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Supply Chain Management Professional
July 2014 Vol. 2窶年o. 4
Greening the Supply Chain SME Corner SME and Supply Chain Management... Page...22
ENTERPRISE Amazon Supply Chain Story... Page...26
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In This Issue Feature Reverse Logistics.... Page...31
editorial
The Aftermath of a Hike I
Girish V S Executive Editor
was following the debate on the hike in railway fares by the NDA government a few days back. It made of interesting listening. One thing I am convinced – we do not have a nuanced position on this. All parties, irrespective of their orientation have come out against the hike. Some see it as a burden on the common man. India Inc., which should arguably be worried over the impact of a 6.5 percent hike in cargo rates has welcomed the move. The erstwhile ruling party – the Congress is planning to travel without tickets as a mark of protest. The party in power has expectedly defended the move. We are an amazing nation. Every one of us has a crib about the state of the Indian railways. We find the trains too dirty. The coaches too primitive. We find the accident rates very high and blame the railways for not doing enough to prevent accidents. We complain about the food served in the railways. We want the best of services. But are not prepared to pay for it. By its own admission, the railways need around five lakh crores for ongoing project. In the whole din, the commercial viability of the railways is forgotten. Yes, we need a world class railways. We need dedicated freight corridors. We need passenger safety. For once, I welcome the hike. But at the same time, I would like to government to withdraw some of the wasteful expenditure it incurs on conferring freebies to a whole host of people – led by the politicians themselves. Why not limit the freebies to our elected representatives – and cut out family, friends and hangers on? Why should railways have a dedicated compartment for their senior management? Why can’t they travel in the regular coaches? I do not mind spending commercial rates. But I am upset when freeloaders reduce the impact of what I pay for. I would have loved to see a team constituted to tackle waste in Indian Railways, This month onwards we are introducing a new column – SME Corner – a series of articles that will highlight the travails of the SME segment as far as supply chain management is concerned. This edition carries our curtain raiser. We hope you find the series interesting. Happy reading.
Executive Editor
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Contents
26 Enterprise >>
Analysis of latest Supply Chain and logistics happenings from around the globe.
SCMPro looks at Amazon Supply Chain and it’s fulfilment capabilities.
08 Insight >> Dr.Rakesh Singh takes a look at the causes for food inflation and the measures to tackle it.
31 Feature >>
Reverse Logistics Changing Consumer Preference and peers competition has put more pressure on companies to get their reverse logistics hard. We look at phenomenon of reverse logistics and its implications. implications.
34 Column >> In the first of 6 part of series by Raymon Krishnan, Joe Lombardo and Stephanie Krishnan on optimising Supply Chain performance.
22 SME Corner >>
Starting this issue of SCMPro, we bring you a new series – SME Corner, where we take a look at the issues facing SME’s.
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06 SCM News >>
Rising consumer awareness and the necessity to protect the environment has led to an upsurge in sustainable practices. SCMPro takes a look at greening of supply chains.
July 2014
38 Survey >> SCMPro brings you summary of Logistics Performing Index Report by World Bank.
42 Academic Advocacy >> In Academic Advocacy three students at Great Lakes Institute Management Studies, Chennai, analyze Green Supply Chain Management Systems in the Retail Industry in South India.
SCMPr Executive Publisher Jayaram Nair jayaram.nair@scmp.in Mobile: 9821732929 EDITORIAL Executive Editor Girish V S girish.vs@scmp.in Consulting Editor Dr. Rakesh Singh rakesh.singh@scmp.in Creative & Production Shivasankaran Pillai shiva.pillai@scmp.in Advertising Soney Mathew soney.mathew@scmp.in Mobile: 9987272050
46 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.
48 SCMPro Classdroom >> In this issue of SCMPro Classroom, Dr. Rakesh Singh explains the role of Transaction cost in SCM.
