SCMPr
n SCM World n Enterprise n Technology n Knowledge n HUMAN RESOURCE
Supply Chain Management Professional
August 2014 Vol. 2—No. 5
`150
‘Achchhe Din’
for
Infrastructure in India?
In This Issue Guru speak In Search of Excellence Page...10
Interface Betting on Technology Page...32
SME Corner Financing SME Supply Chain Page...38
SL_SCM Pro_W206 x H270mm_Ad5_Print.pdf 1 7/24/2014 1:42:57 PM
editorial
The Burden of Expectations
I
Girish V S Executive Editor
see a dangerous trend emerging among the educated elite of the country–ascribing every development to “Modi Sarkar”. Dangerous because it sends expectations sky rocketing. The government is already reeling under the burden of expectation – the new government will come, wave a wand and hey presto – we will be a new nation. It kind of absolves us of any effort. It is up to the government to find solutions to our problems. Not for us to try. And herein lies the rub. For a nation used to government in absentia, we now swing to the other extreme – an omni present government. The nation waited eagerly for the Union Budget. To a large extent it was an average effort. But a drowning man will clutch at straws–and we clung onto every word and interpreted it liberally. I for one, liked it for its modesty–not sending a wrong signal too is doing it right. No government can undertake policy u-turns. It leads to the exact thing we need to avoid –confusion. Think of it, if every government were to do policy flip flops, where would we be? Case in point–the now sick Ratnagiri Power– the erstwhile Enron. Congress government signed off on it. The next Shiv Sena–BJP government junked it, only to restore it due to tragic events. The next congress government threw it out again. Result–a sick firm that will never produce the power we so desperately want!Policy stability with nuanced shifts are what the doctor ordered. And the FM delivered. So is it a Budget of Hope–the jury out on this one. It is more of prelude. We need a lot more bitter pills before we get back on track. But will the politicians have any stomach for that! In this issue, we look at the Union Budget and what it means for our industry. We hope you will find it interesting. And as ever, please send us your feedback–we will love to hear from you. Happy reading.
Executive Editor
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Contents august 2014 4
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06 SCM News >> Analysis of latest Supply Chain and Logistics happenings from around the globe.
08 scm world >>
24 budget note >> Y M Deosthalee, CMD, L&T Finance Holdings on Union Budget 2014.
Dr. Rakesh Singh, Managing Editor, SCMPro outlines agenda for SAARC countries.
10 guru speak >>
26 Enterprise >> Girish V S, Editor, SCMPro brings you an overview on Walmart’s Supply Chain Practices.
Kalpesh Pathak, Vice President FIAT on the state of Supply Chain Management in India.
29 technology >>
22 budget proposals >>
32 interface >>
S.A.Mohan, CEO, Maini Materials Movement writes on impact of Budget-2014 for the industry.
We caught up with Xavier Pairada, Regional Manager, Asia, SSI Schaefer to discuss warehousing practices from around the globe.
I P Singh, Head of Barcode and Suppliers, Indian and Subcontinent, Zebra Technology in conversation with SCMPro.
14 lead story SCMPro Lead story for this month is on Union Budget impact on Supply Chain Sector
August
34 knowledge >> In part 2 of 6 part series, the columnists discusses level of adequate and competent execution capabilities of the organizations.
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Executive Publisher Jayaram Nair jayaram.nair@scmp.in Mobile: 9821732929
EDITORIAL Managing Editor Rakesh Singh rakesh.singh@scmp.in Editor Girish V S girish.vs@scmp.in Research Editor Piyush Shah piyush.shah@scmp.in
38 sme corner >> In SME Corner for this Edition, SCMPro brings to our readers a paper on SME Financing for Supply Chain.
43 Academic Advocacy >> XxxxxxxCMPro Classroom, Dr. Rakesh Singh explains the role of Transaction cost in SCM.
46 scmpro classroom >> Piyush Shah, Research editor, explains inventory decision in this issue of SCMPro Classroom.
48 human resource >> Darryl Judd in his inimitable style takes a close look at the so called inability of the supply chain sector to attract top talent.
Creative & Production Shivasankaran Pillai shiva.pillai@scmp.in Advertising Soney Mathew soney.mathew@scmp.in Mobile: 9987272050 Media Group 1/ 211, Sona Udyog, Parsi Panchayat Road, Andheri (East), Mumbai -400069 INDIA. Tel: + 91 22 60020157/159 Printed and published by Jayaram Nair on behalf of B2B Media Group. Printed at SAP Print Solutions Pvt. Ltd, 28 Laxmi Ind. Estate, Lower Parel, Mumbai - 400 705, India and published at 211/1, Sona Udyog, Parshi Panchayat Rd., Andheri (E), Mumbai - 400069. No part of this publication may be reproduced or transmitted in any form or by any means including photocopying or scanning without the prior permission of the publishers. Such written permission must also be obtained from the publisher before any part of the publication is stored in a retrieval system of any nature. No liabilities can be accepted for inaccuracies of any description, although the publishers would be pleased to receive amendments for possible inclusion in future editions. Opinions reflected in the publication are those of the writers. The publisher assumes no responsibilities for return of unsolicited material or material lost or damaged in transit. All disputes are subject to the exclusive jurisdiction of competent courts and forums in Mumbai only. ANNUAL SUBSCRIPTION RATE INDIA: `1,800/-
Academic Partner
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newS
Britain Risks a Supply Chain Crisis A
s the world awakes to responsible sourcing, reports in UK suggest that most British businesses have very little visibility on where their products were sourced from and how it was manufactured. This lend credence to doubts that slave labor was involved in manufacture of some of these products.According to a report in the Financial Times, “nearly three-quarters of supply chain profession-
als surveyed by the Chartered Institute of Purchasing and Supply admitted that they had “zero visibility” on the earlier stages of their supply chains. Eleven per cent acknowledged that this meant it was “likely” that slave labor was used at some point in the process of making goods and transporting them to the UK.” There is a tacit do not ask and do not tell policy among British businesses as far as respon-
sible sourcing goes. They are content with remaining ignorant of the malpractices in their supply chains.According to the International Labor Organization, about 21m men, women and children are slaves. This includes involuntary domestic servitude, bonded labor where employers exploit an initial debt to make people work for free, forced child labor, and adults coerced, forced or deceived into prostitution.
Plea to End Supply Chain Abuses Labor Strikes to Hit US Supply Chain? T
win disasters helped shape the supply chain in 2013. Foods advertised as beef were found to contain horse meat – sometimes 100 percent. In the other incident 1129 people died when theRana Plaza – a eight story building in Dhaka collapsed. The fallout – the UK government is urging retailers to adopt practices that will stop such abuses. What does this mean for suppliers in the developing world? For one, they will have to take care of a few issues – like undertaking safety audit of their premises – including fire. The factory buildings need to be designed better, pushing up rentals or costs. Another fallout would be on the employees – employees will get better pay and facilities, including fixed working hours and overtime pay for extra labor put in. Child labor will have to stop. These will increase the cost of production. But will the buyers in the developed world bite? For the record, Walmart was not interested in raising the purchase price post the Dhaka disaster. The firms in the developing world do not have the funding ability to absorb these costs. Are we going to see a more responsible buyer, before we push responsible manufacturing? Watch this space.
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he US is staring at a possible port strike. The US Port employers and international Longshore and Warehouse Union talks over a new contract many end in a strike or lockout. The last time the contract expired in 2002 saw a ten day lockout and supply chain disruption. It ended when the government intervened. To add to the woes, truck drivers at Los Angeles and Long Beach Port –which handle around 30 percent of the US container imports went on a strike. Fall out–shippers are exploring Canada as a port of trans-shipment. Canadian rail network is feeling the pinch as volumes to the US showed a 22 percent jump. Meanwhile shippers are caught in a dilemma–do they allow cargo to go to the US and get caught in a strike or re-route it to Canada? Either way some interesting time for shipping. Jonathan Gold, vice-president for supply chains at the National Retail Federation, said “The whole point of companies’ putting these contingency plans in place was to make sure that their cargo was able to move and wouldn’t end up sitting somewhere else”
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An Agenda for SAARC
With Modi assuming power the process of cooperation and integration in south Asia has acquiredsignificance. WTO ministerial conference in Bali has kept 31st July as last day for all member countries in the world to sign this accord and move WTO forward. Dr. Rakesh Singh outlines an agenda for SAARC.
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Rakesh Singh Distinguished Visiting Professor of supply chain strategy and economics, Great Lakes, Chennai and Chairman, Institute Of supply Chain Management, Mumbai
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he world at large is in favour of Trade facilitation agreement to be finalised by 31st of July. India is the only country objecting to putting TFA before the general council as the issue of food security has been pushed aside. This trade facilitation agreement is in India’s favour and will facilitate a big role in SAARC region of integration these economies but also fostering greater economic and political cooperation. SAARC is a multilateral cooperation forum. India, Srilanka, Pakistan, Nepal, Bhutan, Bangladesh, Maldives and Afghanistan are its members. SAARCcountries formed the South Asian Free Trade Area (SAFTA) to help their economies increase their intra country trade so that economic development improves. The region on the average has grown at a rate of six percent and during 2011-12 it grew at 7.2 percent. South Asia seems to be the second fastest growing economy in the Asian region behind South East Asia. What is disturbing is, though the regional GDP growth has been robust, the integration between these economies remains a distant dream. The intra country trade is just around 6 percent of their total trade. They have failed to emerge as even a distant form of a common market. It is important to investigate the reasons for this low level of intra country trade within the SAARC region. What are the impediment towards common market and what needs to be done to make these countries move and integrate for a larger economic gain sharing? The scale of economic activity has wit-
nessed an upward surge. Simultaneously what is interesting is that it is ranked higher than many African countries in not doing well in trade facilitation. The question is whether these countries are natural trading partners? Is trade at the border between these countries a costly affair? Is this the reason why outside trade is much higher than inter SAARCtrade? What are the facilitators of intra region trade? What’s the state of logistics and infrastructure which are essential for economic integration within the region, are they in place? What about trade facilitators are they in place? What is required to fulfil SAARCS dream of one common market? Impediments in the way of greater regional integration is caused not only by the traditional bilateral issues we all are well aware of. The purpose of this column is to explore the economic reasons for trade among countries in this region to be just 6 percent of South Asia’s global trade. A number of studies have come to conclusion that the cost of trade between south Asian economies is very high. Goods loose competitiveness at home before being exported overseas. A close look at the reasons for this dismal performance brings out the lack of infrastructure internally within these economies and cross border infrastructure that will facilitate trade. South Asia has also gained dubious reputation in regional integration including trade facilitation. The logistics performance index, published by World Bank is an eye-opener. Except India in this region, which has a rank of 47. All other countries are far behind some
scm world even behind African countries. Improving logistics performance is at the core of economic growth and nations and its business competitiveness. Indeed, inefficient logistics increases the cost of producing goods in this region on one hand and cost of doing business with others on other hand. Quality and extent of infrastructure defines the quality of logistics services. It is often said that firms today compete on the basis of their supply chains. A robust and efficient supply chain can only be built if the government plays its role of providing the right quality of infrastructure. This will work in inviting best of the Logistics service providers to eye this market build end to end supply chain solutions for businesses to be cost leaders and win both locally as well as globally. South Asia scores very poorly on infrastructure, be it road, rail, air and sea. There are no global service provider’s operating between these countries as the infrastructure connecting these countries is poorly developed. Research shows that these countries can grow together if trade happens and trade can only happen if the infrastructure is in place. And this, complemented by absence of numerous trade facilitators, make trade between these countries even more difficult. Trade facilitators along with infrastructure help nations connect to compete and grow simultaneously. Supply chain reliability is a major concern both for traders and logistics service providers. In a global environment consignments require more certainty about when and how the delivery take place. Thus efficient border management is essential for success of inter country trade. This eliminates delays and improves predictability in border clearance. Cooperation between governments in this region is critical to the success of cross border trade. Let’s analyse the data from United Nations social commissions for Asia and Pacific trade cost data. Trade cost depends upon transport modes, procedures, and product and country group. It reveals that a marginal improvement in trade facilitation brings substantial gain in trade volumes. The success of trade facilitation also depends upon how quickly the asymmetry in trading infrastructure is narrowed and made inclusive. If we look at SAFTA and its role in integration, the agreement between all these countries had identified the need to harmonise
custom clearance procedures, classification, transit facilities for intra SAARC trade and development of communication infrastructure. However provision of these agreements have not been implemented. The subcontinent is weighing down trade possibility because of absence of these facilitators. A region having more than 43 percent of Asia’s population and 24 percent of world population needs greater integration. Inefficient trade and transport facilitators have to give way to the south Asia of the future. These routes are combination of interstate movement of goods as well as passenger traffic movement in the region. Countries like India, Nepal, Bhutan and Bangladesh require greater road connectivity on the Indian Land. Identified route of road network has substantial length in India, connecting Afghanistan with country like Bhutan. Similarly in Maritime, Bangladesh ports can be used to remote landlocked Bhutan. A simple model of connectivity with Bangladesh will provide India with an easy accessibility with its seven north eastern sister’s states. The route has further connectivity with Myanmar, Thailand and other eastern countries. In addition to these, regional corridors to connect Lahore to Agartala, Kathmandu to Karachi, Timphu to Haldia, Kathmandu to Lucknow and many such corridors can be built to increase connectivity and growth. Further there is a need to look at trade facilitators. These countries need to reduce lengthy customs procedures, faster opening of credit account in the bank, faster cargo insurance with the help of ICT, use of ICT to obtaining permits and licences in Bhutan, synchronisation of cross border customs in south Asia, acceptance of south Asia regional transit, development of border infrastructure, single window approach and training of trade facilitating officials. This will go a long way in building a South Asia which will be prosperous and interconnected. Politics will have to facilitate economic in this region. India is almost 70 percent of land and the SAARC economy.It can play a leading role in integrating South Asia. While protecting its political interest of food security it should facilitate the process of WTO agreement on Trade facilitation. Modi has begun and process is to be taken forward to its logical conclusion.
