst parcel delivery service in UK – with 58 percent customers experiencing bad deliveries!

January 2015

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THE BEST OF 2014

January 2015

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THE BEST OF 2014

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he New Year signifies hope and cheer.

Hope that the year will prove to be better than the one gone by. And cheer to keep us motivated to strive for the promise the year holds. It is a time to look back at the year gone by and take stock of what we did right and what we did not do. Of the hits and misses.

Keeping in that spirit, this year we bring you a collection of articles that appeared in the previous 12 months of SCMPro. These articles were chosen by our editorial advisory team along with the Editor. Each article was chosen for a specific reason – either for its popularity or for bringing out an aspect of supply chain we are not familiar with. The idea was to present the best of the year in a nutshell. A quick guide to all that was the best.

The first article - Forecasting what to do and what not to do – is a star from our 2014 series.

The GIGO principle (Garbage In, Garbage Out) is a well-known phenomenon in IT. But the same can be applied to supply chains as well. If the business forecast is not accurate, the resulting supply chains too will not be optimized. This article by Dr. Rakesh Singh was one of the most popular articles of 2014, for its focus on the basics of forecasting.

The second - Challenges of global fast fashion supply chains – by Dr. John Gattorna was a two part series that explored the challenges of supply chain management for global fashion brands. The article is special for the insights it brings on aligning the supply chain to the customer needs.

The third - Disaster Risks and Impacts on Supply Chains - has been chosen for its focus on an emerging area of SCM – Humanitarian Supply Chain Risk Management.

Humanitarian logistics is one aspect of a supply chain – a supply chain response to a compelling cause. However, apart from the response of the supply chain to a disaster, disasters too have an impact on supply chains.

Humanitarian logistics addresses the supply chain impact on disaster. The converse, though not a part of humanitarian logistics, has its own challenges.

The fourth - Financing SME Supply Chains

by Asad Ata; Manish Shukla; Mahender Singh has been chosen as it highlights the biggest challenge to SME - finance. Small and Medium Enterprises (SME) are the backbone of an economy. They contribute immensely to the employment opportunities in the country and account for roughly 40 percent of the exports from the country. However, when it comes to financing, SMEs are considered higher risk and face multiple constraints. As the ad says – small business is big business.

The fifth– Agri Collateral Management – explores the contours of warehouse receipts – an innovative financing tool for agri producers. Farmers in India face multiple challenges. As the harvest reaches the markets, traders form a cartel to beat down prices. This limits the farmer's income and exposes the sector to dramatic changes in food prices. The ability to store products and release them for the right price can boot rural incomes and create a healthier economy. But for that to happen, the farmer should be able to store the produce at the right environment to avoid losses. One such area is inventory management – not from the traditional perspective, but the inventory at the warehouses – the ability to realize higher value from storage. Collateral management is fast emerging as an option for firms to realize higher value from their supply chains.

The sixth article - Complexities of Distribution Chanel in India – Challenge or Opportunity? – is an extract of a presentation

by Pratin Vete - Associate Director – Performance Improvement, of Ernst & Young – presents the challenge of pharma distribution – where small players rule the roost, and the manufacturer does not have visibility beyond the super stockist.

And finally, we bring you an interesting article

by Kanika Bhutani of EY on supply chain in the dot com era.

Happy Reading.

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January 2015

FORECASTING

RISKS

KNOWLEDGE

FOCUS

ACADEMIC ADVOCACY

Forecasting what to do and what not to do 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

The GIGO principle (Garbage In, Garbage Out) is a well-known phenomenon in IT. But the same can be applied to supply chains as well. If the business forecast is not accurate, the resulting supply chains too will not be optimized. This article by Dr. Rakesh Singh was one of the most popular articles of 2014, for its focus on the basics of forecasting. This is a star from our 2014 series.

Thanks to global competition, demand is no longer certain for any business. Gone are the days of certainty, long product life cycles and loyal consumers. The overall environment is today dynamic. In such a situation firms increasingly realise that understanding demand, planning demand and linking supply with demand pays. At the same time, if the supply chain forecast is substantially in error, the ramifications will be felt throughout the entire process.

chain. Once these are tabled, forecasting will be less uncertain in an uncertain environment.

And the new IT based tools for supply chain and forecasting will be able to improve the forecast and institute a system for tracking forecasting errors. Forecasting practices are characterised by some interesting insights about changes in techniques. Research indicates that in the 1980s, despite the growing availability of computer based forecasting systems, companies continued to rely predominantly on subjective techniques. Since the mid 1990s companies have started using computer-based forecasting systems, yet surprisingly forecast accuracy has not improved even among those who use these models.

This is why forecasting has assumed a significant importance, and increasing number of managers look to forecasting to reduce costs.

Despite significant developments in the area of supply chain forecasting as well as IT, most organisations do a poor job of incorporating demand uncertainty into their production planning processes. Most often this is blamed on forecasting without realising the importance of selecting the appropriate forecasting technique. Managers need to identify first the firm level variables which cause variability in the supply

January 2015

Seasons rule: A plethora of questions arise today. Are forecasts reviewed and agreed upon by key departments in the organisation? Are right statistical methods used in forecasting the demand for a product? What horizons and time period are used for both long and short-term forecasting? How are

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THE BEST OF 2014 What these companies probably forget is that not all demand is unpredictable: there are times when demand follows a predictable pattern. statistical and judgmental considerations combined? In a study conducted by the Great Lakes Institute of Management, Chennai, it was found that the most widely used method of forecasting is the sales force composite method. Causal and time series models have given way to rolling plans. With the changing nature of businesses and increasing complexity due to changing nature of demand, this shift from quantitative to qualitative models is understandable. But what we found surprising was that even where causal and time series models would have been appropriate, IT based sales force composites were used blindly.

Forecasting is not owned as yet by any department, thus a consensus approach has yet to evolve leading to a budget driven demand planning.

What these companies probably forget is that not all demand is unpredictable: there are times when demand follows a predictable pattern. While auditing the forecasting processes of a lifestyle major, I found that the company used the time series technique for its vacuum cleaners and spare part requirement. The forecast error was so high that they gave up forecasting in favour of an ERP system where sales force composite forecasts were converted into rolling forecasts.

This too did not meet with much success. To understand the problem we used data collated from Mumbai's Colaba market and found that the consumption data showed strong seasonality. No forecast would be accurate unless corrected for the seasonal trend and combined with the appropriate time series technique. Nor would the investment in an up-to-date

information system be of much help.

Similarly, another company, a tractor major, for which we designed a forecasting model, had almost given up the causal method of forecasting and embraced the sales force composite method, even though the latter's accuracy remained a major worry.

Tractor demand is closely related to what happens to agriculture. We had identified a causal model that was based on drivers of demand for tractors and provided a fair guide in planning sales.

The company did not know how to convert causal forecasts into short-term forecasts for better operational planning and thus gave up scientific forecasting for judgmental methods.

On the other hand, agribusiness firms such as Bayer and Syngenta have been quite successful in this area. Along with their rolling plans, they also forecast the crop scenario for various regions. They intelligently use their sales forces to track changes in the cropping pattern, areas under different crops, procurement prices and rainfall. This data is then used to create an operational sales forecast on both a quarterly and a monthly basis.

Not surprisingly Syngenta and Bayer have been able to minimise inventory in comparison to other players in the industry.

Keep internal biases in check: Forecasting methods and models need to be applied intelligently. Indian firms seem to have lost their direction. Their choice of forecasting methods seem to be dictated by supply chain requirements with little understanding of when, where, what and how to forecast. The appropriate choice of a technique depends upon the inherent uncertainty in the business environment and factors that cause this uncertainty.

According to a number of surveys, firms today are moving away from sophisticated techniques to one based on

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market response, i.e. sales force composite method. This method is an outcome of thinking that as the business environment becomes more uncertain, firms can minimise their supply chain cost by adapting responsive and postponement strategy rather than being dictated by forecast. In supply chain literature this is called “quick response�.

Firms use their widely dispersed sales force to compute a rolling forecast and align their supplies to these forecast. But this approach does not solve all the problems.

For example, we found that there is a general tendency for small changes in customer demand to be amplified within a production distribution system.

Upstream replenishment demand and physical shipments exceed the original order quantity. They are caused due to orders moving up the supply chain levels, unplanned trade and promotion discounts, long lead-time and batch ordering.

There is a general tendency for small changes in customer demand to be amplified within a production distribution system.

All these are essential parts of business organisation and these marketing, logistics and forecasting initiatives lead to wide scale fluctuations. Forecasting is often used as an order history from the company's immediate customers. At each level of the supply chain, members smoothen their orders based on their understanding and comforts.

Improve business practices: Such business driven variability is further distorted as marketing and promotions create havoc with market data or demand trends. Most members of the supply chain stock during promotions and discounts, leading to a jump in demand. But each promotion is carried

January 2015

THE BEST OF 2014 out in isolation vis-Ă -vis the rest of the organisation; and strategically to compete with key competitors. Keeping track of these spikes seems next to impossible, be it in the consumer durables sector or in an engineering company or for that matter agribusinesses. A forecaster sees the upward trend and forecasts high leading to inventory costs in the supply chain.

Similar problems are posed when a full truck load becomes the norm due to the transport discount, and here again the jump in data can mislead forecasters. We also found that longer lead times meant higher demand amplification, poor forecast and excessive inventory cost.

In sum, firms often blame forecasts for the error when the real culprit is their own business practice. Forecasting methods can work when you are in a position to track this business driven variability and then factor them into your forecast.

Share knowledge: Finally, it should be remembered that forecasting is an integrated exercise in which all levels of the supply chain are involved and willing to share information which helps in increasing demand visibility within organisations as well increase the performance of forecast. IT thus is a critical tool. But, most firms show a significant level of dissatisfaction with the quality of IT. We found that most firms lack extended enterprise functionality and open system architecture which can facilitate integration and collaboration and bring transparency across the total domain of supply chain management. The current information systems are inward looking and miss linking across the boundaries of the organisation. They do not connect easily with other systems.

Information systems in these companies also lack flexibility in adopting to ever

January 2015

changing needs of the supply chain in terms of changing business models and processes. There is a lack of collaborative architecture in decision support software. These firms still use orderingbased information instead of flow-base.

Lack of advance planning with process functionality hinders optimal supply chain allocations. Real-time communication between information systems transport and warehouse management systems and advance planning systems is totally absent.

Information systems in these companies, thus, lack a modular, pen and Internetlike architecture or “web-enabled ERP�.

Forecasting finally is victim of the same ills which plague any organisation. To facilitate the changing dynamics of business in response to uncertainties, these firms need different processes, structures and linkages. Many of these firms who claim to practise supply chain management in practice do not have one. Softwares bought by these firms cannot replace the need to link structures with processes. Most of these firms have a rigid and outdated organisational design leading to lower internal flexibility. They are unable to link various processes of organisation with corresponding structures.

Thus it is clear that forecasting as an exercise is more than using sophisticated techniques.

The way forward: The structural issues here deal with what is to be done in terms of organisations, in terms of crossfunctional teams, what will be done in terms of supply bases in terms of the structure of distribution channel, and the structure of the manufacturing centre. Key process that come into play include such things as insuring/outsourcing, strategic processes, new product development

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supply planning and execution, demand planning, logistics, and strategic sourcing. Forecasting would be effective only if we know the key linkages between structures and processes.

Among the most important ones are common information, co-location, cross-enterprise teams, cross-functional teams, common measures, joint planning and some degree of trust.

We found that firms which used forecasting successfully had developed not only cross-functional trust, but also cross-organisational trust with distributors and suppliers. The cross functional discipline that requires the various internal groups to put aside their turf issues and focus on building an advantaged distribution system. Many successful companies have succeeded in improving cooperation among internal functions and gaining significant operational benefits. Whereas the firms in which well meaning employees were reluctant to work effectively together with other departments inside the firm, found it easier to point fingers at other departments than cooperate in making the forecasting error-free. They considered departmental or functional excellence as more important than business excellence.

Thus it is clear that forecasting as an exercise is more than using sophisticated techniques. These techniques will work effectively only when we create demand visibility across the supply chain. This calls for aligning marketing, promotions, discounts and other logistics decision with a clear purpose of creating demand visibility across the supply chain. Information technology is an important forecasting enabler, but it is not effective unless the right kind of organisational design in terms of new structures, processes and linkages are put in place.

Demand Planning and Supply Chain Forum 2015 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.

Who Should Participate?

The Forum is open to product managers,

Why Should You Participate? £ Benchmark yourselves against the best in the

marketing managers, corporate planners, market researchers, or professionals who

Industry. £ Hear what Demand Planning and forecasting

prepares or analyses forecasts as part of their job responsibilities.

will look like 3 to 5 years from now. £ Improve your company's forecasting

All corporates who have a formal demand

accuracy and the value and effectiveness of

planning and forecasting function are

your forecasting and planning team.

encouraged to participate under the corporate

£ Get your team to learn and make your

platform.

Demand Planning more productive.

Forum Agenda Keynote Address byDr. Rakesh Sinha, Godrej Consumer Products Ltd. Special AddressSales and Operations Planning by Pratin Vete, Associate Director- Performance Improvement, EY Measuring Performance byDr. Rakesh Singh, Chairman ISCM

on t r o p e r a e eleas nd Planning r l l i w M C a IS m e D f ia” o d e n t I a t n i S g e n “Th d Forecasti t. an at the even

Panel DiscussionThe Way Ahead Recognizing the winners

Initiative

Registration fee: Rs. 7500 + tax. For registration, Contact info@iscmindia.net or call 022 60020157 / 59

THE BEST OF 2014

Challenges of Global Fast Fashion Supply Chains Dr John Gattorna is an acknowledged 'thought leader' on the global supply chain scene. This article, examines the challenges of supply chain management for global fashion brands. The article is special for the insights it brings on aligning the supply chain to the customer needs.

T

here is no doubt that the fast-changing and glamorous image the fashion industry projects to consumers and the rest of society is very appealing. Nonetheless, it is this very aspect of its nature which poses significant challenges for supply chain professionals. One such challenge is the marking-down of slowmoving items at the end of the season, an example which highlights the rationale behind a number of important decisions made by companies in relation to network design and inventory location.

Dr. John Gattorna UTS University of Technology, Sydney

January 2015

Xavier FarrĂŠs Miebach Consulting

Interestingly one particular item might shift faster or slower, depending on the store and its location. Generally, slow-moving stock ends up being sold at a significant discount during

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THE BEST OF 2014 clearance periods, or shifted through an external, online, or company outlet store.

However, if located in the right store at the right time it could have been sold at fullprice. Therefore, companies are increasingly opting for simpler supply chain networks, to easily and quickly replenish and rotate stock to stores, in accordance with local market trends.

The ideal situation would be to operate with only one global inventory location. However, this is not a practical option for most businesses. Currently, only one company, Inditex (Zara), has been able to achieve efficient global deliveries from central distribution centers based in Spain, to stores within 40 hours range. This is one of the reasons why, Inditex (Zara) frequently arises in conversations. Generally recognized as a world leader in fashion retail, the company is renowned for listening very closely to consumers, making rapid and instinctive product design decisions, and being able to create and place products in stores faster than any competitor. Some outsiders are convinced that their business model places a bigger emphasis on the cost of stock and markdowns, rather than the process of producing and shipping products, a model with which many companies feel systematically incompatible.

In fact, the volume of product shipped by many companies does not even merit attempting to deliver globally with such speed and efficiency. Paradoxically, size is sometimes an enabler of speed because the very big volumes, 800 million garments a year in the case of Inditex, facilitates cheaper airfreight costs, and allows for production to shift between suppliers, an option not generally open to most players in the industry.

Other companies have opted to situate inventories regionally to guarantee rapid deliveries and ensure order lead times to stores do not exceed three days. Companies that have chosen this particular strategy, operate with networks which normally consist of up to three or four globally-

positioned inventory locations; typically in Asia, Europe and the US respectively. In some cases, companies use network modelling technology to assess different alternative inventory location scenarios in order to identify the optimal solution.

However, it is also possible to tackle the mark-down issue from another angle. Some companies optimize revenue streams during sales periods using price elasticity optimization techniques. In this way they can implement discount mechanisms that maximize revenues in accordance to the reaction by customers to different price points based on historical performance.

Stores Replenishment Sourcing and manufacturing lead times within the fashion industry can usually be anything from one to three months. As a consequence, optimizing the process of store replenishment requires accurate forecasts.

There are a number of proven factors at different stages of the forecasting process which help improve accuracy. These include, the reaction of potential customers to new collections, specific events held to discuss and determine forecasts, and analysis of first orders from those specific channels which are first in the order decision cycle, for example, wholesale.

Companies that have chosen this particular strategy, operate with networks which normally consist of up to three or four globally-positioned inventory locations.

In contrast to other industries, this forecasting process is more opinion than statistically based, mainly because the majority of products are new and there is no historical data to rely on. That said, there is definitive evidence that this process is becoming more multi-functional in order for companies to collect the best intelligence from all possible sources. In the opinion of Manel JimĂŠnez, the Supply Chain Director of

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January 2015

THE BEST OF 2014 Desigual, “the process of generating accurate forecasts is critical. We are continuously refining the way we incorporate the intelligence we gather during delivering of a collection. The more multifunctional, the better the results�.

Stores have to have sound product replenishment procedures to avoid out-of-stock in stores, when the product is available in the back room.

Finally, there is no doubt that social media and direct interactions with customers are starting to become a source of intelligence, not only for product design, but also for generating better sales forecasts. When companies operate in different channels (wholesale, franchise, retail and online) interviewees confirmed that the behavior of those channels alters according to market conditions. As a consequence, they acknowledged that the theory of buying behavioral segmentation, as developed by supply chain thought leader John Gattorna would definitely facilitate a more effective forecasting process.

Most companies' supply chains replenish their stores based on stock levels and company forecasts. However, the Inditex model differs slightly in two ways. Firstly, automatic order replenishment proposals can be amended by store managers who actually have the final word on order quantities.

Secondly, lack of product availability in stores might be seen as the consequence of the demands of fashion, with new products continuously brought in to satisfy consumers' need for new styles and trends.

In any case, sales in stores tend to build up over the weekend period. The replenishment processes therefore have to be flexible enough to cope with corresponding weekly peaks and troughs, a fact which can pose difficulties, especially when operating Distribution Centers. Stores have to have sound product replenishment procedures to avoid out-ofstock in stores, when the product is available in the back room. For this purpose stock record accuracy is of vital importance, and increasingly companies are at last considering RFID as the ultimate solution to this problem.

January 2015

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Manufacturing Lead Times We have already discussed in this global fashion retail series about network design and inventory location in Chapter 1 and stores replenishment in Chapter 2. In this chapter we want to take a more upstream view to discuss about sourcing and manufacturing lead times. In this particular area, there are two key aspects being debated within the industry. The first is the question of sourcing location.

Sourcing far away ensures cheaper costs but often entails visibility and traceability challenges, whereas, sourcing closer to key markets guarantees a faster response but with higher costs and capacity constraints. The second key debate is whether to buy fabrics in order to react faster to market changes, or buy finished products to avoid the capital and obsolescence costs that holding fabrics in stock often creates. Nonetheless, in the opinion of Berta Escudero, the CSCO of GrupoCortefiel, the best supply chains in the industry have managed to find the right balance between all the options, in order to more effectively meet the requirements of their respective business models.

In any case, accelerating the responsiveness of key suppliers in order to react faster to market changes is a definite priority for most companies and is seen as a clear competitive advantage. The behavioral supply chain design configuration developed by John Gattorna, provides useful insights into how this particular goal might be achieved.

THE BEST OF 2014 A good example of this kind of thinking could manufacturing capabilities, increasing their ability be heard in the words of Nick Cullen, the to react quickly. In addition, their purchasing Group Supply Chain Director of Clarks: “Our power gives them more leverage over suppliers. business is complex. We have multiple To increase agility, some companies may need to markets, channels and points of supply around significantly transform engrained processes, the world and we're continually refreshing our systems and values embedded within their supply range as we're in the fashion business. chains. Making these modifications will definitely Whichever way you look at it we need value require robust change management and execution chains with different characteristics. We capabilities. When pushing for these changes, the attempted to force a one-size-fits-all approach implications of mark-downs and the loss of sales and trim around the edges for different needs. opportunities due to inadequate response can play It became clear that we need a small number of a major role for building a “burning platform” for different value chains to be both efficient and change. effective. Currently we are part way through implementing value chains where each one has From experience, in order to achieve a successful a different balance between cost, service, transformation of this scale, strong support from flexibility and agility for particular senior executive leadership is customer and consumer channels. required. All stakeholders will have The increase in depth The key factor that will make this a to alter their modus operandi and is a reflection of the success is that it is a business wide this will require assistance from more complex transformation to create value the very top. relationships chains, and it unites the business between the Talent Development around a common purpose”

functions and sophistication of the different technologies and tools in use today.

Additionally, it has been acknowledged in conversations that the refinement of certain emotional skills may enable key supply chain personnel to successfully manage their relationships with business partners. The right combination of this factor with the former one explained above, could largely determine whether the pursuit of improved responsiveness and integration of the supplier base will be successful.

Interestingly, the Swiss watch industry offers relevant insights into this particular issue. The precision of machines and high-end design for which the industry is renowned, require very complex supply chains and strong relationships with business partners, i.e., taking both a downstream approach to maintain awareness of market developments and ensure accurate forecasts, and an upstream view to guarantee the supplier base is engaged and agile enough to satisfactorily react as needed. Once more, it is size which can greatly determine agility.

Larger companies often have in-house

In this series on global fashion retail we have discussed about network design and inventory location, stores replenishment in and sourcing and manufacturing lead times. At the end of the series, we want to discuss about talent management, as it is a major current concern for global supply chains. The growth in emerging markets has created a higher demand for managers, and the fierce talent wars amongst companies to hire the best staff makes the situation even more complicated. Additionally, as global supply chains keep developing at a rapid pace, supply chain management has become a much deeper and broader discipline.

The increase in depth is a reflection of the more complex relationships between the functions and sophistication of the different technologies and tools in use today. The increased breadth of supply chains is due to the more global nature of business, where managers are expected to work with a wider variety of people and cultures in more geographically diverse contexts.

This situation means that the understanding of

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January 2015

THE BEST OF 2014 cultural differences, the flexibility needed to deal with distinctive cultures, and the capability of building trust in different cultural settings have become genuinely essential requirements to engage employees within firms and to ensure talent is nurtured from within organizations. In the words of the CSCO of GrupoCortefiel, Berta Escudero “International companies with a multicultural workforce are more aware of multicultural diversity. To be successful in global business environments you have to be very respectful with cultural differences” Interviewees have found global cultural models beneficial for a better understanding of these differences. In particular, participants found the model developed by David C. Thomas and Kerr Inkson to be useful because one can easily identify countries in the seven cultural dimensions, e.g., Spain and France in “Egalitarism”, Japan and USA in “Mastery”, China and India in “Hierarchy”, the UK in “Affective Autonomy”, and the Netherlands and Switzerland in “Intellectual Autonomy”.