A close look at the reasons for this dismal performance brings out the lack of infrastructure internally within these economies and cross border infrastructure that will facilitate trade. SCMPr
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guru speak
In Search of
Excellence
Supply chain today operates at three levels – strategic, tactical and operational. It includes product development, customers, manufacturing, suppliers and logistics. The result - supply chain management has moved to mainstream corporate consciousness. Today, a supply chain professional can be found in the board room. The journey has not been easy. Kalpesh Pathak, Vice President Fiat India Private Limited speaks to SCMPro on the state of supply chain management in India.
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t is interesting to trace the evolution of manufacturing and the phases in which firms developed their competitive edge. The first phase – around the time of independence was the decade of technology. Technology drove manufacturing innovation. Within a decade, technology was no more the differentiator. Then came manufacturing automation which became the driver which differentiated corporate strategy. In the current phase- across the globe, including India, technology and manufacturing automation are no longer differentiators for competitive advantage. Today firms compete on their supply chains. Take the example of my industry – the automobile sector. Almost everyone uses the same technology and more or less the same processes. Going forward the differentiator will be the supply chain. And firms with smart supply chains will be winners – having that clear edge in the market.
Supply Chain Strategy
Kalpesh Pathak Vice President Fiat India Private Limited
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If supply chains are to provide a competitive advantage, firms need to develop a keen focus on a few areas. Today, the biggest challenge we have in supply chain management in India is inventories. Again the automotive sector, (and I believe this to be true for many other sectors) we function in a push model – the manufacturer pushes inventory to the dealers, leading to huge stocks piled up in the pipeline. If we have to create an
efficient supply chain, the first task on hand is to reduce this stock in the pipeline. These inventories add to the cost of doing business and reduce the profits. Customers are also affected by such inventory pile up. The customer is forced to make compromises – when she walks into a showroom, the sales person at the showroom will try and liquidate the stock on hand – for example if the customer prefers a white car, but the dealer has black color, the sales person will try and manipulate the customer to accept the black car. In effect, the customer has compromised! The first focus should be on the outbound supply chain, and try reduce the inventory stuck in the supply chain. Probably, one way of doing this is to shift the measurement parameter for sales. The industry measures sales based on the dispatch to the dealer. Instead, if the industry measures the off take from the dealer, we will see a change in our approach to supply chain management. And we may see inventory levels going down in the nest three to four years. A second focus should be on the inbound supply chains. An estimated 90 percent of the products that go into a manufacturing plant is point to point delivery. There is no consolidation of the material or milk runs. The transportation market is fragmented, and are not able to offer optimized solutions. This offers us an opportunity to optimize and create efficient supply chains. The need of the hour is to push for a few 4PL players
guru speak to consolidate the smaller players in the supply chain. This will help us in reducing traffic congestion on the roads, fuel consumption and environmental pollution. The third focus area is demand variation. The firms prepare a sales forecast based on the previous year’s performance. And the figures are based on stock pushed onto dealers, not sales at the dealer showroom. Sales may realize that adverse market conditions they foresee may cause sales to be below their projections. And as is the norm, sales is reluctant to convey this to the management. The fallout of this is on the suppliers. They prepare their production based on this faulty forecast of sales. The result is inventory buildup at the suppliers end. And worse still – it leads to expensive capital blocked in unproductive inventory. Again an area for savings. These three initiatives should see a significant improvement in efficiencies. One fear that is sometimes voiced is that
The transportation market is fragmented, and are not able to offer optimized solutions. we are not geared to capture this level of information flow from the dealers. It is a fact that the government of India is keen to move to dealer off take as a measure of sales. The plan is to capture this data from the RTO, when the vehicle goes for registration. Such neutral collection of data can help the industry. There is a delay in implementing this, but the government is keen to move to this method. If not today, we will see this implemented a couple of years down the line.
Supply Chain Excellence A natural progression for any supply chain is embedding a culture of excellence. A simple concept, but a difficult proposition. Supply chain excellence is the ability to constantly monitor the supply chain, remove the constraints as they develop and constantly optimize it. Another approach is design for excellence – create an optimized design abinitio. This approach works will when you are setting up a new supply chain. In essence
this means incorporating the mistakes made in the existing supply chains and eliminating them at the design stage itself. Supply chain excellence is having the right product at the right place at the best possible price and quality to meet a customer demand. Achieving supply chain excellence is fraught with both internal and external challenges. The internal challenge begins with the lack of right skills and attitude. India does not have the educational infrastructure to create a trained pool of employees. The learning curve is long. Along with imparting the right skills, supply chain profession needs to be promoted as an aspirational career. A large proportion of the best and brightest do not see supply chain as a career option. Without a trained pool of employees, supply chain excellence is a pipe dream. Inaccurate demand forecast too can take away from supply chain excellence. A supply chain which has been designed for a certain projected value will not be as efficient at other values. Which in essence brings the focus on to accurate forecast of demand.
Green Supply Chain While on the topic of imminent changes, another imminent change is green supply chain – a very complex issue. A workable solution is a top down approach – where the government mandates certain performance parameters and the industry following suit. The other approach is bottoms up – where the industry comes together and adopts green practices. Fortunately, awareness of green practices are high among the automobile industry. The government has taken steps to develop the Bharat norms for automobile emissions. We very close to developed nations as far as emissions norms are concerned. We are Euro IV, while they are on Euro V. The Indian government had initial plans of adopting to Euro V norms by 2016. The stumbling block is the quality of fuel. Apart from the major metros, we have not been able to ensure clean fuel across the country. We may miss the euro V norms by a couple of years. The silver lining is that we are ahead of the curve as compared to other developing nations. Both the government and the manufacturers are committed to reducing emissions. SCMPr
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guru speak A significant cause of increased emissions are the condition of our roads. Better roads should lead to faster movement of goods, and reduced emissions. The wear and tear on the trucks will be lower, which would in turn reduce emissions. It is a fact that 95 percent of the supplies of the automotive industry – both in bound and out bound, travels by road, which creates a huge carbon foot print. One way would be to develop multi modal transport capabilities in the country. A network of ships and rail network should be developed to move supplies across the nation, with only the last mile through road. There are some encouraging developments here. The Railway Ministry, in association with SIAM has just released the Automotive Freight Train Operator Policy – AFTO –un-
A natural progression for any supply chain is embedding a culture of excellence - a simple concept, but a difficult proposition. der which the government will encourage manufacturers to own private rakes and the railways will facilitate the movement of these rakes over the rail network. The need of the hour is to increase the use of rail transport which will bring benefits in terms of cost and green concerns. However, widespread use of railways may still be some years ahead. Another option we have is the costal inland waterways. The current governments plan to interlink rivers will help us connect the country in better ways. There has been some experiments with the costal transport, but it has not seen widespread adoption – probably due to the policy paralysis we were facing. If we could develop this it will give us huge benefits in reducing the carbon footprint. Moving to inbound logistics – one way to reduce the carbon footprint would be to shift to re-usable containers. At FIAT we have around 60 percent of our incoming parts in re-usable containers – no wood and no cardboard cartons. We still have around 40 percent coming in wood and wood based 12 SCMPr
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packaging. It is time the industry moved towards eliminating wood based packaging. An interesting innovation in FIAT was the use of car carriers to get the chassis into our production ac instead of LCV’s. The number of LCV’s reduced by a factor of eight.This resulted in reduced carbon footprint and reduced the traffic into the plant. An integral part of a green supply chain is the active involvement of the suppliers. OEMs have to educate, inform and train their suppliers on green practices if they are to reduce their carbon footprint. Again, FIAT has been active in this area by holding regular training sessions on world class manufacturing.
Supply Chain Risk Management The Indian supply chains face four major risks. A major risk that a manufacturer faces is transportation risk – there is no surety that the deliveries will happen at the planned frequency. The supply chain may have been designed for a truck to enter the premises at a designated frequency. However, the transportation efficiency in India is around 60 to 70 percent. (Assuming 50 percent of the suppliers are within a 50 KM range.) In essence no supply chain professional can be sure of on time deliver all the time. Technology has made it possible to track shipments in real time – the supply chain manager will at least know where the goods are stuck. A second risk is the non-availability of raw materials. Especially so if the sources are limited and demand high. These have to be tracked more closely, and if possible alternate sources cultivated. There is a marked over capacity at most parts suppliers – essentially they have made large investments and the volumes do not justify the investment – this pushes up the finance costs and in turn affect the supply chain. The cost of doing business goes up. This is yet another risk. A unique risk for the Indian supply chain is labor unrest – the threat of a supply disruption due to strikes are very real. While there are a number of challenges to the supply chain, the constant push to excellence is what defines the Indian supply chain profession. And it is this search that adds zing to SCM as a profession.
INSTITUTE OF SUPPLY CHAIN MANAGEMENT Presents Seminar on
“Unlocking the Value of Pharmaceutical Supply Chain” Date: 13th October 2014, Venue: Scitech Centre-Jogeshwari East, Mumbai
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t is well accepted that going forward firms will compete on their supply chains – meaning the supply chain will be integral to the profits of a firm. Thinking of our supply chain as a profit enabler is a new paradigm. ISCM, supported by OPPI is bringing you an event where the best supply chain minds in India will engage you to think differently about your supply chains.
Who should attend?
This is an ideal platform for industry to come together with consultants, researchers and academicians to take a look at the emerging supply chain paradigms like:
Understand the building blocks of a profitable Supply Chain
Creating Dynamic Supply Chains to Expand Profit Margins
Validate your strategic vision and investment decisions
Developing a Framework For Supply Chain Performance Measurement
Discover, evaluate and compare the latest technologies, services and partnerships
Salience of Accurate Forecasts for Demand in the Supply Chain
Get an unbiased guidance from thought leaders
Sales lost: Supply Chain Visibility
Understand the importance of accurate forecasting
Supply Chain End-To-End Visibility: Creating Winning Partnerships
Connect with your peers to share best practices
CXO’s and senior supply chain professionals from sourcing, Distribution, Transportation, Planning, Demand Management, Supplier Relations, Quality and Regulations Key Takeaways
For further details contact: Sanjay Gupta - 8446942500 - info@iscmindia.net
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lead story
‘Achchhe Din’
for Infrastructure in India
lead story
Keeping in mind the importance of this budget as a beacon of hope for all things to come in the next five years, SCMPro decided to devote the lead story to the union Budget and its impact on the supply chain sector.
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he long wait is over – the first budget of the new government has been presented and appreciated by a large cross section of the people. The government did get it right in their assessment - Decisive vote for change represents the desire of the people to grow, free themselves from the curse of poverty and use the opportunity provided by the society. Country in no mood to suffer unemployment, inadequate basic amenities, lack of infrastructure and apathetic governance. As a country, we have grappled with dipping growth for the past five years. And we derived better. Did the budget deliver on the promise – well not really. There are definitely some good intentions in this budget – the resolution not to bring in retrospective tax is a major step. And the government committed itself to roll out of GST. The heart is in the right place. We begin our exploration of the Budget with - ‘Achchhe Din’ for Infrastructure in India. The 2014 Union Budget was tipped as the “Budget of Hope” – a budget that was to lay a roadmap for a rejuvenated India. Infrastructure has always been identified as core to the economic growth of India. The key to long term and sustainable development of the economy is investments in infrastructure – the famed one trillion USD that is needed to kick start infrastructure development. Dinesh Rajput explores the provisions for infrastructure in the budget, In the next article, we take a look at the provisions for Warehousing in the budget.For a long time, India has allowed tons of food grains to rot. Inadequate storage space has been a perennial problem. Improper storage causes a colossal waste – something that India cannot afford. This in turn has the potential to push food inflation up. In a refreshing change, the new government has realized the primacy of storing grains in a proper warehouse. The Union Budget has earmarked Rs. 5000 Crores for developing warehouses. And finally we bring you the responses from two industry CEOs – Mr. Y. M. DeosthaleeChairman & Managing Director,L&T Finance Holdings and Mr. Mohan S A, CEO, Maini Materials Movement Pvt. Ltd. Happy Reading
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Road transport and Highways
‘Achchhe Din’
for Infrastructure in India?
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Road transport and Highways
The 2014 Union Budget was tipped as the “Budget of Hope” – a budget that was to lay a roadmap for a rejuvenated India. Infrastructure has always been identified as core to the economic growth of India. The key to long term and sustainable development of the economy is investments in infrastructure – the famed one trillion USD that is needed to kick start infrastructure development. Dinesh Rajput explores the provisions for infrastructure in the budget – will we live up to our potential? SCMPr
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Road transport and Highways
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ndia grew at less than 5 percent in the year 2013-14 - the lowest in a decade.We went into an election with palpable sense of gloom across the country. And to our relief, India has elected for a change. The new government will not find the going easy there are many obstacles and slippery turns the government will have to navigate. The first and the foremost task is reviving the economy and dealing with inflation. The solution tothese twin problems is a single factor - ‘Infrastructure Development’. Since the economy is facing a slowdown, a kick start by new government is the need of the hour. Government will have to push aggregate demand by spending on infrastructure development. This will surely help the economy in meeting future growth requirements. Infrastructure development will also help the industry to increase output and reduce the cost of supply chain. Second part is constantly increasing prices. Though RBI is trying its best to deal with inflation, they are still unable to handle the problem. Supply shock is one of the biggest causes behind inflation in India which RBI alone cannot reduce. The government will need to debottleneck supply chain problems in food distribution. And again the answer is government will need to put huge money in infrastructure development.
Current Status of Infrastructure in India India as an emerging hub for infrastructure projects is still lagging behind in many areas. There are various obstacles which investors face in running infrastructure projects. There various issues like delays in regulatory approvals, problems in land acquisition and rehabilitation, and environmental clearances.According to the Ministry of Statistics and ProgrammeImplementation (MOSPI) Flash Report for Febru18 SCMPr
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ary 2014, of 239central-sector infrastructure projects costing `1000 crore and above,99 are delayed with respect to the latest schedule and 11 havereported additional delays with respect to the date of completionreported in the previous month. The additional delays in respectto projects relating to the petroleum, power, steel, and coal sectors are in the range of 1 to 26 months. The total original cost ofimplementation of these 239 projects was about `7,39,882 croreand their anticipated completion cost is likely to be ` 8,97,684 crore, implying an overall cost overrun of Rs. 1,57,802 crore(21.3 per cent of the original cost). The expenditure incurred onthese projects till February 2014 was `4,10,684 crore, which is45.7 per cent of the total anticipated cost(Ministry of Finance, 2014). Freight loading (excluding loading by Konkan Railways) by Indian Railway during 2012-13 was placed at 1008.09 million tones. India has one of the largest road networks in the world, spread over 48.65 lakh km.Domestic passenger traffic handled at Indian airports reached 122.43 million during April to March 2013-14.The Airports Authority of India (AAI) is a major airport operator managing 125 airports across the country.During 2013-14
(April to March) major and nonmajor ports in India accomplished a total cargo throughput of around 980.49 million tones. The government on 26 February 2009 approved the RoadRequirement Plan (RRP) for upgrading of 1202 km of NHs and4363 km of state roads (total 5565 km) to twolane at a cost of `300 crore in 34 left wing extremism (LWE)-affected districts inAndhra Pradesh, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh,Maharashtra, Odisha, and Uttar Pradesh for inclusive growth ofthese areas. Under the RRP, development of 2929 km lengthhad been completed till 2013-14 with cumulative expenditure of `3878 crore. The development of roads under the programme isscheduled to be completed by March 2015.
Budget for Infrastructure There are around 900 PPP projects currently under development India. To streamline the PPP processes and develop the market for further investment government has decided to set up an institution called 3P India by providing the corpus of `500 crores. Sixteen new port projects are proposed to be awarded this year with a focus on port connectivity. `11,635 crore will be allocated for the development of Outer Harbor Project in
Proposals for Infrastructure in the Budget n `37,800
crore to National Highways Authority of India for roads and `14,000 crore for rural roads. Plan to award 8,500km road projects this year. n Development of inland waterways and harbor projects. n Develop and complete industrial corridors through close monitoring by a National Industrial Corridor Authority. n `7,060 crore for 100 smart cities and satellite towns with transport and infrastructure. n Sixteen new port projects to be awarded this fiscal year. n Single-window customs clearances at Indian ports. n Airports in tier I and tier II cities to be developed via the public-private partnership model. n Special economic zones to be revived. n Setting up Infrastructure Investment Trust for attracting long-term funds. n Reduction of several customs and excise taxes to boost domestic manufacturing.
projects with improved liquidity, better viability, andreduc Finance, 2014).
Road transport and Highways
The latest available data on gross deployment of bank cre shows that the rate of growth of bank credit moderated from a per cent in 2013-14. ii) Signed an agree-12 to17.7 Tuticorin for phase I. SEZs will also Growth Rate (Avg. of 12 monthly y-o-y) of ment with the ADB for be developed in Kandla and JNPT. Credit to Infrastructure Sector A project on the river Ganga called ‘Jal Marg Vikas’ (National Waterways-I) will be developed between Allahabad and Haldia to cover a distance of 1620 kms, which will enable commercial navigation of at least 1500 ton vessels. The project will be completed over a period of six years atan estimated cost of `4,200 crore. Government has proposed investment in National Highways Authority of India and State Roads of an amount of `37,880 crores, which includes `3,000 crores for the North East. During current financial year a target of National Highways construction of 8500 km will be achieved. Government has devoted a sum of `500 crores to develop a transport network which can insure faster travel. This will also improve the supply chain in transporting goods across cities. Government will initiate work on select expressways in parallel to development of Industrial Corridors.
Infrastructure Financing The India Infrastructure Finance Company Limited (IIFCL) was set up in 2006 for providing long-term financing for infrastructure projects that typically involve long gestation periods. The IIFCL funds viable infrastructure projects through long-term debt as well as refinance to banks and financial institutions for loans approved by them. During 2013-14, the IIFCL mobilized long-term resources primarily from multilateral and bilateral institutions like the ADB, World Bank, and KfW aggregating `1605 crore as compared to `1080 crore raised during 2012-13. During 2013-14, the IIFCL: i) Successfully mobilized `9840.74 crore through tax-free bonds issue as against `10,000 crore allocated to the IIFCL.
another line of credit for US$ 700 million and also executed a Finance Contract Agreement with the European Investment Bank (EIB) for a line of credit of Euro 200 million. iii) Sanctioned two more pilot transactions for proposed bond issuance of around `1417 crore taking cumulative sanctions for four transactions amounting to around `2200 crore under its Credit Enhancement Scheme (pilot basis). iv) Further disbursed `1058 crore under the Take-out architect of Golden Quadrilateral Finance Scheme taking cumulative Project and various other projects disbursements from 27 banks/ fiwhich has resulted in improved nancial institutions to `3819 crore. Rail-Road and Port-Road connecv) Was allowed to offer finantivity. In Budget 2014-15 the govThewith Take Away cial assistance to PPP projects ernment has given good emphasis tenors longer than other consoron infrastructural development tium lenders and remainThe as sole triedthe inclusive development Budget has clearly and shown intentions of new govern lender, if necessary, after other of various backward regions in of infr development in India. NDA has a good track record lenders are paid. This will enable India. Apparently India is headleadership of Prime Minister Mr. AtalBihari Vajpayee. Mr. Va spreading the debt repayments ing towards better infrastructure Quadrilateral Project andofvarious other has re over a longer period which will roads, rails and projects ports but which govbenefit PPP infrastructure projects ernment will definitely face many with improved liquidity, better viobstacles while going ahead with ability, andreduced restructuring their plans. Funding such a huge risk(Ministry of Finance, 2014). requirement at the time when The latest available data on gross various developed economies are deployment of bank credit to marecovering from the shock of recesjor infrastructure sectors shows sion will be the toughest task for that the rate of growth of bank the new government in India. credit moderated from an average Government huge emphasis on of 44.8 per cent in 2011-12 to17.7 PPPs needs to be wait and watch. per cent in 2013-14. The new government will have to gain the trust to attract foreign funds The Take Away from global as well as domestic marThe Budget has clearly shown the ket to attract Investment. intentions of new government reDefinitely the budget allocations garding the infrastructural develhave given a ray of hope to the indusopment in India. NDA has a good try and public at large in regards with track record of infrastructure dethe infrastructural development Invelopment under the leadership dia but we all have to patiently wait of Prime Minister Mr. AtalBihari for some more time to seeAchchhe Vajpayee. Mr. Vajpayee was the Din for infrastructure in India. SCMPr
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lead story
The Storage Fillip For a long time, India has allowed tons of food grains to rot. Inadequate storage space has been a perennial problem. Improper storage causes a colossal waste – something that India cannot afford. This in turn has the potential to push food inflation up. In a refreshing change, the new government has realized the primacy of storing grains in a proper warehouse. The Union Budget has earmarked Rs. 5000 Crores for developing warehouses. SCM Pro takes a look at the budgetary provisions and its implication for Indian agriculture.