One prevalent topic in conversations was that of the Chinese culture. In particular, the importance of taking the time to forge the personal relationships necessary for doing business or implementing projects in China.

In terms of increasing employees' loyalty to firms, participants have concluded from experience that providing extensive overseas training to key employees from developing economies is a practical way to increase retention rates.

They have also concluded that this

January 2015

practice is highly valued by those individuals' assigned overseas postings and a very good way of promoting company values. In some cases, Long-term overseas assignments are considered beneficial, although not very practical when there is a need to find talent in the country of origin.

Finally, periodic team reports are regarded as being very important to ensure members of staff in global locations continue to nurture the values of the company. In any case, talent is not an easy topic in the global fashion industry. As Alan Higgins, the Operations Director EMEA of New Era Cap Company explains, “Global Talent doesn´t develop by itself. You have to acknowledge cultural differences, and put in place a specific program with a compelling employer proposition and a structured development plan. When you identify the people with potential, you have to put the effort in as a business”.

Of the policies to apply in order to retain and develop key employees, ensuring responsibility, showing respect, revenue sharing schemes, and the practice of rewarding individuals (not only with monetary compensation, but also in terms of recognition) were seen as most effective. One retailer had clearly addressed this issue by determining a number of specific guidelines and with thirty per cent of leadership performance reviews being dedicated to talent development.

Conclusion The research conducted and reported in this paper has shown that global retailers usually opt for very simple network designs which enable

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them to quickly respond to fashion trends, whilst minimizing the detrimental impact of mark-downs in slow moving stock. Furthermore, some retailers utilize network modelling optimization technology to find the best solutions.

What became very clear was the importance of sales forecasts for enabling efficient store replenishment. These forecasts are becoming increasingly multifunctional. Moreover, as garments change continuously to match fashion trends they are also becoming more opinion than statistic-based, although social media and customer interactions are starting to bring workable data into this process.

Interestingly, larger companies are sometimes the most agile, and having the right mind-set, values, and organizational structures is essential for achieving such agility.

What is certain is that the deep transformational changes needed to achieve the required level of agility are only successful when supported by the upper-levels of organizations.

Interviewees advocated the use of global cultural models to enable better talent management. However, specific talent retaining plans with clear leadership accountability are also deemed very important.

Finally, the management of the customer buying behavior, through the alignment of strategy, values and leadership styles as detailed in the Dynamic Alignment methodology developed by Dr John Gattorna is providing the most clues as to how the global fashion retail industry might overcome the challenges it faces.

Rural and Agri Strategy Summit 2015 15th May 2015, Mumbai Out of the Box Strategies for the Future

Who Should Attend

Rural markets provide a vast opportunity for corporates in India. In the

?

Understand drivers and enabling framework

past companies have been flirting with rural markets without much commitment. There are three important flows in rural markets. Urban

for reaching rural markets. ?

Understanding the role of corporate

to rural for consumables and expendables, urban to rural for

initiatives in rural and agricultural

agricultural inputs and rural to urban for agricultural produce. Rural

development.

and agricultural marketing suffer from infrastructure, and credit constraints. Making cost of reaching rural market high. Farmers on another hand do not find access to markets directly leading to lower realization for their products.

?

Getting abreast with logistics, credit and

insurance need in rural markets ?

Develop an understanding of the challenges

in Agri and Rural Supply Chain

The summit will explore the evolution of Agri retail, logistics

?

An aggregate collaborative out of box

challenges, lack of access to credit and risk management. This will

strategy for all players in the rural Agri

provide a platform to explore a collaborative out of box rural reach and

markets.

development strategy which will be a win-win solution for all stakeholders.

Agenda ?

Challenges of Modernizing Indian Agriculture – A Macro and Micro View ?

The Changing Rural Consumer ?

Rural Reach and Agri Supply Chains – Strengthening the Ties ?

Challenges of Reaching and Communicating with Rural Consumers ?

Making Agri & Rural retail successful ?

Role of Rural Credit / Insurance in rural Agri Supply Chain ?

Rural and Agri Logistics – Cold Chains, Warehouses and infrastructure bottlenecks ?

Experiments in Agri Logistics – the case of ITC e-Choupal and Tata Kisan Kendra ?

Dynamic Alignment – Bringing Sales, Marketing and Operations together ?

Out of the Box Strategies for rural and Agri Markets

Initiative

Delegate Registration Fee: Rs. 10,000 + Tax. For more detail, contact jayaram.nair@scmp.in or call 022 60020157 / 159

FORECASTING

RISKS

KNOWLEDGE

FOCUS

ACADEMIC ADVOCACY

Disaster Risks and Impacts on

Supply Chains Humanitarian logistics is one aspect of a supply chain – a supply chain response to a compelling cause. However, apart from the response of the supply chain to a disaster, disasters too have an impact on supply chains. Humanitarian logistics addresses the supply chain impact on disaster. The converse, though not a part of humanitarian logistics, has its own challenges. For one it creates resilience in supply chains. This article has been chosen for its focus on an emerging area of SCM – Humanitarian Supply Chain Risk Management.

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ccording to Council of Australian Governments, Disaster resilience is 'the capacity to prevent, mitigate, prepare for, respond to, and recover from the impacts of disasters'. Building supply chain resilience enhances our ability to minimize the effects of future disaster events on communities, economy and environment. It also means we efficiently and effectively cope with the impacts of disasters when they do occur. Resilience is a dynamic quality and is usually developed and strengthened over time, it builds upon rather than replaces existing strengths and arrangements.

Global supply chains expand the risks of natural disasters and in turn natural disasters affect supply chain operations. As supply chains go global and multi modal, these developments globalize disaster risks and bring extra vulnerability to businesses, particularly to their production networks. Natural disasters are one of the causes of disruption to supply chains. They usually result in widespread damage to a large number of companies and production locations at the same time. This has a severe impact on industry and significant time is often required for recovery from natural disasters.

According to an ARTNeT Working Paper, “some widely adopted supply chain management strategies also increase the risks of problems in situations of natural disasters. Examples include the “just-in-time” practice and lean supply chain management, which require more frequent deliveries of supplies, minimizing the non-value-added time and inventory. These efficiency maximization models in business increase the level of interdependence between firms and correspondingly raise the chances of a supply chain

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Global supply chains expand the risks of natural disasters and in turn natural disasters affect supply chain operations. disruption. Also, the compression of non-value-added time in inventory transfer and storage may remove the essential risk buffer between the production nodes and deepen the negative impact when natural hazards occur in the global supply chain. For example, when a disaster hits a supplier or a distribution link and disrupts the supply chain, the focal firm that adopts “just-in-time” practices will suddenly encounter production suspension due to supply shortages and the negative effect will transmit quickly to the downstream supply chain.”

There are a few lessons from the great Japanese earthquake. In March 2011, an earthquake struck Japan triggering a devastating tsunami, which led to the meltdown of nuclear reactors in Fukushima. The disaster caused a record 210 billion United States Dollars (USD) in economic damage, representing 3.8 per cent of Japan's Gross Domestic Product (GDP). The combination of the earthquake and tsunami damage and the meltdown of the Fukushima nuclear reactors affected broad areas and caused severe damage in various sectors, especially in the manufacturing and chemical industries.

As a result of this disaster, individual firms suffered huge direct losses, and the disaster could have a longterm impact on the ability of firms to produce and deliver their products or services. On top of this, the disaster affected the employment opportunities in Japan, creating large scale unemployment due to closure of firms in the affected area. This subsequently led to labor migration from this area to other locations, creating fresh pressures

on the supply chains.

Another defining crisis was the floods in Thailand in 2011. A large number of firms had chosen Thailand as a low cost manufacturing center. And most of them were confined to the low lying areas in and around Ayutthaya and Pathum Thani. The floods caused significant impact on other countries through their global supply chains. In India, car manufacturer Honda was affected by the floods as some of its crucial parts were supplied from Thailand. Thailand's supply chain disruption and production losses affected Japan, where the manufacturing production index fell by 2.4 per cent. In US, the price of hard disk drives tripled during the floods.

According to the policy framework, Enterprises involved in global supply chains must adopt risk reduction strategies to increase resilience.

Supply disruptions due to natural disasters are no more an abstract discussion.

Given the scale of possible damage due to natural disasters, Asia-Pacific Research and Training Network on Trade have published a policy guideline for managing the impact of disaster risk on supply chains. The framework addresses three stake holders – the private business enterprise, the governments and the private-public partnership ventures.

According to the policy framework, Enterprises involved in global supply chains must adopt risk reduction strategies to increase resilience. Two key strategies are: Find a balance between efficiency and risk - While sourcing from only one

21

supplier can reduce production costs, it can also make producers vulnerable to disasters. Although having multiple suppliers in different locations may raise transaction costs, it reduces the risk of disruption by securing supply substitutes. To achieve a proper balance between efficiency and risk, firms should take risk into account and conduct a prudent cost-benefit analysis and implement measures to enhance disaster resilience. Such measures may include: 1) raising production flexibility to cater to the volatile nature of the market, 2) selecting suppliers on the basis of risk criteria rather than on pure cost minimization (Christopher, 2011), 3) shortening the supply chain and increasing supply chain visibility, 4) diversifying risks by using different distribution channels and suppliers, 5) enhancing relationships with other supply chain partners. The second key strategy is to Invest in long-term continuity.

For Governments, the policy framework advocates a dual role.

Governments have a responsibility to develop and disseminate information about risk and risk reduction measures to raise awareness within global supply chains and assist individual entities to prepare for potential natural hazards.

Post-disaster recovery is another important issue for governments as the speed of the recovery process is the key to mitigating negative consequences on global supply chains.

To reduce vulnerability to supply chain disruptions, companies must think of the entire value chain . The pros and cons of efficiency and risk in supply chain should be carefully evaluated and aimed at building disaster resilience.

Governments play a fundamental role in building supply chain resilience.

Disaster risk reduction is essential to lowering potential impacts and should

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THE BEST OF 2014 Comparison of National and Global Supply Chains National Supply Chain

Global Supply Chain

Customers

Worldwide Customers

be incorporated into long-term action plans that encourage disaster-resilient supply chains.

At the same time, measures should be taken to increase the speed and effectiveness of disaster recovery in order to prevent the spread of the impact of the disaster through the global supply chains.

Nation A Focal Firm PN1

PN2 Nation A

PN3 PN5

PN6

Nation B

Domestic Customers

Focal Firm

PN4

Specific measures could include providing financial support, protecting and promoting employment and facilitating business rehabilitation and maintenance. Corresponding measures should also be adopted to maintain the confidence of investors in global supply chains and therefore ensure the long-term competitiveness of the country. Effective management of the risks also requires collaboration between the public and private sectors. Public-private partnership in managing risks arising from natural disasters should be explored in areas such as insurance, strengthening physical assets, issuing extremeweather warnings and sharing information on disaster risks and risk reduction strategies.

Successful implementation of public-private partnerships in managing risks arising from natural disasters is crucial for the security and well-being of global supply chains and national economies in the future.

PN2

PN1

Nation C Nation C

Nation B

PN4

PN3 PN: A Production Node : A Distribution link (including service facilitating these processes)

PN5

PN6

Table- Losses for Eartquake damages in 2011, Renesas Electronic Corp Amount

Items

(USD Millions)

Repairs to Property, Plant and Equipment (expenses for restoring to the original condition) Loss on disposal of stock Loss on disposal of fixed assets Fixed expenses during suspension of operations (loss for inability to operate) Loss on cancellation of lease contracts and others Total loss on the disaster Insurance payments received Net loss on the disaster

535.80 90.70 77.10 73.30 37.30 814.20 (198.90) 615.30

Extracted from: The impacts of natural disasters on global supply chains By Linghe Ye and Masato Abe, ARTNeT Working Paper Series No. 115.