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lead story
Building Storage n Allocation of Rs 5,000 crores will boost the
infrastructure for scientific storage of foodgrains and perishables. n The additional storage will be created in food-deficit areas. n State warehousing corporations and agriculture marketing Boards would execute the majority of projects. n Will boost employment opportunities at the doorstep of farmers and help reduce disguised employment in the agriculture sector.
This would help in strengthening infrastructure for scientific storage of foodgrains and perishables.
T
he Food Security Act is expected to create a warehouse shortfall of around 1.5 million tons for food grains and perishables. This is over and above the existing shortfall. Warehouses are the no so glamorous part of the supply chain. Yet they are crucial to lower food inflation. The government has finally woken up to the necessity of improving warehousing by providing an outlay of `5000 crores for Warehouse Infrastructure Fund to be used in setting up an additional one million tons of storage space.This would help in strengthening infrastructure for scientific storage of foodgrains and perishables. National Bank for Agriculture and Rural Development (Nabard) would be the nodal agency for the project and funds would be made available as financial assistance. India lacks cold storage chains – leading to an estimated 40 percent of agricultural produce going waste
even before it reaches the retail outlet. NABARD can now help setup a series of cold chains and cold storages for fruits, vegetables and milk.The modalities for the allocation of funds are not yet clear. NABARD is in the process of finalizing the allocations. It is expected that a forma; announcement may be made by the end of July or first week of August. And initial indications are that the investment would be equitably divided among all states of India. The private sector may get a small allocation–estimated at between 15 to 20 percent - essentially to rope in state-of-the-art technology in storage and warehousing. The bulkof the projects would be executed by the State warehousing agencies. State warehousing corporations and agriculture marketing boards would execute the majority of projects and the requirements of Central Warehousing Corporation (CWC) would also be considered while earmarking funds. This is a welcome development for the farmers of India–if all goes according to plan, a majority of these warehouses will be created nearer to the farmer–making it easier for the farmer to store his output in welldesigned warehouses. One of the major problems with farmers was their inability to raise cash post-harvest. Banks would extend crop loans easily. Lack of adequate warehouses meant farmers cannot take recourse to warehouse receipts, a funding tool available to some farmers today. Under a warehouse receipt scheme, farmers can raise funds on the produce stored in warehouse, pending its sales as market conditions improve. SCMPr
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lead story
Budget proposals:
Impact on Logistics and Supply Chain Industry T
S.A. Mohan CEO, Maini Materials Movement
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he new government’s presentation of the budget for the year was preceded with high expectations not just for the country but also for warehousing, supply chain and logistics industry. The budget did not disappoint and for the first time we saw several industry level announcements for the logistics sector. Just the fact that the Honourable Finance Minister used the word ‘warehouse’ more than 10 times indicates the Union Government’s focus on warehousing &logistics! Warehouses have become a key part of supplychain management as growth of organised retail is driving logistics and warehousing infrastructure for quality space. Therefore, more Next Gen warehouses are the need of the hour. Capacity addition in warehousing sector requires commensurate improvement in supply chain infrastructure in terms of handling, storage and transport and this will help bring down costs.
lead story There are high hopes to bring a final solution in the course of this year and approve the legislative scheme which enables introduction of GST. This would streamline tax administration and avoid harassment of business and result in higher tax collection both for centre and states.
On Infrastructure
I welcome Mr SadanandaGowda’s move to set up logistics support to e-Commerce players by providing designated pick-up centres at identified stations. It would offer supply chain & e-Commerce industries an alternative to the expensive air cargo that they now rely on for delivery. Rail cargo could be up to 45% cheaper than air-cargo, according to distance and volume, as per industry estimates. The industry can now use a judicial mix of road-rail and air to improve fulfilment at lower costs. There were specific announcements of increasing 24X7 customs clearance at ports and airports with a solid intent to implement Goods and Services Tax (GST) in the coming year. Introduction of GST has been given a thrust. Committing to expeditiously rolling out Goods and Services Tax (GST), Finance Minister ArunJaitley said that a solution to the issues relating to the comprehensive indirect tax regime may be finalised in the current year itself.
Maiden budget of our new Union Government has paved way for infrastructure reforms and has created a sense of confidence among investors, who are awaiting removal of structural bottlenecks in projects. With much of the Budget focussed on infrastructure, including the building of ‘smart cities’, airports and sports complexes, I’m optimistic about the new government’s agenda of building up infrastructure projects.Modi government has made its intent very clear that attracting private sector in infrastructure sectorwith PPP and PPPP models is the only way out. The government has laid special focus on development of critical infrastructure that is needed to spur economic growth. This budget promises to address several issues faced by the roads, power and airport sector. The proposed investment of Rs 37,800 crore into NHAI and State roads and a specific focus on development of select expressways in parallel to the development of industrial corridors will improve overall infrastructure, connectivity and lend efficiencies to supply chain. `11, 635 crore allocation to develop the first phase of outer harbour projects in Tuticorin, development of SEZs in Kandla and JNPT to ramp up the infrastructure in shipping, and Jal Marg Vikas project on Ganges to develop inland navigation between Allahabad and Haldia will showcase newer opportunities and cost advantages to the industry. Directive to build new airports in Tier- 2 & Tier – 3 cities is a welcome step forward.
On expectations logistics industry The Finance Minister has set the tone for an aggressive and sustained growth path by announcing a progressive Union Budget. Being the lifeline of the economy, logistics industry expected a set of reforms and thrust across related sectors of the economy and the Finance Minister didn’t disappoint. The proposed investment of Rs 5,000 crore in warehousing, a clear focus on implementing GST by the end of this fiscal will provide the much needed impetus to the logistic industry. The proposed investment into NHAI, State roads and development of select expressways in parallel to the development of industrial corridors will improve overall infrastructure, connectivity making supply chains highly efficient. SCMPr
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budget note
A Promise Redeemed T
Y M Deosthalee Chairman & Managing Director, L&T Finance Holdings
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he Finance Minister’s maiden budget is more directional in nature. Several reformist measures have been announced viz., Road map for fiscal consolidation to reach 3% by fiscal 2017, sorting out all issues related to GST by the end of the year, controlling non-planned expenditure and establishing stable and predictable tax regime.A lot depends now on the implementation of the road map. Coming to specifics, the task of achieving the target of 4.1% fiscal deficit is indeed challenging, given the current state of the economy. However, increase of planned expenditure to Rs. 5.75 lakh cr indicates to channelling of tax payers’ money for productive purposes. The increase in FDI level in insurance and defence was a low hanging fruit and should bring in some money to these sectors. It is heartening to note that the Government recognises the importance of PPP in infrastructure sector. However, specific initiatives are needed to boost the investments through PPP model, which are yet to be announced. The proposed allocation Rs.37,880 crs for investment in central and state roads should provide impetus for roads. The announcement for awarding 16 new ports and smaller airports in PPP mode should augur well for these sectors.
The announcement of REITs type structure for Infrastructure projects would facilitate portfolio churning for developers. While the regulatory relief announced for banks in the form of lower SLR, CRR for infrastructure lending is a positive step,it is necessary to provide similar kind of relief to Infrastructure Finance Companies (IFCs), who operate in this sector. The budget also provides some relief to the common man in the form of increase in the exemption limit in income tax, increase in exemption under section 80-C and also housing loans for self-occupied properties. One of the steps for boosting the manufacturing sector, in the form of investment allowance for investments over Rs.25 Crs would benefit SMEs significantly. The Finance Minister has also tried to address the supply side bottlenecks and the burgeoning inflationary situation by establishing a Price Stabilization Fund, which would striveto mitigate the risk of price volatility in agricultural produce. The plan to invigorate warehousing sector should improve the distribution of food grains and enable tackling inflationary pressures. Overall, the budget is a decent exercise given the fiscal constraints and the short time available with the new government.
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WalMart –
Building on Supply Chain Fifty two years ago Walmart opened its first retail outlet in Rogers, Arkansas. Today Walmart has 11000 retailunits in 27 countries,more than 60000 suppliers across the globe. The secret ingredient in its success is its focus on supply chain management. Walmart has had a huge impact on supply chain thinking and practice, and is regularly cited for its supply chain excellence. Girish V S, the Editor of SCMPro brings you an overview of Walmart’s Supply Chain Management Practices.
E
ver since the beginning of the industrial revolution, the necessity to organize the flow of goods and services – both into and from the manufacturing facility in a timely and smooth manner has been a challenge for corporates. Any break in the supply chain will result in lost sales and reduced profits. Walmart is the worlds most successful retailer with a turnover of USD 473 billion of which USD 136 billion came from its international operations. It manages USD 32 Billion in inventory. Walmart has become the most powerful
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retailer with the highest sales per square foot, inventory turnover, and operating profit of any discount retailer. Walmart started with a goal to provide customers with everyday goods at the lowest price possible. And the way to achieve it was through supply chain excellence. Sam Walton, the founder of Walmart was convinced about the power of information technology in operations that as early as 1960, he enlisted himself in an IBM school in New York to recruit experts to computerize its operations.
The road to supply chain excellence began in 1962, when Sam Walton purchased bulk merchandise and transported it directly to his stores. The first innovationin supply chain was removing a few of the chain’s links. In the 1980s, Walmart began working directly with manufacturers to cut costs and more efficiently manage the supply chain. Another innovation of the early years was a supply chain initiative called Vendor Managed Inventory (VMI). Under VMI, manufacturers were responsible for managing their products in Walmart’s warehouses. As a result, Walmart had close to 100 percent order fulfilment. By 1989 Wal-Mart had the lowest distribution costs estimated at a mere 1.7percent of its cost of sales, as compared to competitors like Kmart at 3.5 percentor Sears at 5 percent.
Information Sharing and Collaboration Early on, Walmart realized the importance of collaboration and data
Enterprise
sharing. In 1980s, Mike Graen of Procter & Gamble wasdeputed to Walmart to work on a data sharing project. At that time, Walmart was P&G’s fifth largest customer. Data sharing and collaboration between suppliers and retailers had not yet come of age. Graen had to just improve the information flow between the two companies using IT. According to Graen, “Within the first eight months, we made a $50 million swing in profitability [in terms of Walmart’s profitability selling our product].” This was the “Continuous Replenishment”. The only thing that P&G knew about its product demand was the orders that were placed by the retailers. With this development, P&G was for the first time, able to see inventory levels, store-level sales data, and every information from when an item was shipped to Walmart to when it was sold. And very quickly Walmart extended this data collaboration to who ever wanted it. As a next step, Walmart unveiled its “Retail Link System”
Its state of the art IT infrastructure enables its suppliers to track and analyze sales data, forecast demand and in turn this helped Walmart, track and predict inventory levels. where the supplier could get sales data of product sales at each store every day. This helped Walmart lower its merchandising cost at the same time helped its suppliers plan their production better. This created competition between the suppliers, further reducing the prices for Walmart. As Matt Waller, chief data scientist, and PV Boccasam, CEO, Orchestro, puts it “Each brought an alternative approach to forecasting, estimated their own and cross-price elasticity and shelf outof-stock rates, calculated store and DC fill rates, analyzed assortment decisions, estimated inventory investment and cost analyses, derived
return on investment for the shelf space, and illuminated category trends and its drivers.” Walmart streamlined supply chain management by pioneering communication network with suppliers to improve material flow and lower inventories. The network of global suppliers, warehouses, and retail stores behave almost like a single entity.