Note: Calculations based on 1 USD= 80.5 Yen Source: Renesas Annual Report 2011

Figure 3- Disaster impact spill-over from the Great East Japan Earthquake

Percentage Change (% YoY)

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0 Japan

Thailand

Phillipines

-20

Percentage Change (% YoY)

Auto production after Japanese earthquake

20 0 Japan

Phillipines

Thailand

Malaysia

-20 -40

-40 -60 March 11

-60 March 11

April to May11

April to June 11

Source:CEIC Data Company Ltd. (accessed 30 March 2012

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Financing SME Supply Chains Small and Medium Enterprises (SME) are the backbone of an economy. They contribute immensely to the employment opportunities in the country and account for roughly 40 percent of the exports from the country. However, when it comes to financing, SMEs are considered higher risk and face multiple constraints. Asad Ata; Manish Shukla; Mahender Singh from Malaysia Institute for Supply Chain Innovation examine the issue of Finance in SME supply chains. This paper has been chosen as it highlights the biggest challenge to SME- finance.

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sia's economic miracle is often associated with large, multi-national companies. While these organizations are important drivers of the region's growth, SMEs have played a key role.

However, unlike larger companies SMEs struggle with finance as a limiting factor rather than a lever for value generation.

As the backbone of many economies across Asia, SMEs have been the key drivers of the remarkable growth that the region has

Asad Ata

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Mahender Singh

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Banks want to see at least two sources of repayment to justify the ability of the lender to repay the loan.

Many of the SME businesses are based on needs and not as a conscious choice or an opportunity to build upon.

achieved over recent years. More importantly, these enterprises will continue to play an important role in Asia's economic renaissance. It is estimated that SMEs comprise more than 98% of the number of enterprises in the Asia-Pacific region. The sheer number of SME organizations is not the only reason why they are important to Asia's prosperity. SMEs promote business ownership and entrepreneurial skills. They can be agile, adapting quickly to shifts in supply and demand, attributes that are particularly important in volatile global markets. In addition, SMEs are engines for job creation.

In an increasingly uncertain and complex business environment, understanding and managing the flow of finance through respective supply chains, is a critical capability for all companies regardless of their size. This is particularly true for SMEs as they compete on scope instead of scale, which requires an adaptable supply chain. This is a challenging task for SMEs who are limited by resources and the understanding needed to acquire the skills essential for designing, building, and managing an advanced supply chain; factors critical for their survival. For example, SMEs have a difficult time accessing and understanding their capital requirements and managing finances effectively internally and across the boundaries of their enterprise. Without a good understanding of currency fluctuations, trans-border transactions and associated costs, SME's struggle to compete. While larger companies capture efficiencies by forming strategic alliances with core suppliers, SMEs are not equipped financially to enter into such partnerships.

Government Initiatives Realizing the importance of SMEs, the

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governments in most countries have made dedicated efforts to create policy frameworks, regulations, financial institutions and rating agencies to promote the growth of SMEs. India has fostered an influx of investment in Asia. The development of India's domestic market has a significant influence on neighboring countries such as Bangladesh, Sri Lanka, and Myanmar, and on the markets of the ASEAN countries. The Indian government has taken several vital steps towards identifying and promoting various SME sectors in India. The Ministry of Small and Medium Enterprises (MSME) has developed policy guidelines and legal frameworks. The Small Industrial Development Bank of India (SIDBI) provides credits to SMEs through a tie-up with various public-sector banks.

The Demand and Supply of Finance Access to timely and cost-effective finance is a big challenge for any SME across the world. The SME need for finance can be broadly divided into two categories based on their capital and operating expense. Capital expense is incurred for activities such as setting up the venture, scaling the operations, facility modernization, diversification, and other emergent needs.

In addition, a SME incurs operating expense in every cycle of its growth, for the payment of raw material, salaries, rent, and utilities etc. Similarly the source of funding for these expenses can be classified in terms of fixed costs and working capital. The fixed costs involved in setting up the business are mostly the initial investment made by the entrepreneur. The entrepreneur investing in land, machinery, and buildings, may get loans from the banks. Government funding also represents a huge contribution at various stages of the venture starting from the setting up of the business to technical modernization. Other sources of funding can be family, friend, and venture capitalists.

Table 1 presents a snap shot of the sources and requirements for capital.

THE BEST OF 2014 for the right purpose. Most banks want the owner to put in at least 20 to 40 percent of the total request. At the same time, banks depend on the owner's equity for rating a loan request.

One of the largest costs is incurred in the initial stages of the SME's life cycle in the form of operating expenses. Bank loans are of the most prominent source of funding for this expense. Once the business is operational, there can be several other sources for financing the working capital. One of the major sources is through advance payments from buyers and credit from the suppliers. Another source is financial service providers, offering finance against finished-goods inventory.

Despite all the efforts, SMEs continue to face several hurdles to sustaining their operations.

One of the most predominant is access to finance both on supply and demand side. On supply side, financial institutions face constraints due to a number of factors starting from information asymmetry. There is a lack of accurate and detailed information about the borrower.

Few countries maintain a central database regarding the borrowers within the organized financial sector. But maintaining a database of the overall SMEs is not feasible for the banks due to the large number of borrowers.

For any start up innovative

enterprise such as an ICT firm, this information asymmetry becomes more crucial. A major issue is the lack of a policy framework for risk analysis of the borrowers. This results in the lending organizations charging very high interest rates for a good loan and a low interest rate for a bad one.

Banks want to see at least two sources of repayment to justify the ability of the lender to repay the loan: the cash flow from the business as well as the presence of a secondary source such as collateral. SMEs' inability to provide past financial statements to help analyze their cash flow and the minimum required collateral makes it difficult for banks to extend these loans.

Existing businesses showing a proven financial track record with consistent profit are more likely to be approved than start up, innovative businesses or a business operating marginally but with an opportunity to grow with additional investment.

Moreover, the financial institutions also want to see the owner's taking some equity in a business. This is to ensure that the owner is committed to the business and that the loan is used

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The associated transaction cost in processing a loan application, administering the loan, and updating the status makes it invariable for a large number of banks to finance SMEs. Any financing product or scheme provided by the banks is also affected by the system's political, social, and legal environment system. Inefficiencies in the banking sector also contribute to this problem. In the absence of a functional system to enforce and monitor the rules of lending and borrowing, inappropriate use of the loans cannot be prevented.

For example, in the Indian subcontinent a notable behavior among borrowers primarily engaged in agriculture and related business is to use these funds for personal financial needs. Bad farm loans contributed 44 percent of new non-performing loans (NPLs) in fiscal year 2011 in India.

Thus the development of SMEs requires the presence of a supporting environment in any country. The figure below illustrates a conceptual framework categorizing the key factors into two layers. While the factors in the outer layer deal with the legal, social and political environment of the country, the factors in the inner as discussed earlier in the background are associated with infrastructure, technology, market and finance services available to the SMEs.

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Social

Legal

Infrastructure

Technology

SMEs Finance

Market

Political

Figure 1: Environmental Factors for SME Sustainence

from lending organizations. With most of their assets leased or rented, SMEs also lack the collateral required for financing or loans.

INSIGHTS The case studies and interviews conducted provide insights into financial needs of SMEs in the respective sectors. On comparing the following similarities and differences were observed:

Lack of motivation, interest and education Many of the SME businesses are based on needs and not as a conscious choice or an opportunity to build upon e.g. businesses or trade including agro-business ventures inherited from the family lacks the motivation and entrepreneurship which is a key ingredient for innovation.

Coupled with a lack of education, the growth and maturity of the business is not realized to its full potential

Working Capital Constraints ?

SMEs are under high pressure due to the constraints of

day-to-day working capital. ?

The longer the cash cycle, the higher the pressure e.g.

Horticulture where it could be from 60 to 90 days verses small scale manufacturing.

As a result, SME's are vulnerable to market changes. These are extremely varied and often unpredictable; the introduction of a low cost fashionable scarf from China and the dumping of live chicken into the Malaysian markets from Thailand on account of floods, are two examples. While in both these cases the SMEs were aware that it will only take about six to eight weeks for the markets to absorb these disruptions, enterprises that are susceptible to even relatively small disruptions would mostly collapse.

?

Establishing a line-of-credit with the suppliers could help

alleviate some of this pressure. ?

Where advance payments or loans are possible from

buyers, the demand is more certain and predictable, and SMEs are able to operate with greater confidence.

Fixed Capital Constraints For businesses with high investments in fixed assets upfront and a lower rate of return, scalability is constrained even when an opportunity to grow – such as purchasing a farm or a dairy – with further investment arises.

Next Steps MISI seeks to develop a framework that links the SME needs for capital with the role the SME has in the Supply Chain. Based upon this goal, a Multi Criteria Decision Analysis Tool could be developed to help SMEs and financial organizations to gain insights into these business opportunities.

Inability to qualify for loans Lack of documentation, bills and receipts to demonstrate the cash flow of the businesses, especially for startup enterprises, means that SMEs fall short on acquiring loans

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Agri Collateral

Management

Farmers in India face multiple challenges. As the harvest reaches the markets, traders form a cartel to beat down prices. This limits the farmer's income and exposes the sector to dramatic changes in food prices. The ability to store products and release them for the right price can boot rural incomes and create a healthier economy. But for that to happen, the farmer should be able to store the produce at the right environment to avoid losses. One such area is inventory management – not from the traditional perspective, but the inventory at the warehouses – the ability to realize higher value from storage. Collateral management is fast emerging as an option for firms to realize higher value from their supply chains. This article has been chosen for dealing with an innovative financing tool for farmers – Warehouse Receipts.

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he Indian agri commodity market consists of a large number of participants including farmers, multiple layers of aggregators and traders. The farmers have poor holding capacity due to poor balance sheet quality and credit history. Banks are keen to identify lending opportunities within this segment to meet their priority segment obligations. But the threat of a high level of non-performing assets and heavy supervisory costs proves a dampener. To add to the problems, if the agri produce is not stored at the right temperature and moisture, the produce loses its value.

The Warehouse receipts guarantee existence and availability of the commodity quantity, type, and quality in an identified storage facility.

Mr. Ragheysham Chandak, the Chairman of Buldana Urban had a moment of epiphany – as a farmer, when he transported his produce to the markets, he observed that the prices offered to him were lower than what was seen in the markets. The reason – the middle men who controlled the prices formed a cartel to push prices down during harvest. The same was sold at far higher prices a few weeks later. He decided to build the first warehouse in Buldana to store his output, and sell when the prices were higher.

But his produce was too small for a warehouse to attain optimal performance. He tried to sell the idea to other farmers in Buldana. The farmers had a small problem – they needed the money immediately to square off their debts. The traders used this urgency to crash prices.

Chandak purchased the produce from the farmers, warehoused it and sold it for a higher price a few weeks later. (To his credit, he traced each farmer and returned the difference in price to them!) Today Buldana Urban Credit Society run 300 warehouse and offers a unique “Grain Bank” to the farmers of Buldana. A place where farmers can deposit their produce, avail of loans on the value of the stored grains at lower interest.

That is the power of collateral management.

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To get around this problem of poor perceived creditworthiness, banks evolved an innovative financial instrument – the Warehouse receipt.