Cross Docking Cross docking, a logistics practice first pioneered by the US Military, became the pivot of Walmart’s efficient inventory replenishment strategy. Cross Docking is the direct transfer SCMPr
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Its state of the art IT infrastructure enables its suppliers to track and analyze sales data, forecast Enterprise demand and in turn this helped Walmart, track and predict inventory levels
of products from inbound or outbound truck trailers without extra storage, by unloading items from an incoming vehicle and loading these materials directly into outbound vehicles or vice versa, with no storage in
and service response logistics. Technology has helped Walmart to foster informal cooperation among stores, distribution centers and suppliers,reducing centralized control. By tracking customer purchases and demand, the system al-
The road to supply chain excellence began in 1962, when Sam Walton purchased bulk merchandise and transported it directly to his stores. between. As an added bonus, the trucks could take back the unsold merchandise.
Technology Walmart has embraced technology to maintain its goal of everyday low pricing. Its state of the art IT infrastructure enables its suppliers to track and analyze sales data, forecast demand and in turn this helped Walmart, track and predict inventory levels, create highly efficient transportation routes, and manage customer relationships 28 SCMPr
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lows consumers to effectively pull merchandise to stores rather than having the company push goods onto shelves - the vaunted demand chain. Recently Walmart has used RFID and Smart Tags that can be used by employees using hand held devices to identify items that need to be replenished. Early results point out that there was a 16 percent reduction in stock outs and RFID items were replenished thrice as fast as those identified using bar codes.
According to Army Col. Vernon L. Beatty, who commanded the Defense Distribution Depot in Kuwait, spent a year with WalMart as part of the military’s Training with Industry program “Supply chain management is moving the right items to the right customer at the right time by the most efficient means. No one does that better than Walmart.”
Supply Chain Capacity Building In 2012, Walmart launched its Supply Chain Capacity Building program – a comprehensive program that was aimed at helping its suppliers and the manufacturers develop the capability to improve working conditions by investing in education, training and operational efficiencies.These programs vary from half day training programs to one-on-one engagements that lasts for several months. Wal-Mart is considered “bestin-class” for its supply chain management practices. Practices that are a key competitive advantage helping Wal-Mart increase operational efficiency and meet customer needs.
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See More, Do More IP Singh Head of Barcode and Supplies, India and subcontinent, Zebra Technologies
Zebra Technologies Corporation, is a global leader respected for innovation and reliability. Zebra offers an extensive portfolio of visibility solutions incorporating barcode, RFID and location systems, which transforms the physical elements of a business into the digital. This transformation creates a transparent picture of an organization’s value chain by helping customers know—in real time—the location, motion and state of assets, people and transactions throughout their operations. SCMPro Chats up IP Singh, Head of Barcode and Supplies, India and subcontinent, Zebra Technologies on the sidelines of India Warehousing Seminar SCMPr
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TECH NICHE
Z
ebra Technologies offers printing solutions to specific industry verticals like retail, pharma and logistics. Zebra Technologies is in the process of acquiring the enterprise business of Motorola Solutions Inc. The acquisition is set to be completed by the end of 2014, subject to other regulatory provisions. With this acquisition, Zebra becoming a complete solution firm. In India, Zebra has been associated with some of the largest government projects like the Rashtriya Swasthya Bima Yojna or the driving licenses – an estimated 60 percent of the smart card based driving licenses issued by the states use Zebra technology. India is a promising market for Zebra Technologies – its Asia Pacific business grew at 29 percent in the last fiscal, with India and China expected to continue to lead the growth. In a major landmark, Zebra achieved a turnover of USD one billion in the last year. In India Zebra Technologies has direct presence across the country, with offices in New Delhi, Mumbai, Bangalore and Kolkata. The firm is focused on solutions for either thermal or thermal transfer printing, as printing technologies go. The solutions span printers for printing on paper or on cards – PVC cards, smart cards and the like.
On Synergies of the Merger Zebra is a printing solutions firm and Motorola is a scanning solutions firm. Both the firms have been working together with customers to provide solutions. With the takeover, Zebra can offer a 30 SCMPr
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one stop solution for all printing and scanning requirements from customers. Customers are really happy with the development. Walmart is the largest customer for both the firms and they have expressed delight at the takeover. To help the process, all Zebra staff are trained on Motorola products too.
On Printing We heard speakers talk about the necessity for standardization – including labels. Labels are now viewed as a as a critical mechanism for maintaining compli-
On RFID Printers RFID has become a critical technology for a wide range of industries — including supply chain. The return on investment from RFID comes from reducing the time and labor required to track assets and materials, decreasing losses and theft, improving maintenance operations, and streamlining efficiency through better asset availability and utilization. RFID is transforming trade. Companies can use RFID to automate most processes for identifying objects and recording their loca-
The return on investment from RFID comes from reducing the time and labor required to track assets and materials. ance, ensuring brand consistency, improving operational efficiency, and supporting business growth. They are the final link between the company and key stakeholders including customers, consumers and regulators. Zebra offers thermal and thermal transfer printers. And there are many types of thermal printers. Each material features different attributes that enable it to be used in different environments. It is critical that the labels printed are not only readable and scanable at the manufacturing stage. They need tolast throughout the products life cycle - till disposal. This will reduce the risk of non-compliance to government and industry mandates.
tion or movements. It creates value by enabling automatic recording of these activities, reducing labor costs, and providing more accurate information - including alerts if unauthorized material movement occurs. Zebra RFID printers give a firm total visibility, allowing firms to identify, track, manage and optimize assets. The RFID printers are never pure RFID, but coupled with barcode printers – it prints and encodes at the same time – allowing people to read the labels printed.A combination of RFID and bar codes can help manage warehouses better – with bar codes working for eye level stocks and RFID devices that can reach the
TECH NICHE top of a 15 meter stack. The trend is towards active RFID technology. This is a little expensive now, but over the next five years we will see prices dropping – like we saw for passive RFID devices.
On the Internet of Things The internet of things is defined as he interconnection of uniquely identifiable embedded computing
contributes to the stream of data that organizations will store and mine by enabling interconnectivity of Internet-aware devices. This ecosystem of connectivity helps provide enterprises with deep visibility into their organizations’ operational events, accessible through the Cloud, anytime, anywhere and in-between.It enables organizations to gain real-time
Zebra offers the broadest range of innovative printing and real-time location solutions to identify, track and manage critical assets, people and actions. like devices within the existing Internet infrastructure. Typically, IoT is expected to offer advanced connectivity of devices, systems, and services that goes beyond machine-to-machine communications. The Internet of Things (IoT)
visibility into their operations allowing them to be more nimble, agile, and make better-informed business decisions. Once organizations have seamlessly enabled device connection to the data center, they can see events occur-
ring throughout their value chain in real time—and act upon them. Zebra’s extensive portfolio of asset-tracking, location, and printing technologies, including barcode, passive and active RFID, and RTLS—along with unmatched domain expertise—turns the physical into the digital to give operational events a virtual voice.
The India Focus Zebra offers the broadest range of innovative printing and realtime location solutions to identify, track and manage critical assets, people and actions. Zebra’s broad range of products, deep understanding of our customers and productive R&D ensure that we offer highly relevant solutions and services that meet our customers’ changing needs. Zebra intends to be the solution provider of choice to the Indian customer across the size of the firm – from a small kirana shop round the corner to the largest conglomerate.
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interface
Betting on Technology Warehousing forms an integral part of supply chain. But India has been slow to realize this. For a large part we are content with providing rack space. And since we compete on price, automation levels are low. World over, warehouses have embraced technology. SCM Pro caught up with Xavier Pairada, Regional General Manager, Asia of SSI Schafer for an insight into warehousing practices from around the world. Do you see a change in the business model in warehousing?
Xavier Perello Pairada Regional General Manager, Asia (SSI Schaefer)
There is a transformation in the perception about the warehouse among top management across the world. Earlier, the warehouse used to be a dumping ground. Now it has become a profit center. In quite a number of cases, the warehouse is an integral part of the supply chain. It has become a strategic asset to many firms. We have not seen this happen in India, but we are sure it will slowly but surely happen. In conventional industries a warehouse can be used to store raw materials, semi-finished parts and finished goods which can be sent to the markets at the appropriate time. That is now changing.There is a wider scope for value addition in the e-commerce industry, where the warehouse is an integral part of the fulfillment process. The interesting fact about India is its Cash on Delivery model. Nowhere in the developed world do firms ship e-commerce goods before they receive payment. Handling the cash should be imposing an additional cost in India. Where should a warehouse be located – near the customer or in a central location?
Internationally, warehouses are moving to where the customer is – ideally within a 32 SCMPr
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200 KM radius of major customer base. We see an interesting behavior in India – people tend to create a warehouse in the central part of the country – ostensibly to serve all parts of the country. Therefore we have warehouses come in the middle of nowhere – no infrastructure, power, roads or people! In India, the population is located at urban centers at the four corners of the country – Delhi, Mumbai, Bangalore, Chennai. Kolkata etc. From a cost perspective, it does not make sense. What are the trends in warehouse automation?
Across Europe and US, the predominant trend in warehouse automation is picking technology. This is due to the increasing
Internationally, warehouses are moving to where the customer is – ideally within a 200 KM radius of major customer base.
interface trend of e-commerce.Companies are increasing their SKUs and as a result, getting the right pick is the focus. It is no longer a pallet of goods that need to be shipped. It is now one shirt or one mobile phone or one pair of shoes. This is putting huge pressures on the warehouse. This need is driving technology. Across the world, goods come into the warehouse in pallets and are stored in pallets. In India we see goods come in all types of containers. They have to be palletized and re-palletized for storage, adding to costs and reducing warehouse efficiency. But we are hopeful that standardization will soon come to India.
different labelling requirements like the nutrition content of a food package, different languages, and if you send it overseas, it may require special nomenclature. If you are running a warehouse in China and dispatching goods all over the world, you will need to print in multiple languages, include whatever is the statutory requirement of that country and so on.Warehouses that can do this will be helping businesses in a big way. Another value added service is shorter time to market. The faster you can move the goods into and out of the warehouse, the more revenue you can earn.
What should India focus on to improve warehouse efficiency?
What practices give you sleepless nights?
Standardize, standardize and standardize. India has to focus on standardization in a big way if it has to gain efficiency. India has to standardize on pallet sizes and truck sizes. Today we have goods coming in nonstandard pallet sizes. And in trucks with all kinds of dimensions. Take the trucks – non-standard truck size makes docking difficult – it will be either higher or lower. Once you standardize, you will see significant improvements. We believe, India should standardize the pallets. Once that is done, everything else will fall in place. What do you think is going to drive warehousing in India?
Given the size and population, we believe the food and retail industry are going to be the drivers of everything - the supply chain, logistics and warehousing in India. As economic growth kicks in consumption is bound to rise, creating a demand for better and faster supply chain management. And yes, there is a nascent, yet growing e-commerce segment too. What value added services can a third party player offer as added value to the customer?