A warehouse receipt is a documentary proof of ownership of commodities (e.g. bags of wheat) that are stored in a warehouse, vault, or depository for safekeeping. The Warehouse receipts guarantee existence and availability of the commodity quantity, type, and quality in an identified storage facility. It may also show transfer of ownership for immediate delivery or for delivery at a future date. Rather than delivering the actual commodity, negotiable warehouse receipts are used to settle expiring futures contracts. The process of entering into a warehouse deal, storage, retrieval and despatch of stored commodities form the core of collateral management.

Typically collateral management deals with the process of posting and managing collateral in the financial markets. However, in the real economy, collateral management can be defined as the management of all actions related to collateral provided by a firm or individual. Collateral management involves the storing of the asset at the right environment, monitoring the asset for changes and handling events such as transfers. Changes to the collateral can be identified quickly under this type of management and may affect the cash flows of the firm. Collateral management involves the management of assets, typically finished goods, including agricultural produce, against the value of a transaction.

There are Collateral management starts with an the collateral agreement with a collateral service provider, specifying the legal mechanism for moving collateral and key operational parameters, including eligible collateral, credit thresholds and timing. The document also defines transactions to be covered by the collateral agreement.

Collateral management services allow banks to ignore the borrower's financial strength and rely on the warehouse receipt issued by the agency for measuring creditworthiness.

Contrast this with traditional lending for working capital, based on the balance sheet of

THE BEST OF 2014 the borrower. Warehouse receipt financing is more secure due to the collateral manager's intermediation. The collateral manager guarantees the quality, quantity and availability of the collateral, provides price information and aids in disposal of the commodities, if necessary. The collateral manager also ensures that the commodities are adequately insured for natural calamities, theft and quality deterioration.

One of the challenges faced by collateral management service providers is the complexity of securing multiple warehouses spread across remote areas of the country. The Warehousing Development and Regulatory Authority (WDRA) were set up to regulate and ensure implementation of the provisions of the Warehousing (Development and Regulation) Act, 2007 for the development and regulation of warehouses, Regulations of Negotiability of Warehouse Receipts and promote orderly growth of the warehousing business. However, only 365 warehouses are registered with the warehouse authority, and an additional 555 applications are pending approval. 115 Agri Commodities and 26 Horticulture Commodities are registered for issuance of Negotiable Warehouse Receipts.

To provide secure and safe collateral management operations, extensive risk profiling, audit planning, and manpower management are required. Collateral management is manpower intensive and therefore the key risk to a collateral management agency remains the quality of the personnel deputed to supervise the inflow, storage, and outflow of commodities.

As with any aspect of business today, technology plays an important role in collateral management. The wide geographic spread, remoteness of the locations, and poor infrastructure pose huge challenges for rolling out technology in Indian collateral management operations. Today, most good collateral management service providers have the technology basics to ensure issuance and release of the warehouse receipt, track them centrally, and keep all relevant personnel

updated in real time on the status of the collateral. Collateral management in India will continue to see tremendous growth and acceptability. The product, which started around 2004 and promoted by two new private sector banks, is now being used by about 40 financial institutions to disburse loans.

To provide secure and safe collateral management operations, extensive risk profiling, audit planning, and manpower management are required.

Collateral management operations process A good collateral operating model aligns people, processes and technology, supported by clear objectives; products and services and well-defined controls.

Daily actions include: 1. Managing Collateral Movements: to record details of the relationship in the collateral management system, monitor customer exposure and collateral received, call for margin, transfer collateral to counter party, check collateral to be received for the eligibility, reuse collateral according to policy guidelines, deal with disagreements and disputes and collateral valuations, reconcile transactions.

2. Custody, Clearing and Settlement 3. Valuations: to value all securities and cash positions held as collateral.

Valuations may be done on an end-of-day or pre defined periodicity.

4. Margin Calls: to notify, track, and resolve margin calls.

5. Substitutions: to deal with requests for collateral substitutions. For example, substitute one form of collateral for another.

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Complexities of Distribution Channel in India –

Challenge or Opportunity?

The real challenge to any pharma manufacturer in India is ensuring their products are available on the store shelves across the country. Organized, modern distribution is largely absent in the country. Instead we have layers of small players, who control the last mile access. In the US, the company comes up with a product and then chooses the distribution channel. In India, we need to do it together. To top it all, the allocation of margins to these layers is not clear. This poses challenges for the pharma sector. Hitesh Sharma, Partner - National Life Sciences Leader, and Pratin Vete, Associate Director – Performance Improvement, of Ernst & Young speak about these challenges.

T

But what we are not factoring in is that over 90 percent of these new products will not exist three years ahead.

January 2015

here are a few key trends that define the Indian pharmaceutical industry – and the one that attracts the most attention is the proliferation of brands.

Studies by EY s show that 94 percent of the products launched since 2009 have failed to generate a sales of INR 2 crores.

Such brands contribute 70 percent of new product revenue, while approximately 10 percent of brands contribute to 75 percent of the revenue. From the supply chain perspective, this 90 percent, which has volumes but not value is the real challenge. The supply chain head has to spend considerable time and effort planning for these products. It is believed that new products are a growth driver for

30

the industry. But what we are not factoring in is that over 90 percent of these new products will not exist three years ahead, or they are not growing. As a result of this, the growth of existing products slows down, and we launch yet another new product.

Another trend that is visible is the shrinking of the new product pipeline.

EY experience has shown that over the past five years there has been a significant decline in new product launches – and this is across both domestic and multinational companies.

Now we have a situation, where there is a doubt about the quality and quantity

THE BEST OF 2014 of the growth driver – the new products.

Associated with this, there is an ever increasing sales force with sub optimal quality. The past seven years data shows that there has been a doubling of the number of representatives visiting a doctor –from 100 to 200. A top notch doctor could have 500 representatives visiting her. As a consequence, the time per representative has come down to 2 to 5 minutes. The industry's inability to attract right talent as representatives has led to a decline in quality, and as a result, the ability to build brands has taken a beating.

The industry is shifting from acute to chronic and from branded to generic. Concurrently, technology has led to the decline of the doctor's dependence on a medical representative for information about a product. The focus is shifting from portfolio focus to brand focus and from single stakeholder to multi stakeholder management. The industry today has the OTC, generics-generics, hospitals, specialty and super specialty segments. And each of them has its own supply chain dynamics. Another shift we are seeing is the change in focus from doctor to doctor plus patient. This means a change in the supply chain channels – there are large OTC brands who have started e-tailing their products.

There is a subtle channel transformation happening. And then there is the issue of channel sustainability.

We are aware that 80 percent of our population is living in class II to class VI and rural India. And we are also aware that the formal supply chain – under the company's control ends in class I cities – the stockists. Beyond them we have the wholesale chemists and an entity known as the hub chemist. These fall outside the control of the pharma company. The Hub chemist is at the cusp of the Class II and Class III town, having both a retailer and wholesaler license, with around 80 doctors and a same number of chemists who buy from him. And this is the entity who caters to 80 percent of the population, because that where the distribution has not reached. We have seen that in the generic –generic category, up to 80 percent of the volumes are happening through the hub chemist. And for large brands, they contribute 30

Any typical pharma company will have around 2000 distributors, out of which 500 would contribute around 75 percent of the sales. percent of volumes. And their numbers are not large – there are around 15000 hub chemists. We are all aware of their existence. But we have not picked up the significance of their contribution to the supply chains.

The second significant part about the supply chain is the channel complexity. If we look at the urban markets, the retailer has two major requirements – service within a quick time and better margins. And when we move to the Class II and below markets, the requirements change from service and margins to credit – generally upward of 45 days. And because they need such long credit periods, no distributor can sell to them – they can be serviced only by wholesalers.

The important factor here is creditworthiness.

And no stockist can guarantee creditworthiness of 750000 chemists. In a real sense, the stockist is an investor and the wholesales entities are the service providers. And we do not have any visibility here. We need to be aware of these complexities as we design our supply chains. India cannot afford the lean distribution models of the west, primarily due to the needs of our supply chains.

And while we do have a complex distribution channel, there is a significant skew – any typical pharma company will have around 2000 distributors, out of which 500 would contribute around 75 percent of the sales. EY had commissioned a study in Uttar Pradesh and Andhra Pradesh to study this skew. We found that around 1000 wholesalers contributed to around 35 percent of the volumes. And if we can get control over these, we could have significant control over the supply chain. Similarly, we need to identify the significant contributors among the hub chemists. And we end up with a substantial part of the supply chain under our direct control.

If we can understand from where the major contributions come from and map them, we will be able to gain significant control over the supply chains.

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THE BEST OF 2014

Connecting the Dots:

Supply Chain in the Dotcom Era The e-commerce boom in India has sparked a revolution in retail while simultaneously placing the customer in the driver's seat. The growth that has been witnessed in the space, and the forecasted potential, is momentous and has retailers aggressively vying for increased market share. While it's evident that the future will see the 'survival of the fittest', this segment has realised the need to evaluate their internal functions and make amends so as to differentiate their proposition.

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Kanika Bhutani Associate Director, Fraud Investigation & Dispute Services

January 2015

upply chain and logistics are core competencies for entities in this segment, and ironically these are the functions which lack thorough visibility; this inadvertently leaves the retailer vulnerable to losses.

Management of the retail supply chain is a key element of a retailer's central mission of getting the right amount of product, at the right time to the right customer in a costeffective way. Another essential facet of supply chain management, which organizations tend to overlook, is the incorporation of an efficient risk management system. While the value of an efficient risk mitigation structure is underestimated today, as we progress into the digital age the benefits will become more widely visible and tangible. Here are a few areas to consider as important elements in paving the future of an efficient and cohesive supply chain:

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The high-expense of the online game With the advent of 'pure-play' online retailers, who captured the market with their customer first approach through offers such as same day delivery and cash on delivery etc. had a lack of focus on initial Return On Investment. This approach has set the bar in the industry and has driven traditional high street retailers to launch online channels to complement their existing business model. Some 'brick-andmortar' retail businesses have invested heavily in setting up online retail channels to gain competitive advantage, only for this new channel to remain autonomous from the core business. In the early days of online retailing this might have been due to a conscious decision not to divert management attention from core business operations. However, as online retailing is growing significantly to be comparable in magnitude to traditional

THE BEST OF 2014 operations, this can result in wasteful and disruptive duplication of functions in areas such as marketing and supply chain.

A key driver of complexity in a retail environment is the number of unique Stock Keeping Units (SKUs) and the number of formats and fascias.

Traditional retailers will need to recognise that they may need to make significant investments in Information Technology (IT) when looking to become a multichannel retailer. This may well represent a step change from how they have operated before, with requirements for 24X7 reliability, availability and security of customer data. The best retailers are integrating their offline and online supply chains and investing in versatile supply chain systems and scalable, flexible online platforms.

Smart tech integration Although the struggle with the supply chain mechanism has been a traditional hindrance and a black hole of sorts, technology has slowly helped bridge a number of gaps. Technological advancements and breakthrough implementations are now paving the way for a more informed and controlled mechanism of supply chain management.

A key driver of complexity in a retail environment is the number of unique Stock Keeping Units (SKUs) and the number of formats and fascias. Whilst offering a large number of SKUs may seem to be offering customers what they want, it adds cost to the operation. High SKU counts result in larger distribution centres, higher stock levels, more suppliers to manage, and more effort to

maintain product availability. To support this complexity reduction in retail operations, warehousing and merchandising IT systems should be integrated and not reliant on human intervention to transfer information from one system to another.

Backward integration Taking off from efficient technology implementations in the supply chain framework, organizations could also look at backward integration to ensure streamlining of logistics, with the vendors or third party logistic providers.