One area which is very low tech, but can add a lot of value is in the labelling process. There may be
Another value added service is shorter time to market. The faster you can move the goods into and out of the warehouse, the more revenue you can earn.
There are quite a few. Standardization is a big worry. For example, if you have a customer who is doing cross docking at around 10000 cases per hour and wants to increase the volumes, then he has to investin automation. For automation to work, we need standardization- on labels, bar codes,etc. Another worry is the lack of detailed information about the contents of a case. As I said earlier, India has to embrace standardization. Else, automation will not pay the expected dividend. Can we retro-fitting an option for older warehouses?
We understand that there are a number of older generation warehouses that are now looking for a technology upgrade. It is absolutely possible to retrofit new technology into existing warehouses. Five or ten years ago, most warehouses were designed with a purpose in mind. Now they have reached the maximum volumes they can handle. The only options are to expand the area if land is available, or invest in technology which will help them to do more with the same premises. The option to expand the area is always there. If you can delay the area based expansion, you will still have room to grow ten years down the line. And with land prices shooting up, such expansion could prove costly. Luckily, technology obsolesce is not a big worry. However, if you have a state of the art facility today, and you expect it to be running ten or fifteen years from now, it may not happen. Not because the machine will breakdown or spares will not be available. The real threat is from the business requirements changing. With business growing, you may hit the thruput threshold pretty quickly. The technology pieces will still work, but you need a different set up or process. That is an issue. The basics pretty much remain the same. What may happen is that the newer equipment will be faster and better – and the older generation will still be doing the job. SCMPr
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n SCM World
n Enterprise
n Technology
n Knowledge
n HUMAN RESOURCE
Understanding the Value of a Supply Chain Structure In Part 1 of this series, you may recall how we discussed some of the common challenges attributed to managing supply chains effectively. We have recognised, that a key factor for dysfunctional supply chains, is themisalignment between the business strategies. The level of adequate and competent execution capabilities in the organisation, as another contributing factor that was identified in part 1. SCMPro brings y0u the second part.
M
Stephanie Krishnan Honorary Fellow and Lectures for the University of Wollongong.
Joe Lombardo Over 3o years of experience in corporate logistics and supply chain management has founded ESP Consult.
Raymon Krishnan Currently serves as President of the Logistics and Supply Chain Management Society.
For more information on the articles or to contact the writers please email info@lscms.org
34 SCMPr
August 2014
anaging the corrective actions in such situations, will involve a structured review process of the organisation, the vision and mission statements and the management approach to driving company wide integrated programs. This is a major process andwould undoubtedly create a high degree of disruption to the organisation. It will also present management with a formidable challenge and requires decisive leadership in the organisation to initiate and sustain such a programs. Whilst one might feel that this sounds so familiar, they will be hearted to know, that their company or circumstances, are not alone in facing such issues. Surprisingly there are
Knowledge many organisations that fail to embrace the knowledge and science of managing supply chains. This is also manifested in the HR statistics of how few companies haveinvested in supply chain competencies and strategic management education and training in a consistent manner across the whole organisation. By cherry picking and applying snippets of supply chain practises,one does not really harness the full supply chain methodologies, that are able to integratethe supply execution capabilitiesto the business strategy. In this part of the series, we will examine the value of deployinga supply chain structure into the business model, irrespective of size, market sector or the goods or services involved. Most business leaders are very familiar with business strategies, business models, product strategy, marketing strategies, investmentstrategy and many other strategies relevant to 2 the business functions. But these strategies, campaigns, product launches and the like, are plans on what and when to do something that will bring revenue and profit to the Enterprise. But what about the how ?
The Business Strategy What is crucial to achieving the goals ofthe business strategies, is the implementation and execution of the strategic plans.The various strategies need to be executed in a coherent and synchronised manner or will be ineffective in their deployment. The more the strategies, and the increased business complexity, the more critical will be the timing, methodology and accuracy of the execution model. Managing the execution processes of a company business strategy, and sustaining the business model, would suggest the need of
an overall “super” strategy to make it all happen. This would seen quite evident, but it is not always clear on how it would be done and who would be responsible for theexecutions of this activities. This is in fact the 1ststep to appreciate the Value of a Supply Chain function within an organisation, aclearly defined and struc-
This approach would be easy to implement and create the path of least resistance, disruption and cost. A solution that many in the organisation would well subscribe to, as it involves minimal change to their departments, authority and responsibilities. But before too long, managing sucha structure would prove to be very difficult,
By cherry picking and applying snippets of supply chain practises, one does not really harness the full supply chain methodologies. tured system to enable the execution of the business strategies and model. In the illustration below, is illustrated a traditional business structure, in the classical chain of command. The introduction of a supply chain function would seem quite easy to bring it into organisation, Feature which could be a dedicated supply chain function working with all the other functions – as show below.
yield low results and eventually collapse. It will fail because the only change made, was to create a new horizontal functional layer into the existing organisation, and give it the name of supply chain. The expectation that the existing vertical organisation would follow the directives and coordination of this new function, is a dream and not sustainable. Note: All the charts are de-
This ESP Consult Supply Chain Model implem Enterprise Overview resista that m Business�Strategy� subscr change and re Business�Model� manag be ve Sales�&� eventu Product� Make�or�Buy� Financial� Organisa on� Marke ng�� Strategy� Strategy� Strategy� Strategy� Strategy� only c horizo existin Supply�Chain�Model��� name that the existing vertical organisation would follow the direct function, is a dream and not sustainable. SCMPr August 2014 35 35 � enabling sustainable performance�
2�
Note: All the charts are designed for illustration of the point of principle and are not inte
Knowledge more sophisticated than what they really are. The simple and unambiguous definition of a supply chain, can be described as,A series of tightly inWhat is a Supply Chain ? terconnected and related processes At this point, we should pause that form the backbone of an Ento reflect on the definition and terprises’ capabilities to transform components of what makes up a and deliver its revenue generating supply chain and then to appreci- goods and servicesto its Customers. ate how it becomes relevant to an To illustrate this fundamental Enterprise. definition, let us consider atypical to better definethe processes,monitor the signed for illustration of the point of principle and are not intended to represent the optimum supply chain model or structure.
we are now able ce of the supply chain.
Put very simply, the supply chain is the “Blood
siness model thatconnects connects a structured manner, e “BloodLine” Line” that in in a structured manner,the activities rprise in coherent and interconnected flows. functions of an the activities of all the relevant happen byEnterprise chance, norinwork on theirand owninterconnected in isolation. But they are coherent flows. verall performance. he business strategy that creates the positive supply chain flows. There are many interpretation business model. y chain, are the basic enablers andis awill thea Customer operating and definitions of what sup- provide It starts, with order, and ends with a Customer delivery, ply chain. Some imagine it to be rategy.
a complicated methodology where and in between we have an interyou need tohave highly nal process of transformation. d Enterprise chart, where we put atskilled the and centre, the business cycleIn intellectual graduates to under- chart below we show this business el. Wethen connect stand the itexecution model to model, the vertical and work it. Whilst others as having 3functional major blocks in confuse or interchange terminolothe company business cycle. el, that supports the business strategy. gies, to make simple things sound As this model is fundamental
d and in all at will cessful
ESP Consult � enabling sustainable performance�
Supply Chain Model Enterprise Overview Business�Strategy�
should Business�Model� in its of the Company�Business�Cycle�&�Supply�Chain�Model��� ments able in Sales�&� Product� Make�or�Buy� Financial� Organisa on� Marke ng�� ges in Strategy� Strategy� Strategy� Strategy� Strategy� itions, r the rgets relevant to the business strategy.
August 2014of principle and are not intended to represent the 36 SCMProf the ed for illustration points cific company or industry
5�
to understanding the basics of the supply chain management, we must focus all the company activities that revolve around the 3 major blocks of a company’s businesscycle. When one can visualiseacompany business cycle, modelledin this manner, it will be clearer to see how the business strategy, can be effectively executed. Creating a logical structure around the company business cycle,will enable all the organisational functions to better identify their roles in the model. The processes and mechanisms to connect the 3 major blocks of the business cycle, becomes the supply chain execution model. Having set-up the fundamentals of the supply chain model,each of the major blocks will have a clear visibility of where and how their operational functions are linked and contributeto the overall supply chain. By re-focussing the company vertical functions in this manner, we are now able to better definethe processes,monitor the effectiveness and measure performance of the supply chain.
Connecting the key points of the business model Put very simply, the supply chain is the “Blood Line” that connects in a structured manner,the activities of all the relevantfunctions of an Enterprise in coherent and interconnected flows. However, these supply flows, do not happen by chance, nor work on their own in isolation. But they are driven by vital stimuli to sustain the overall performance. It is the synchronised coherence to the business strategy that creates the positive supply chain flows. The business functions in the supply chain, are the basic enablers and will provide the operating capabilities to execute the business strategy. In the chart below we show the revised Enterprise chart, where
This approach would be easy to implement and create the path of least Knowledge resistance, disruption and cost. A solution that many in the organisation would well Business�Strategy� subscribe to, as it involves minimal we put at the centre, the business A structured approach also enables a better change to their departments, authority cycle and the supply chain execution model. Wethen connect the and responsibilities. But before too long, Business�Model� alignment of relevant resources and will also execution model to the vertical managing sucha structure would prove to functional organisation and to the reduce operating costs and improve overall be very difficult, yield low results and business model, that supports the Sales�&� eventually collapse. It will fail because the Product� Make�or�Buy� Financial� Organisa on� businessStrategy� strategy. Marke ng�� Strategy� Strategy� Strategy� profitability. only change made, was to create a new If the enablers are Strategy� aligned, balanced and driven by a competent horizontal functional layer into the resourcesorganisation, and remove the nonleadership in all functions, it will that we described above. This ap- ing existing and give it the Model� bethis momentum that willSupply� lead toChain� proach will��facilitate and engage contributing elements from core name of supply chain. The expectation an effective and successful execu- the management and key decision supply chain activities. A structhat existing vertical organisation wouldre-think followofthe directives coordination approachand also enables a better of this new tion ofthe the business strategy. makers,in a complete a tured function, is asupply dream andstrucnot sustainable. alignment of relevant resources and An effective chain relevant functional organisation. ESP Consult �
enabling sustainable performance�
Supply Chain Model Enterprise Overview
2�
ture should not be complicated nor
Anorganisational
focus,must
will also reduce operating costs and
Note: All the charts are designed for illustration of the point of principle and are not intended to represent the optimum supply chain mysterious in its design and opera- be made on the core functions, improve overall profitability. model or structure.