The logistics industry is extremely competitive, leading to thin margins or often losses. It is dominated by unorganized operators with five or fewer trucks that results in inefficiencies and diseconomies of scale. While freight rates have gone up in the recent years, fuel costs have trebled further eroding the margins. Backward integration helps eliminate the fragmentation and apart from the lower cost benefits for the retailer, it also helps increase visibility and automates the process through the customised use of technology. These dynamics help avert misuse of the process and enhance predictability through the use of analytics and shared market intelligence.

Mitigating risk and corruption Among all the elements mentioned above there needs to be due diligence conducted in monitoring the organisations efforts. When the supply chain becomes complex the risk of inflated invoicing, manipulated margins, kickbacks and collusion between the supplier facing employee and contractor, is high. It is therefore crucial for brands to understand and map the supply chain. Therefore, there should be routine monitoring to assess their compliance so as to identify red flags and fraud vulnerable areas. It is prudent

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to invest in compliance support at these levels through awareness generation, capacity building and continuous monitoring. Both internal and external resources can be utilised for this purpose. This can be achieved by aligning supply chain compliance and integrity initiatives with the overall business strategy.

When a brand and its supply chain implement the Code of Conduct and practice sustainable compliance it creates value leading to employee satisfaction, environmental improvement, increase in production and sale, brand image and appeal to investors and consumers.

Value creation builds human capital, social capital and environmental capital further reinforcing the financial capital.

Amongst many challenges, brands today have to deal with the new challenge of supply chain compliance and integrity and remain profitable at the same time.

From a short term perspective, expenditure on supply chain compliance and integrity may appear to be an additional expense but it the long run it is lucrative and is in the best interest of the brand. In fact it should not be viewed as expenditure but an investment for sustainable development. Why stay behind? Make a difference. Invest in supply chain compliance and integrity and reap long term benefits.

When a brand and its supply chain implement the Code of Conduct and practice sustainable compliance it creates value leading to employee satisfaction, environmental improvement, increase in production and sale, brand image and appeal to investors and consumers.

Note: Views expressed in this article are personal to the author.

January 2015

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

FEATURE

Lean Management for

Cold Storage Cold Chains are inviting attention from investors, industry and the Government. As India sets out on establishing cold chains and cold supply chains, the industry can leapfrog the problems that developed nations faced in the process of developing cold chain management. Mr. Prashant Prashant Gubba Research and Technical Head Gubba Cold Storage

Gubba speaks about their experience in Lean Management for Cold Storage.

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few years back, a business associate introduced me to the philosophy of lean manufacturing and how implementing lean had dramatically changed their business fortunes. I then contacted the referred Lean Expert, a company called Kanzen Institute, and initiated the process of lean implementation with them. Right at the start, the goals for lean implementation were fixed considering the key business indicators: 1. Maximum utilization of cubic space: this has a direct impact on the business profitability since the main cost is refrigeration 2. Minimum truck Turn Around Time: inward and outwardthis enhances customer satisfaction 3. Maximize productivity of workers: labour cost being a significant component for both us and the clients The above goals were in line with the core lean philosophy which is “Doing more and more with less and less” The lean implementation was done through a series of focused improvement workshops during which cross functional teams were formed to take up specific improvement projects across the various plants.

These goals were in line with the core lean philosophy which is “Doing more and more with less and less”.

We have three broad types of plants – conventional seed storage, racked seed storage and frozen foods. One plant of each type was selected and teams were formed to focus on the flow of material from truck to storage as well as on space utilization within the storage facility.

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January 2015

FEATURE Lean Focused Improvement Workshop On the first day, the lean expert gave the teams a basic orientation on how to observe the process under Lean paradigms in order to identify Muda (waste or non value added), Muri (strain) and Mura (inconsistencies / variations). The teams then spent the day observing the process and came out with a list of observations and opportunities for improvement therein. These were shared in the evening with the rest of the teams and the Management and actionable points were decided.

These actions were then implemented on the second day – they included change in practices or methods of doing work, some modifications in equipment/ tools to help workflow and reduce strain and some strategic decisions on how the process should be run.

Lean Workshop under progress under leadership of Lean Expert Ganesh Mahadevan

On the third day, the same process was observed to verify and validate the impact of changes made and results measured. A 15 day action plan was made to complete the balance action items and these were monitored on a daily basis at the plant level and a weekly basis at the management level.

Truck Turnaround Time

Space Utilisation increased after increasing the height of the crates

January 2015

The team members observed the truck loading and unloading activities from the paradigm of Zero Waiting time of truck. By definition loading means that material is being physically placed in the truck and unloading means material is being lifted out of the truck. Hence if at any point in time this is not happening, it means the truck is waiting. The entire process from Gate In to Gate Out was studied as the time taken for this is the overall time the truck is held up at the cold storage facility. Some of the major improvements done by the team

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following the observations were: 1- Synchronization of activities at docking area with the activities at the storage bays so that the bags flow smoothly through the lift, conveyor and manually.

2- In several cases, some material had to be moved especially in racked storage facility to access the required material thereby delaying the start of loading. So a method of internal shifting prior to arrival of truck was implemented.

3- Linked to the above, a system of Pre-Alerts was started wherein our Plant Supervisor would interact with the regular clients on the previous evening and get the details of the trucks expected on the next day. This helped in planning of labour, equipment and internal shifting.

4- Delay in picking and removing SKUs in the frozen foods storage facility- multiple handling and counting of these products was observed. The team rearranged the

FEATURE entire ice cream room using 5S principles – any item should be located and picked in less than 30 seconds.

A trolley was designed and put into use to minimize rough handling of crates.

5- Multiple counting, cross checking and documentation was delaying the post loading process of gate pass generation. This was streamlined and a system having software and printer was shifted to the ante room next to the docking so that by the time the truck driver closes his vehicle and secures the goods the gate pass is ready.

Through all these improvements the average TAT for a 10 ton truck was drastically reduced from 45 minutes to 35 minutes. The labour productivity also went up significantly as the people were involved mostly in the actual loading/unloading activity and idle waiting time was cut out.

Storage Space Utilization These teams worked with the paradigm “Chilling is meant for the client's material be it seeds, ice cream, dairy products or others”. So any space in the facility occupied by other things or lying empty is non value adding from our perspective. This means we are spending money on refrigerating unwanted items or simply cooling empty space. Some of the major improvements done by the team following the observations were: 1- Uneven height of seed bag thappis observed resulting in unutilized space at the top. Maximum height marking and painting done on all bays to guide the hamali labour in filling up the bays.

2- A racked slot can take up to 1.5 MT load, we observed that our average load ratio was about 1.3 MT which mean about 13% underutilization. The main reason for this was difficulty in stacking the regular bags on the pallet especially for bulky seeds like cotton.

After discussing with our clients, we made the transition to bulk of the materials coming in jumbo bags of 1.5 MT capacity and these were loaded in the racked slots. Pallets and bags above 1.5 MT were also received and stored on the ground level.

3- In the frozen foods facility we store a wide variety of products with varying packaging and sizes – carton boxes, crates, plastic packets etc. Here the team

worked on fixing the stacking norms for each product based on client recommendations, the same was displayed and workers trained to follow them.

Within a couple of months of implementing these improvements, we had shut down one cold room in the frozen food unit saving huge costs of refrigeration, increased our racked storage to 1.5 MT/slot and space utilization in conventional seed storage by 10%.

Any space in the facility occupied by other things or lying empty is non value adding from our perspective.

Sustenance of Lean Our experience with this lean implementation was initially mixed. The focused improvement workshops brought our diverse employee base together promoting teamwork and sense of achievement which left everyone on a high at the end of the 3 days. But the hard part was to complete the action points and sustain the practices in the subsequent period. Here we, the top management have a significant role to play in terms of motivating and supporting the employees, monitoring their progress regularly and if need be even putting some pressure on them to finish things.

Over the last few months we have sustained about 60% of what we implemented which we are now in the process of enhancing. This we are doing through framing and implementation of Standard Operating Procedures (SOPs) which will incorporate all the good practices implemented during the lean improvement phase.

We are also implementing a reward and recognition scheme for our employees wherein the best improvement ideas implemented will be appreciated in various forum like our newsletter, on the notice boards and in internal forums.

In conclusion I would like to say that before Lean we thought we are already the best and there is nothing left to improve. But Lean opened up a different paradigm and this in turn gave rise to a whole new set of improvement opportunities.

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January 2015

Traditional supply chains deal with the flow of products and information across the value chain. Financial Supply Chain, on the other hand deals with the flow of finances. At the heart of an organization is its ability to meet its financial obligations in time. FSCM deals with events that will impact the working capital, payment terms, pricing and inventory decisions by the firm. For an SME this is crucial as they do not have any control over pricing, payment terms or interest rates.

SCMPro takes a look at two of the innovations by banks in managing Financial Supply Chain among SME's.

Financial Supply Chain for SME’s “ On the one hand we praise the contribution of SME to nation building, and at the same time deny them credit at attractive rates to make them profitable.

January 2015

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financial supply chain is the flow of payments between various entities in a supply chain. Apart from the flows related to the cost of goods or services, a financial supply chain also includes the financing products available to the entities in the supply chain. For quite a while, the suppliers and vendors of a large corporate were treated as separate entities, to be evaluated on a standalone basis. This put the SME suppliers and vendors at a disadvantage.

Small and Medium Enterprises operate under quite a number of constraints -poor infrastructure, lack of business process knowhow, below par human resources, small foot print and lack of avenues for financing. Because of the smaller revenue base and balance sheet size, SME's are typically assigned a BBB or lower rating – which places them at the bottom of the credit worthiness ladder. The Basel II recommendations on credit evaluation place a 150 percent risk weight for loans given to firms with a rating of BB or below. Which means that lending to most SME's will be a costly affair for banks. This is also reflected in the SME lending rates of banks. And therein lies the trouble with our financial system.

On the one hand we praise the contribution of SME to nation building, and at the same time deny them credit at attractive rates to make them profitable. The financial system and the banks in particular responded by

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that can help the SME financial supply chain. Products like Factoring and Forfeiting helped the SME in the collection process, at a slightly higher cost. The banking system developed two specific products aimed at the SME sector –the Channel or Supplier financing and the Distribution or Vendor Financing. In both these products, an SME either selling products to or buying products from a large company can borrow the rating of the larger firm for securing credit.

This is an innovative financing opportunity for the SME to get credit at better rates.

Distribution Financing Channel Financing is to provide integrated commercial and financial solutions to the supply and distribution channels of a large corporate. Channel Finance gives support to the commercial relationship between the banks' large clients and their suppliers and customers. The commercial aim of Channel Finance is to add value to supply and distribution channels by providing unique solutions that meet our customers' demands. To leverage Channel Finance, banks rely on two major product lines: Distribution Financing and Supplier Financing.

Distribution Financing is a value – added service given to dealers/distributors of big corporate, which are the customers of the bank.

The Distribution financing operates as follows: 1. The Big corporate have many dealers, and the dealers/ distributors who require a credit period when they purchase goods from these big corporate. Under this scheme, the invoice is drawn by the Big corporate. The Big corporate applies

for discounti ng these invoices and presents the same to the bank. The distributors do not need to pay the big corporate on receipt of the invoice. The dealers / distributors make the payment at maturity by issuing post-dated cheques at discounting.

2. On submission of the invoice to be discounted, the bank checks for the line limits and on adequate limits approve the request. If the limits are inadequate the request is rejected.

3. The invoice is discounted and the amount gets credited into the Big corporate's account. The limits are blocked to the extent the short-term loan is granted against the invoice discounted.

4. On Maturity the Bank sends the post-dated cheques given by the dealers or distributors for clearance.

A grace period is given for the cheques to get cleared. If the cheques bounce, then the invoice is not liquidated and after Maturity date plus the grace days, the Bank recategorizes or moves the asset from Normal asset account to Past Due Obligation asset account.

5. When the SME customer makes the payment, Bank liquidates the invoice and the limits are released.

The Bank periodically applies the accrued interest to the customer and debits the customer's account.

Supplier Financing Supplier Financing is a value added service that provides immediate liquidity to the SME supplier by allowing them to sell their trade

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“

Supplier Financing is a value added service that provides immediate liquidity to the SME supplier by allowing them to sell their trade receivables.

receivables, which have been accepted by their large corporate buyers. Proceeds are paid to the customer upfront and buyer subsequently pays the Bank on maturity date. It provides customers with the earliest possible use of funds.

The Supplier financing is provided to vendors or suppliers of a large corporate in two forms: ?

Pre-Delivery Financing: It is a

working capital finance given to supplier against a purchase order. It is usually used for manufacture of goods and this is only for the local market. ?

Post-Delivery Financing: It is

defined as a loan granted to a supplier against an invoice or bill of exchange, subsequent to the actual

January 2015

delivery of goods. Supplier can avail this credit in local currency only.

The Supplier financing operates as follows: 1. The supplier who wishes to acquire working capital finance used for manufacture of goods for the large corporate, requests for a pre-delivery loan to the bank.

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The financial system is evolving more sophisticated products for the SME financial supply chain. An exciting product that can be introduced is Total Accounts Management.

2. The supplier presents the Purchase order to the Bank, the bank checks for the line limits and on adequate limits approves the request. If the limits are inadequate the request is rejected.

3. A pre-delivery loan is given against one delivery schedule of the purchase order. The Predelivery loan is disbursed and the amount gets credited into the customer's account. The limits are blocked to the extent the loan is given.

4. The loan is rolled over if the maturity date is to be extended.

5. On receipt of the payment, the loan is liquidated. A predelivery loan can be liquidated either by negotiating the invoice with other bank or negotiating/ discounting the invoice and availing a post-delivery loan against it. This can happen at any point of time during the life cycle of the loan. The bank allows part liquidation of a loan. On liquidation the limits, which were blocked, will be released. At every stage of the life cycle of the loan and at month ends the bank accrues the interest.

The bank periodically applies the accrued interest to the customer and debits the customer's account.

Conclusion The Channel and Vendor financing schemes are an attractive opportunity for SME's to get credit based on the rating strength of the larger firm with which they are associated. For the financing needed to execute the larger firms business can be secured. The only catch here is that if the SME supplies or is a

January 2015

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partner with more than one large firm, then each facility sought by the SME will be funded at the rate that is applicable for the particular large firm. This is more of an issue for the banks, rather than the SME. The financial system is evolving more sophisticated products for the SME financial supply chain. An exciting product that can be introduced is Total Accounts Management – the bank takes over the management of both the accounts receivable and the accounts payable for the SME, leaving the SME to focus on what they do best – manufacture and sell.

The entire working capital financing of the SME will be taken care of the bank. However this may run into a road block in India because of the notorious parallel sales that happen in India. A pilot launched by a bank in India was a failure! But for SME's who wish to grow and professionalize their operations, this will be a welcome product.

SBI's SME Vendor and Dealer Financing Schemes Electronic Vendor Financing Scheme The scheme provides for financing receivables of vendors (suppliers) of reputed Corporates or Industry majors (IMs) with whom tie-up has been entered. The scheme is a completely web based solution with minimal branch intervention and provides instant credit to vendors account electronically. This enables both the Industry Majors with whom tie-up has been entered and their vendors to achieve the objective of Just In Time production. The vendors enjoy timely availability of funds.

Electronic Dealer Financing Scheme The scheme provides for financing purchases of Dealers from Corporates /Industry Majors (IMs) with whom tie-up has been entered. It is a completely web based solution with customized MIS provided to the stakeholders. The Industry Major enjoys timely availability of funds. The dealer can make effective utilization on working capital funds. Both Industry Major and dealer can make use of improved cash flow forecasting

SCMPro CLASSROOM

Forecast Error– Understanding Bias and Magnitude

This time of the year, most firms start the process of preparing their annual budgets – based on a forecast. And simultaneously, they try to figure out what went wrong in their previous forecast. A deviation from the forecast – positive or negative can have serious ramifications for a firm. In this class room series, Dr. Rakesh Singh explores the problem of forecast error.

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Dr. Rakesh Singh

easuring and understanding performance of forecast is as important as forecasting models used.

Demand planners often do not know which measure of error to use. There are number of measures. Some of the most frequently sited and used ones are Percentage error, mean absolute deviation, mean absolute error, Mean square error and mean absolute percent error. Which measure has to be used and when is the biggest question facing demand planners today.

Understanding performance of a forecast has two dimensions. First is Understanding bias and second, and

January 2015

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the most important, is to understand the magnitude of error in the forecast.

But these two quantitative forecast results may not give you any insight if you do not decompose them and find out what really drives these errors in your forecast and thus what determines your forecast performance.

The goal of any forecasting model is to minimise error and be as accurate as possible. Minimising error has two elements - bias and magnitude. The manager should use at least one measure of bias and one measure of magnitude on an ongoing basis to assess the forecast accuracy. Bias is defined as the systematic difference

SCMPro CLASSROOM between the forecast and actual demand over a period of time.

Statistically it can be measured by calculating Mean error or Cumulative forecast error or mean percent error. A persistent bias indicates that the forecast has been too low or too high and can be corrected by subtracting or adding the amount of bias from the predicted value.

The magnitude represent the variance between actual and the predicted demand. This is statistically measured by Mean absolute deviation, mean squared error, standard deviation and Mean absolute percentage error. The persistence of huge magnitude indicates that the forecast has been highly in accurate and cannot be corrected just like the Bias inaccuracy. When magnitude is high, it is important to look into the reasons as the forecasting system used may be a problem. It then needs to be revised and reviewed.

One more point that needs to be taken into account while understanding the performance of your forecast is whether error is due to forecasting model or is due to few functional business practises. One needs to understand the famous bullwhip effect. A build of high standard deviation around the mean may leave you unaware of a typical phenomenon that has been happening with corporates. And what is this? You may have stock outs in some places and surplus in another increasing overall supply chain cost, reducing supply chain profitability and putting a tremendous strain on overall business.

This happens primarily because the entire supply chain is operating in

silos, order moving up the supply chain levels is whipped simultaneously by the retailer, distributor, factory and finally the supplier leading to a changing number at different levels of supply chain. All these compounded by the compulsion of businesses to resort to unplanned promotion which increases forward buying not known to the demand planner. It may also happen that due to the obsession of the supply team to look for full truck load before they supply final goods the demand become surplus as it arrives late and competitor has already fulfilled it.

Which of these various measures of bias and accuracy is the best fit for measuring error? We in our corporate consultancy assignment have relied on Mean error (ME) to measure bias and Mean Absolute percent error (MAPE) to measure the magnitude. These two measures will enable the manager to quantify both bias and magnitude and enable them to use this knowledge to better the forecast and better business decision from those forecasts. The manager can suggest in sales and operations meeting that the forecast bias is very high and hence forecast error cannot be corrected unless functional practises which give birth to these biases are aligned. When he finds that magnitude is very high, he can suggest a complete review of the forecasting system.

So before blaming your forecasting model for the error, be sure that you know to measure it and fix it on the one hand and on other to align all functional tactics to the need of the forecasting to avoid bull whip effect.

This will go a long way to help you put your forecasting function at the center of all planning activities.

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Understanding performance of a forecast has two dimensions.

First is understanding bias and second, and the most important, is to understand the magnitude of error in the forecast.

So before blaming your forecasting model for the error, be sure that you know to measure it and fix it.

January 2015

FORECASTING

RISKS

FOCUS

KNOWLEDGE

Understanding & Managing

ACADEMIC ADVOCACY

In part 4 of the series, we discussed the role of people in the supply chain, and need to have the right competencies for their roles in the organization. We highlighted the importance of high level management attention, to ensure the right balance of resources, with the necessary leadership focus, as well as sustaining a high organization engagement level. It is this combination of good competencies and closely synchronized cross-functional processes that drives a high performing supply chain execution model, where people create the capabilities that deliver the performance and achieve the results that meet the strategic goals. We now look at managing supply chain risks. Stephanie Krishnan, Joe Lombardo and Raymon Krishnan continue with the series.

Risk in the Supply Chain

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n the last 4 Parts of the series, we looked at the internal elements necessary to achieve an effective supply chain performing model. However, whilst this is a fundamental component, we need to address the factors, that could disrupt the smooth flow of the business supply chain, and that can create immeasurable business risks with equally high negative consequences.

What are the types of business risks?

Every business faces potential risks each day of its operating life. The types of risk can vary for different businesses. The severity of risks will depend on the business nature, as well as on the supply chain dependencies.

In Part 5 of this series we will examine the typical risks to the supply chain. Risks are categorized into the potential business disruptions derived from sources of internal factors and external factors.

Internal Risks are those risks which arise from events occurring within business organization, and which could arise during the normal operation of the business. Whilst For more information on the articles or to contact the writers please email info@lscms.org

January 2015

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KNOWLEDGE these risks cannot always be forecasted, Many the probability of their executives are occurrence can be aware of the predicted with some risks that they degree of accuracy.

These types of risks face in the could be contained and business but often it is a “gut controlled directly by the business executive. feeling”.

The typical internal risks sources and impact to the supply chain, can come from, Strategic Risks, Financial Risk, Organizational& Operational Risk, Employee Risk, Innovation Risk and Business Governance.

Risks to the Supply Chain Put very simply, a factor that disrupts the smooth flow of the goods and services of the business is a potential risk. Fig. 1 illustrates the critical steps in the supply chain and business cycle. Disruptions and breakdowns are not only associated with physical and tangible sources. Some of the most serious disruptive risks can be from intangible sources. Data exchanges, data communications systems and other external sources are potential risks that could impact the supply chain.

External Risks are those risks which arise from events occurring outside of the business organization, which may have a direct or indirect impact on the business operations. Such events are beyond the control of the business executive, who could forecast some probability of occurrence but with a very low degree of accuracy. The external risks are those from external sources where the visibility is less clear and the probability of control is lower for the company executive. The typical external risks sources and impact to the supply chain, can come from, Political & Economic Risks, Compliance Risks, Environmental & Natural Risks,

Assessing the Business risks must begin from a zero base starting point. That implies that both internal and external sources of risk must be viewed with equal importance. The tendency is often for companies to address the external risks first. But

However, it is the physical flows of the supply chain that are usually the most visible disruptions to the business.

Risk Identification Process

An effective approach to risk assessment, will be to address the internal risks first.

Company executives often underestimate the risks from the internal Company sources.

Technological Risks and Health & Safety Risks.

Many executives are aware of the risks that they face in the business but often it is a “gut feeling” and sometimes cannot be quantified for sustainable actions. Managing Risk cannot be left to chance.

Most CEOs find it unimaginable that risks could originate from within their own business operations.

But the reality shows that the most vulnerable and damaging risks do originate from internal sources and frequently go unattended for a very long time.

Fig. 2 illustrates the Enterprise Supply Chain model, highlighting the key contributors to the supply chain. A “deep dive” process analysis and

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January 2015

review into all the key business enablers and their respective processes will identify the potential inherent risks.

An effective approach to risk assessment will be to address the internal risks first. Understanding clearly the internal risks, will assist in identifying the interdependencies with external sources and consequently external risks. Clarity of the types of risk and their sources is essential to assert a robust control and total management of the supply chain.