The cost reductions that we tion. The value of the supply chain that are relevant and mandatory expect from this process, will be should include all the elements releto create the necessary capabilities What is a Supply Chain ? the elimination of overlapping vant to the business model, scalable to deliver the results. These are the At this point, we should pause to reflect on the definition and components of what acmakes up a supply in its deployment, agile to adapt to resources and competencies that tivities, wastages in time and effort chain and then to appreciate how it becomes relevant to an Enterprise. changes in the business and operat- should be embedded into the or- but also create a leaner more reThere are many and definitions of the what a supply chain. able Some imagine it to be a organisation to adapt ing conditions, whilst interpretation able to con- ganisation, that can create ca- issponsive complicated methodology needto achieve tohavethehighly skilled and conditions. intellectual graduates to to changes in market sistently deliver the required supply where pabilitiesyou necessary This terminologies, will enable the managechain performance targets relevant Enterprise’s deliverables. understand it and work it. Whilst others confuse or interchange to make simple things ment to identify the critical procto the business strategy. In Part 4 of this series, we will sound more sophisticated than what they really are. Complicated organisation discuss in more detail optimising esseswithin each contributing can be as,A defined, charts, elaborate job titles and people and competencies in supply The simple and unambiguous definition of a supply chain,function, can bewhich described series of tightly measured andcontrolled. The re- capabilities to strange job positions,that have chain organisations. interconnected and related processes that form the backbone of an Enterprises’ sult would give a more visible supevolved over time, sometimes also transform and deliver its revenue generating goods and servicesto its Customers. ply chain model, with performance due to legacy reasons, often con- The value and benefit from indicators in a coherent structure. fuseillustrate and distort thefundamental real supply adefinition, structuredlet supply chain atypical To this us consider business model. It is the collective optimised chain functions. When reviewing a function. of each business block, we have an Understanding andwith using the busi- KPI results supply chainwith structure, it would be order, It starts, a Customer and ends a Customer delivery, and in between that gives the comprehensive vis-having 3 major ness cycle andsupply chain model very productive, to discard all the internal process of transformation. In chart below we show this business model, as elaborate organisation charts, job overview, we are now able to devel- ibility of the overall company perblocks in the company business cycle. titles and thepeculiar job positions opa more effective organisation and formance. Part 6 of this series will sub-organisations This of be the dedicated to Performance Manandimagine what is thefundamental organisation functional As this model to understanding the basics supply chain management, we must could be if we applied the basics would synchronisebetter the exist- agement of the supply chain where focus all the company activities that revolve around the 3 major blocks of a company’s businesscycle. we will expand the above discussion points When onefurther. can visualiseacompany business ESP Consult Supply Chain Model In part 3 of this series,this we will be cycle, modelledin manner, it will be looking at Building and Sustaining clearer to see how the business strategy, an Enterprise Supply Chain Model. Company�Business�Cycle��� can be beeffectively Creating a This will relevant to allexecuted. companies, large and small, mature and logical structure around the company Customer� growing, as thecycle,will business modelsenable are business all the never static, and so are supply chain organisational functions to better identify Demand� continuously evolving. It is crucial Demand�Fulfilment� Crea on� their roles inthe thesupply model. that refreshing chainThe ef- processes and mechanisms to connect fectiveness can only be derivedthe by 3 major blocks Demand� sustaining the necessary capabiliof the business cycle, becomes the supply Management� ties, that are relevantmodel. to delivering chain execution the Enterprise’s goals. � enabling sustainable performance�
Having set-up the fundamentals of the supply chain model,each of the major blocks will have a clear visibility of where and how their SCMPr August 2014 37 operational functions are linked and contributeto the overall supply chain. By re-focussing the company 4�
sme corner
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. SCMPro brings you excerpts from the paper.
38 SCMPr
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A
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 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 AsiaPacific region. The sheer number of SME organizations is not the only reason why they are important
sme corner 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 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 ex-
ness 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. 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
Banks want to see at least two sources of repayment to justify the ability of the lender to repay the loan. pense. 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 busi-
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 SCMPr
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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.
sme corner
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mum 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 for the right purpose. Most banks want the owner to put in at One of the largest costs issuch incurred initial stages the SME’s life cycle in the of operating least 20form to 40 percent of the total as inantheICT firm, ofthis inforexpenses. Bank loans are of the most prominent source of funding for this expense. Once the request. At the same time, banks mation asymmetry becomes more business is operational, there can be several other sources for financing the working capital. One of depend on the owner’s equity for crucial. A major issue is the lack of the major sources is through advance payments from buyers and credit from the suppliers. Another source is financial serviceaproviders, offering financefor against inventory. a loan request. policy framework riskfinished-goods analy- rating Theoperations. associated cost sis ofcontinue the borrowers. This results in Despite all the efforts, SMEs to face several hurdles to sustaining their Onetransaction of in processing a loan application, the lending organizations charging the most predominant is access to finance both on supply and demand side. On supply side, financial institutions face constraints to a number of factors starting from information asymmetry.the There administering loan, and upveryduehigh interest rates for a good is a lack of accurate and detailed information about the borrower. Few countries maintain a central loan and a low interest rate for a dating the status makes it invaridatabase regarding the borrowers within the organized financial sector. But maintaining a database for a large of banks one.for the banks due to the large number able of the overall SMEs is notbad feasible of borrowers. For anynumber start to finance SMEs. Any financing Banks want to see at least two up innovative enterprise such as an ICT firm, this information asymmetry becomes more crucial. A sources of repayment to justify the product or scheme provided by the ability of the lender to repay the banks is also affected by the sysloan: the cash flow from the busi- tem’s political, social, and legal enness as well as the presence of a vironment system. Inefficiencies in secondary source such as collater- the banking sector also contribute al. SMEs’ inability to provide past to this problem. In the absence of financial statements to help ana- a functional system to enforce and lyze their cash flow and the mini- 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 Social agriculture and related business Legal is to use these funds for personal financial needs. Bad farm loans contributed 44 percent of new SMEs non-performing loans (NPLs) in fiscal year 2011 in India. Market Finance Thus the development of SMEs requires the presence of a supporting environment in any country. Political The figure below illustrates a conceptual framework categorizing the key factors into two layers. Environmental Factors for SME Sustenance While the factors in the outer lay-
er 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.
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:
Working Capital Constraints n SMEs
are under high pressure due to the constraints of dayto-day working capital. n 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. n Establishing a line-of-credit with the suppliers could help alleviate some of this pressure. n 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.
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 from lending organizations. With most of their assets leased or rented, SMEs also lack the collateral
sme corner
Many of the SME businesses are based on needs and not as a conscious choice or an opportunity to build upon. required for financing or loans.
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
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.
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. The full paper can be found at http://www.misi.edu.my/v1/wpcontent/media-files/5E..SWIFTwhite-paper..Asad_.pdf
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42 SCMPr
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n INSIGHT
n Knowledge
n SURVEY
n ACADEMIC ADVOCACY n HUMAN RESOURCE Academic Advocacy
A Performance Measurement Framework for Monitoring Supply Chain Sustainability
By Verdecho MJ, Alfaro-Saiz JJ, RodriguezRodriguez R Presented at the 6th International Conference on Industrial Engineering and Industrial Management
In the competitive business environment achieving sustainable supply chains is an issue that is still to be solved despite its relevance. For that reason, there are several tools that have emerged in the last years to aid to understand and support supply chain sustainability. Performance measurement frameworks are useful tools that aid to collect and monitor the evolution of performance of any organization. This paper introduces a novel performance measurement system to fill this research gap.
C
ollaboration is one strategy used by enterprises to compete and keep focused on their own core competencies. In order to gain understanding of collaborative contexts, many frameworks and models have been developed to conceptualize the drivers, barriers and effects of collaboration although there are still numerous issues to be solved. Seuring and MĂźller define sustainable supply chain as ‘the management of material, information and capital flows as well as cooperation among companies along the supply chain while taking goals from
all three dimensions of sustainable development, i.e., economic, environmental and social into account which are derived from customer and stakeholder requirements’. There are various factors that push enterprises to accomplish supply chain sustainability such as legal demands/regulation, response to stake- holders, competitive advantage, customer demands, reputation loss, and environmental and social pressure groups. There is another key factor in the application of sustainable practices that is when a focal enterprise within a supply chain request to the rest of enterprises SCMPr
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Academic Advocacy to meet environmental and social standards e.g. the implementation of these practices in the automotive sector. Despite the existence of success cases implementing sustainable practices, reality does not have to be avoided. Many enterprises have difficulties in the sustainable management of its own business even recognizing the fact that its activity depends on its responsibility with its supply chain partners and stakeholders. In addition, it is essential to note that supply chain sustainability should be derived from the strategy of the own supply chain. This implies that all the enterprises within the supply chain agree on common objectives and those objectives are pursued by all the enterprises in their operations. Otherwise, monitoring sustainability dimensions will be an isolated task lacking value to management. Then, it is necessary to establish mechanisms to deploy the supply chain strategy into operations as well as to monitoring the sustainability of the whole supply chain, which can be measured, and therefore, managed through performance measurement elements (objectives, performance indicators, etc.). One of the most important performance frameworks developed in the academic literature and business applications is the Balanced Score-
Card (BSC) by Kaplan and Norton (1992). Despite its importance, the BSC present some limitations. One limitation is the capability to prioritize, weight and consolidate data from performance elements. In the BSC, once the objectives are defined and performance data gathered from their indicators, it would be useful to aggregate such data in order to obtain a global performance evaluation that will show whether the status of the supply chain is sustainable or not. This paper aims to fill thisresearch gap. In order to prioritize objectives, it is useful to define weights for the different objectives which can be stated as a multi-criteria problem involving different actors. In the same vein, structuring and consolidating data may also be solved as a multi-criteria problem. Therefore, multi-criteria methods can contribute to the implementation of the BSC. The purpose of this paper is to present a multi-criteria performance measurement framework for monitoring supply chain sustainability considering the deployment of the strategy from the strategic level to the operations level and allowing an efficient implementation of its performance measurement elements by introducing an aggregation mechanism that reflects the sustainability status of the supply chain. With this
tool, management of the different enterprises of the supply chain will obtain an overall prioritization of their elements so that decision makerscan focus on those elements more relevant for their sustainability and competitiveness.
The multi-criteria performance measurement framework for monitoring supply chain sustainability The COL-PMS framework for managing performance is an integrated and solid PMS structure based on the BSC for inter-organizational relationships composed by five perspectives (financial, customer, processes, innovationand learning and collaboration perspectives), the first four perspectives are the original ones of the BSC and the fifth perspective is oriented to manage the collaboration aspects (coordination, trust, information sharing, etc.). However, its structure lacks of performance elements to monitor two important dimensions of sustainability: environmental and social dimensions. Thus, the starting point of this work has been to extend the COL-PMS framework to introduce these two dimensions. Then, the framework has been complemented with a methodology to implement performance measurement framework by using
BSC-AHP Performance Measurement Framework for Supply Chain Sustainability Supplychain Sustainability
Financial Perspective
Customer Perspective
Process Perspective
Innov. & Learn. Perspective
Collaboration Perspective
Environm. Perspective
Social Perspective
F01 f02 f03 ..
C01 C02 C03 ..
P01 P02 P03 ..
IL01 IL02 IL03 ..
CL01 CL02 CL03 ..
E01 E02 E03 ..
S01 S02 S03 ..
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the multi-criteria method - Analytic Hierarchy Process (AHP). AHP aims at integrating different measures into a single assessment for ranking decision alternatives which is the case of our problem. AHP has been used for many applications involving performance measurement criteria such as selecting a supplier, selecting performance indicators for supply chain management, and selecting ERP systems in textile industry. The methodology is composed of seven phases. In the phase 1, the performance elements of the performance measurement framework are defined in seven perspectives (financial, customer, process, innovation and learning, collaboration,environmental and social perspectives). In the phase 2, the AHP method is applied to build a model. The AHP method structures the decision problem in a hierarchy of levels. These levels are linked by unidirectional dependence relationships. In the upper level of the hierarchy the ultimate goal of the decision problem is defined. Then, the criteria that contribute to achieve the goal stand in the second level. Then, various intermediate levels may be modelled to represent different levels of sub-criteria. Finally, in the last level, the decision alternatives are established. The AHP method provides relative weights to each element within a level depending on its contribution to an element linked to it that is located on the immediate upper level. In our case, as we use the AHP model to obtain the weights of the performance objectives, we will have three levels: vision (supply chain sustainability), perspectives (criteria)and, finally, performance objectives (alternatives). In phase 3, following application of AHP, pairwise comparisons are made within each level and the local priorities of the compared elements (priority vector) are calculated. Then, the final weights for the alternatives are calculated (phase 4). For that purpose, priorities of objectives are combined together with the sets of priorities of the performance perspectives. Then, in phase 5, a sensitive analysis is performed to check how changes in the local weights of one of the perspectives or objectives affect the final priorities previously obtained. The purpose of this phase is to verify that the solution obtainedis robust enough. In case that the solution is not robust, it is needed to go back into the phase 3 to analyze the pairwise comparison matrices obtained. In phase 6, the data regarding the performance indicators is collected, according to the frequency stated in performance measurement framework. Finally, phase 7, the overall performance evaluation is obtained by multiplying the priority of every performance objective and the value reached in its corresponding performance indicator. This overall performance evaluation has to be contrasted with a value defined as goal that will represent the degree of sustainability within the supply chain to be reached (defined as a percentage of achievement). SCMPr
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SCMPro Classroom
Inventory Decisions Successful inventory management involves developing a sourcing plan that will ensure that goods are available when they are needed and keeping track of existing inventory and its use. While doing this care should betaken that the firm does not buy either too much or too little.Two common inventory-management strategies are the just-in-time method, where companies plan to receive items as they are needed rather than maintaining high inventory levels, and materials requirement planning, which schedules material deliveries based on sales forecasts. Piyush Shah explains Inventory decisions in this article.
T
he three essential questions in item inventory management are – where to have the material, how much to reorder, when to reorder. All other parameters are merely an outcome of these three decisions. Inventory turnover and customer service are both very much dependent on these three decisions. Thus for designing an effective (or in some cases efficient) supply chain it is absolutely necessary that we understand the impact of these three decision parameters. Per se it may seem that inventory
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management in a supply chain is a huge and confusing task. By reducing the task to these three simple chores, we can significantly reduce the complexity in the chain. A key element is that all of these three parameters should be designed into the supply chain. They cannot be arbitrary numbers that evolve out of thumb rules that become established over a period of time.
Where to hold the material A supply chain generally has many layers of players between the manufacturer and the final con-
sumer. There could be the factory depots, central distribution centres (CDCs), regional distribution centres (RDCs) and also stocks kept by the distributors, wholesalers and retailers. In many cases the final consumers also have inventory. The entire material inventory, at any point of the supply chain pipe line, has one purpose – to satisfy the demand of the final consumer at a reasonable cost. In case it is absolutely essential to have a close to 100% satisfaction of customer orders, a large portion of the inventory has to be
SCMPro Classroom kept closer to the customer. Thus, hospitals keep huge safety stock. Excess inventory is always kept for critical maintenance spares at the site. For all multi-location business keeping a large inventory closer to consumer, would result in large inventory stocks. There would have to be inventory at every location. So, while this mode ensures high customer service, it also builds up inventory cost. An easy way to reduce inventory would be to pool inventory. So instead of all retail locations having inventory, a warehouse is created that holds inventory for multiple retail locations. The same service levels can thus be established at a lower cost. However, this method could increase the cost of operating and maintaining a warehouse and it also increases an additional loading and unloading transaction. Depending on these tradeoffs firms have to decide on where to have inventory in the supply chain. In cases of some industrial products like pumps and motors, the dealers keep a very low stock. They merely take the order and then have the material despatched from some warehouse location. In cases of items like bearings, gaskets and other maintenance spares, local retailers keep a large inventory.
How much to reorder The simplest methods for reorder quantity are based on thumb rules. Material is sometimes ordered in truck load or some part load quantities. At times there are constraints on a fixed minimum order. There are cases when the fixed reorder quantity is not a thumb rule, but calculated using the cost profiles of carrying cost, ordering cost, stock-out cost, etc. Both these cases are called fixed lot ordering systems. Fixed lot systems are very easy to manage. The task of calculat-
ing the lot size for every order can be minimised. Also, by keeping a certain lot size, discounts can be availed of. The lot sizes are sometimes matched with the production batch size, thus minimising the inventory that is held up at the factory warehouse. The other extreme is to order exactly the quantity that is needed at the given time. This is called lot for lot (L4L) type of reordering system. L4L works wonderfully for firms operating on JIT pattern. It is also used for item with highly variable and intermittent demand. Here the inventory can be minimised, but it may result in frequent ordering and hence an increased level of transactions and the related costs. On a broad scale, materials that are relatively inexpensive are ordered as per fixed lot systems – the inventory is higher but the transactions are minimised. Since the materials are inexpensive, the inventory costs do not hurt as much. In a similar pattern, the L4L system can be used to control the stocks or relatively expensive items.
When to reorder This is the last and a very important decision in item inventory management. There are two basic types in this decision parameter – fixed period and variable period. In the fixed period the inventory position is reviewed after every fixed period of time and a decision to place an order is taken. The fixed review period can be a day, a week or even a month. This system is used when multiple items are to be ordered from one vendor or one market. In case of a retail pharmacy store, they review the stock of medicines from one pharmaceutical company Fixed lot size Lot for Lot Fixed period ordering Category 1 Category 2 Reorder point systems Category 3 Category 4
once a week and place the order of all the items from that company at one time. In case of milk runs for auto firms, they have a review period of a few hours and collect all the items from one geographical location in every review period. Again, by collecting the orders for many items that are required from one vendor or one location, the transportation costs as well as the transaction related costs can be significantly reduced. Also, the firm is relieved of the pressure of real time and every day monitoring of the stocks. Of course, with this type of fixed interval ordering the inventory levels are generally higher. Thus the fixed period ordering systems is generally used for C class material. The variable period systems are also called reorder point systems. Here a certain inventory level is fixed as a target for every item. As soon as the inventory level reduces to the target, at whatever point of time, a reorder is generated. In these reorder point systems, the reorder may be generated at any random time, whenever the inventory levels reach the reorder point. With reorder point systems, firms can have a very good control over inventory. There is of course the issue of having to maintain a real time vigil over inventory levels, but for A class items, the reorder point systems can have a very positive effect.
Conclusion Depending on the cost of the material, its criticality, importance to the customer, etc. the three decision of where, when and how much have to be taken. Generally it is not possible to take these decisions individually for every item. Items are classified under some pattern and then a policy is fixed for every category in that pattern. This concept of classification will be the topic of the next article. SCMPr
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n SCM World
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n Enterprise
n Technology
n Knowledge
n HUMAN RESOURCE
talent
Taking Risks and Other Things…. Musing from the Transport Logistics China 2014 supply chain conference and the importance of idle contemplation for integration and inventiveness. Darryl Judd, in his inimitable style takes a close look at the so called inability of the supply chain sector to attract top talent. This when supply chain has moved from the warehouse to the board room.
R
ecently I was at a Supply Chain conference in Shanghai where a Supply Chain Consultant, working for a well-known consulting house, when discussing the lack of talent being developed in the supply chain industry, bemoaned the technology disparity, which confronted young tablet totting hipsters when they joined our industry. “My aim” he earnestly enthused, “is to reform the companies I work for by introducing integrated systemic applications that will increase efficiency and by doing so make it also a more attractive place for the next generation”. In this short utterance, delivered with almost religious zeal, he had made several of his listeners, which included a rather elite group of CEO’s and Executive level professionals; feel quite shocked and indignant – me included. How could it be that the younger generation perceives today’s supply chain as outmoded, considering that most of it’s leaders still see themselves as revolutionaries who having achieved the impossible by moving their work tools out of the trucks and warehouses and into the board rooms and head offices and who now lead major corporations all over the world?
Yet he has a point, the very purpose of our conversation was despairing this shortfall of enthusiasm amongst the notepad and tablet proprietors of his generation. Perhaps this is why statistically so many young graduates are still being lost to technical accounting and dentistry professions. In supply chain and logistics industries there is always a pressure to meet deadlines, customer demands, to cut costs, to deal with natural disasters and other manifestations that provide the constant framework of an average (when there is no such thing) day. There is no time to ruminate and reflect. Unnecessary risk-taking is considered a luxury. The up and coming generation however are passionately motivated by the ability to make a difference in some way. The only chance they will have to do this is if we allow them to take risks with our endeavors. Unfortunately, the perception is that our industry is geared towards risk mitigation. Its what we pride ourselves on. Of course the reality is somewhat different, when asked by one of the other professionals at the conference, the head of a major Air Cargo and Logistics Industry body about this, he said that he enjoyed the ability to have an impact by for ex-
ample, “getting a vaccine to a third world country without compromise on quality or deadlines”. He then went on to add “Of course, this could be as simple yet as profound for me as getting flowers to my wife on time for our wedding anniversary everytime I forget”. These profound outcomes such as saving lives or small, everyday events would not happen if it were not for the infrastructure, the complex web of truck, train, airplane, ship, warehouse, van, (the list goes on) that gives us the ability to do this and more in today’s globally connected world. The push is now to encompass this new approach even further and
Darryl Judd COO, Logistics Executive darrylj@logisticsexecutve.com
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talent by doing so go back to that old buzz word that used to belong to our colleagues in IT, namely “integration”. Integration of course has in many ways already happened. Supply Chain and Logistics leaders led their companies through some truly challenging events in recent times, like the GFC and globalization, through their single ability to weave communication channels through all levels of business and by doing so to get everyone all on the same page, at the same time.We now have “supply chain finance” and “supply chain IT” which are “project managed” by leaders with
ken tryst between all members of our trade from the truck driver to the Logistics Director. This is the advantage, which supply chain and logistics will always have over other commercial professions. Going back to our young consulting friend. His premise that our systems are outdated, our tools second rate may often be true enough. It is true that because we are so time and cost pressured, we can often lose sight of the bigger picture. However, perhaps the way to capture the new pool of talent is to find better, savvier means of engaging. To take risks on new ideas,
The up and coming generation however are passionately motivated by the ability to make a difference in some way. both project management and supply chain modalities with the express outcome of getting everyone on the same page, at the same time. In the process however, we are still heavily connected to the ground operations, the underpinning knowledge about company services that drive commercial outcomes. Behind the focus of supply chain is the product. How it is sourced, made, handled, shipped, and sold. This is at the heart of the unspo-
even if the old ways of doing things are proven and steadfast. However I do not think this is at all due to a lack of enthusiasm. My earlier indignation and that of my fellow supply chain professionals who were also in his attendance was due to the stuffiness he implied in our approach. Far from being old fogies, today’s supply chain leaders see themselves as adventurers of industry who have revolutionized the market place as
a whole in order to meet commercial outcomes and on a deeper level to make a difference. How could there be such a massive difference in how the new generation perceives things? Perhaps whilst supply chain has had great success integrating functions such as IT and finance, it may have forgotten the “softer” areas such as human resources, training, development and marketing. Perhaps the next phase in the development of the supply chain and logistics industry is to integrate (yes I have used that word again) training courses, talent development plans and to develop a marketing and branding mechanism to ensure that the message gets across: Supply Chain enthusiasts have embraced i-Thinking, not just iPads but integration and inventiveness. I actually searched the words “supply chain hero” and a range of stories came up from saving lives by getting emergency aid to those during environmental catastrophe, to heroes in commerce who have paved the way for their company’s ongoing survival and eventual success. Now all we need to do is find and claim our own inspirational version of Richard Branson or Steve Jobs... Oh hang on they were both in the supply chain business on some level anyway, weren’t they? After all, it’s all about the product.
www.scmp.in ...think supply chain 50 SCMPr
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