Risk Management Executive would be recommended as it would raise the awareness and focus on risk management across the supply chain. A formalized risk management leadership and structure would assess and mitigate the types of risk and the degree of exposure from both internal and external risk factors to the supply chain and to the business in general.

The key documents from such a structure would be a Risk Assessment Matrix and a Risk Defensive Plan. But before these can be meaningfully formulated, it will be necessary to identify which are the critical processes, resources and services to the business supply chain that generate serious risks.

The starting point for developing a defensive plan however simple or complex, is to know what are the factors that need defending from a risk and the potential negative impact on business continuity.

The guidance of a Risk Assessment Matrix, as illustrated in Fig. 4, would be used to categories the processes with Likely Failure Probability vs the Degree of Severity of such a failure. This would determine which are the key processes that need to be defended with an appropriate defensive/ contingency plan.

The risk matrix mapping must be done for all sources of risks.

This will identify the real and potential business risks as well as to focus attention on the urgency for mitigating actions.

We have outlined the typical internal and external risks in the earlier sections. However, there are other external risks, which Company executives need to understand and anticipate at all costs.

The new age external business risks are those associated with outsourcing. The rapid trend of outsourcing business activities means that whilst moving internal processes to an external 3rd party for economic reasons maybe a positive factor, managing the associated business risk needs to be an important decision consideration.

Whilst 3rd parties have to manage their own risks, the business interdependencies from outsourcing are often so crucial to the supply chain, that they must be considered as internal risk sources and included in the Company Risk Assessment.

Risk Assessment Process Considering the wide spectrum of risk and their sources facing any business, it is crucial the CEO recognizes the need to create a formalized structure to address Risk Management. The appointment of a

January 2015

Figure 4

An organization will have many processes both simple and complex ones, so a prioritization of the key business processes must be done by the process owners with their functional management. The completion of the processes the risk assessments will trigger a detailed review followed by the preparation of the necessary action plans.

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KNOWLEDGE The methodology for formulating a risk assessment is shown in Fig. 5. It must be applied across all levels of the organization that are relevant to the business supply chain.

and the disaster recovery plan will be prepared and directed by departmental high level executives. The defensive plan would encompass actions to contain, reduce or eliminate those risks where the business executive has the ability and The tools to prepare a risk assessment are widely available for power to do so. Whilst the disaster recovery plan (sometimes immediate use. For an effective deployment, called a contingency plan) would involve actions guidance and training would be recommended for deployed in case of an improbable but possible The risk the key process owners and functional managers disruption occurring, that would put the business at assessment to obtain the best benefits. risk. All business risk plans must be review master matrix periodically and tested, where possible, to ensure Building a Defensive Plan& Disaster Recovery is a key their effectiveness as intended.

Plans

document for

Whatever the nature of your supply chain, The risk assessment master matrix (a compilation the CEO & understanding the exposures and vulnerabilities to of all risk assessments), is a key document for the Company business risks and the interruptions they could cause, CEO & Company Executives. This report would Executives. is a fundamental requirement to managing and highlight some very sensitive factors about the sustaining effective supply chains. All the risk company's risks and vulnerabilities. As such all the management processes and plans discussed above inputs, departmental risk assessments and the compilation of must be realistic, effective and are part of the business the company master risk assessment report should be governance responsibilities. The full engagement of all managed by a high level executive reporting to the CEO. stakeholders in risk management is a fundamental preThe company risk assessment report must not be freely requisite. disseminated and should only be shared within a small circle of the CEO's top executives.

For more information on the articles or to contact the writers please email info@lscms.org.

The risk defensive plan (also called the risk mitigation plan)

Figure 5

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January 2015

FORECASTING

RISKS

KNOWLEDGE

FOCUS

ACADEMIC ADVOCACY

Warming up to

Cold Chains Anecdotal evidence suggests that nearly 40 percent of agricultural produce is wasted in India due to inadequate storage and handling facilities. Pharmaceutical products need to be stored always below 25 degrees centigrade for retaining their potency. Sea food exports need efficient cold storage to keep the products edible. Two of the most important items for human life – food and medicines depend on cold chains for their sustainability. SCMPro spoke to Mr. Akash Agarwal, CEO Crystal Logistics Cool Chain Ltd. on the future of cold chains in India.

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Any compromise with the assets would have reflected in the service quality, and the sustainability of the business.

January 2015

he year 2000 was seminal in the annals of Crystal Logistics. A chance meeting at a Dominoes outlet resulted in Crystal entering the reefer business – with one truck, which grew to 5 trucks in a span of four months.

And within another three months, Dominoes cancelled the contract, leaving Crystal with four reefer trucks idle. The hunt for the next customer led them to Amul, who immediately engaged the four trucks. That was the inflexion point for Crystal Logistics in cold chains. The growth of processed foods and pharmaceutical sector has created a huge demand for reefer trucks and cold warehouses.

In the early days of the cold chain industry, resources remaining idle even for a day was not acceptable. The demands of the customers have changed, the dynamics of the business has changed, and the ability of the service providers too has changed. In the early days,

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service providers were given three days' notice for reefer deployment, whereas today, the demand is for immediate dispatch.

The biggest challenge was the lack of domain knowledge in India. There were three or four cold chain logistics service providers, and no one to set benchmarks. The search for knowledge led Crystal to participate in various conferences overseas. By around 2006 Crystal logistics was engaged with the US Government, who provided them with training on the product, best practices and skill requirements. The first step was to build a good team of professionals. At the outset, Crystal took a conscious decision – to invest in state of the art assets – to bring in the best technology of the time, without cost considerations. Any compromise with the assets would have reflected in the service quality, and the sustainability of the business.

LSP FOCUS One of the major challenge in building an infrastructure is estimating the future needs. What today appears a huge capacity may not be adequate in ten years' time. That, and attention to quality.

Crystal entered the cold chain business from the reefer truck business. The idea was to create exceptionally large infrastructure for logistics. The business driver for this sentiment was the customer demand – all customers of the Crystal group were demanding cold chain solutions. The demand was for a single service provider to take care of the entire chain – from port clearance to the customer location, with the stipulated storage environment. The cold chain consists of a front and back end which was transportation and the middle which was cold storage. Crystal had the front and back ends covered.

The next logical step would be the cold storage depot. And unlike the normal warehouse which can be set up quickly, a cold chain will take a year to conceive and execute. In 2014 Crystal built a modern cold storage facility that has been audited by three separate overseas customers.

One of the challenges in cold t e is tropicalization. Cold chain technology evolved in cooler European and US climate. Which means the temperature variation is not that high – while in India, the temperature difference can vary from 45 degrees Celsius outside to minus 35 degrees inside, an 80 degree change; the range is much smaller in Europe. A major expense here is the energy requirement. The cold chain technology is the same. It is the energy required to cool the premises that varies. This also means we need better insulation than the developed nations.

One major learning at Crystal was the need to maintain standards. Developed

nations have an absolute measure of standards which everyone complies with. We in India lack this focus on standards.

Akash Agarwal CEO, Crystal Logistics Cool Chain Ltd.

Food Security and the Potential for Cold Chains Anecdotal evidence suggests that nearly 40 percent of agricultural produce of India is spoiled and cannot be consumed. This represents a huge threat to our food security and adds to food inflation. The trouble starts from the farm.At the harvest, due to lack of skilled resources, produce damage starts.

We do not have the necessary tools to cut the produce with minimal damage.

Immediately after harvest, the produce needs to be stored in a pre-cooler to maintain quality. Due to the fragmented nature of the farms and the remote locations, pre-coolers are not available. Then we have the transportation and storage. From the production centers, the products move to the processing centers - called food factories. At these processing centers, the produce is ripened and then sent to the cold storage. There are three stages here – the pre-cooling, the ripening and the storage.

Most often the farmer cannot afford a pre-cooler, or does not want to invest in one because it will remain idle for most of the year due to the seasonal nature of

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the crop. From the production center, the crop needs to travel to the processing center – which again is not available. At the processing center, the produce will be graded, sorted and washed. It is then stored in a cold room at the processing center. To move it from the processing center to a cold storage to the wholesaler and retailer, we need reefers.

The need of the hour is to create the entire chain – from the pre-cooling centers to the processing centers to cold storage and finally modern retailing outlets to ensure the produce is not wasted. We need pre-cooling collection centers at a five km radius of the production center. Once these collection centers are set up, we will need reefer trucks to transport food.

All this will happen if we create a

The need of the hour is to create the entire chain– from the precooling centers to the processing centers to cold storage and finally modern retailing outlets to ensure the produce is not wasted. regulator who will prescribe standards for each stage. Unless we specify standards, the industry will not have the moral suasion to invest in such assets.

We need policies and standards. India produces 500 million tons of food products – cereals, pulses, fruits, vegetables and the like. Hardly a few percentage of this is currently stored and transported as it should be. This one sector alone has the capacity to absorb billions of dollars to create the infrastructure. Clearly, this is a high growth area.

January 2015

FORECASTING

RISKS

KNOWLEDGE

FOCUS

ACADEMIC ADVOCACY

Supply Chain Management:

It's All About the Journey, Not the Destination Supply Chain Management is a relatively new discipline – it is around 30 years old. Over the years the term has grown to describe different things. This work by Lisa Ellram and Martha Cooper looks at five academic and practioners perspective on supply chain management, and the way forward. SCMPro brings you a review of the article. The article can be sourced from The Journal of Supply Chain Management, Vol. 50 No. 1.

The initial proponents of supply chain management were and practice, and some suggestions on how to proceed as consultant who looked at it as a way to optimally use researchers in designing future studies. resources and assets. The academic work on SCM stared The initial search by the authors threw up over 17, 00,000 later. Even as academics began to use the term supply chain articles and books. A second search provided 567000 articles. management, they realized it did not fully or accurately They then pared it down to the 100 most cited articles describe the complex web or network of relationships and published in journals. It was further pruned processes moving in many directions and to 57 articles based on their coverage. A large Academicians look connecting companies to make products and number of authors have taken a process services more effectively available to at supply chain orientation. As used here, process means, customers. The authors explore "the management in “supply chain as a means for linking evolution of the concept and considers the multiple streams. This structured activities designed to produce an current state of supply chain management. In has led to its output for a particular customer or market doing so, the literature associated with the (Davenport, 1993); it can also be a means to evolution of SCM as supply chain management concept is improve/coordinate processes.” a very broad area. examined. This literature is viewed according to the way that SCM has been conceptualized and applied."

Concluding Thoughts of the Authors Academicians look at supply chain management in multiple This paper examined five perspectives of supply chain streams. This has led to its evolution of SCM as a very broad management. The authors are optimistic about the future of area. It is this very broad canvas and lack of a common supply chain research and practice. This can be seen by the definition has hampered the progression of academic work increasing number of courses on offer. The industry is also and application by firms. This article seeks to trace the trying to standardize the terminology and practice. The evolution of SCM thought among researchers. authors conclude that there is a common set of principles that define supply chain management - such as information transparency, supplier segmentation, customer service, lean principles, quality, improved communication, segmentation, inventory management and the like.

In this seminal work, the authors have selected, highly cited articles that focus on the concept of supply chain management are classified according to whether supply chain management is viewed as a process, a discipline, a philosophy, a governance structure or a functional area, including a discussion of the merits of each approach, bringing us to where we are today. The paper concludes with an assessment of the current state of supply chain research

January 2015

Lisa M. Ellram and Martha Cooper (2014), "Supply Chain Management: It's About the Journey, Not the Destination,"Journal of Supply Chain Management, Vol. 50 No. 1.

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