Printed and published by Jayaram Nair. 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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China Blocks P3 Network C
ompanies prefer in-sourcing transportation only when there is dedicated movement over short distance such as shuttling between factory and warehouse/depot/retailer in same cityor incase of a requirement like customized trucks for the business. The global container shipping industry has been plagued by chronic over capacity in recent years leading to loses for most operators. This had prompted three of the largest shipping lines to consider an alliance – the so called P3 Network. Denmark’s Maersk Line, a unit of AP Møller-Maersk, Swiss-based Mediterranean Shipping Company and CMA CGM of France – the number one, two
and three, respectively, in the industry by capacity – had planned to pool 252 vessels on three routes: Asia-Europe, transPacific and transatlantic to create a grand shipping alliance. The alliance, which controlled 40 percent of global sea trade, would however have competed on price, while sharing the resources – in this case ships. The grand alliance was abandoned as China’s Commerce Ministry expressed reservations, citing public interest. Apparently, the Chinese felt that the alliance would control 47 percent of the Asia Europe trade, “greatly increasing market concentration.” Analysts feel that the real reason why China blocked the deal was to protect the ailing Chinese lines from
China Singapore Rail Link C
hina’s mammoth engineering project to construct a railway from southwest China’s Yunnan Province all the way to Singapore is set to transform rural Laos. China was keen to build a high speed rail line connecting it to South East Asia enabling s=Chinese goods move to South East Asian markets easily and at the same time enable natural resources and raw materials to travel back. Starting from Kunming in Southwest China’s Yunnan Province, the railway will travel south through neighboring Laos and then into Thailand. Ultimately, it will extend all the way to Singapore, via Malaysia. Other branches of the network will reach into Burma, Cambodia and Vietnam.Constructing it will be a mammoth engineering task. It will require 154 bridges and 76 tunnels, as well as 31 train stations, just to get the line the 260 miles from Boten on the Laos-China border to Laos’ capital Vientiane. An estimated 20,000 Chinese workers will be needed to build it, with the completion date set for 2019.All that is holding up the railway is Thailand. Beijing is believed to be waiting for the Thai parliament to approve a planned £41 billion infrastructure upgrade, which will include a high-speed rail line from the Laos border to Bangkok, before signing off on the loan. 6 SCMPr
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a bigger and better competitor, and not public interest. Apparently China Cosco Holdings – a Chinese state owned shipping lines tens of billions of RMB every year. The interesting feature of China’s objection is that none of the three firms are Chinese!
Worry over Ship Emission Rules T
ighter ship emission rules are scheduled to kick in by January 2015 in the UK. In a bid to cut pollution in the North Sea and English Channel, new norms mandate that the sulfur content in fuel should fall to 0.1 percent. This will mean that operators will have to switch from the present heavy fuel to the lighter marine diesel, which is about 50 percent costlier. Moreover, Marine Diesel and car diesel come from the same refineries – which experts say could lead to an increase in car diesel rates by 2.8 pence per liter. This wil create additional expenses to the tune of GBP 700 million to transporters. A report by Amec – a consultant body in UK – reveals that fuel cost for operators in UK Sea routes could increase by GBP 300 million, leading to a hike in fares by up to 29 percent. This would push 1.3 to 3.6 million tons of freight onto roads. The EU sulfur rules were derived from the International Maritime Organization decision in 2008 to restrict sulfur content to 0.5 percent. Some countries pushed for more stringent conditions in some of the most polluted routes.
PHARMA SUPPLY CHAIN
SUMMIT 2014 SCMPro a dedicated brand for the supply chain and logistic professionals in India recognizes the significance of Pharma Supply Chain and the important role it plays in the overall growth of the pharma sector.
DATE : 22ND AUGUST 2014 VENUE : HYDERABAD TIMING : 9.30AM TO 5 PM
ENGAGE, PARTICIPATE AND GAIN INSIGHTS FROM THE BEST MINDS OF THE INDUSTRY
Pharma Supply Chain Summit 2014 @ Hyderabad is an initiative by SCMPro to bring together the best minds of supply chain professionals from the pharma and allied industries to deliberate and discuss on the challenges and opportunities through focused panel discussions and interactions.
TO REGISTER YOUR PARTICIPATION
PLEASE CALL
9821732929 OR WRITE TO
The theme of the summit “Potential for higher growth” intents to leave the audience richer in terms of a better understanding and knowledge for unlocking the potential for higher growth.
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Food InflationThe Bite That Hurts One of the intractable issues in India is the persistent food inflation. Expert opinion, - and sometimes not so experts – attribute this to supply side shock, demand pull, corruption, inequality and the supply chains. Dr.Rakesh Singh takes a look at the causes for food inflation and the measures to tackle it.
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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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ood inflation has once again started rising, heralding difficult times for the Modi government. Food inflation had a major role in the defeat of UPA government. In a country like India where a significantly higher number of people live in poverty (much higher the numbers quoted as per the official poverty line), a change in food inflation would make them poorer inflicting greater misery on them. Thus it becomes imperative for the government to act to see that lives of a large number of our people does not become any more difficult. Agri value and food chain is under severe scrutiny and criticism as it has been one of the prime cause for food inflation in India. This raises fundamental questions. Are farmers in this country paid more as procurement prices disproportionate to their cost? Is agriculture facing a supply side bottleneck due to low productivity? Are there institutional and legal bottlenecks that is hindering the growth of agriculture on one hand and spurring food inflation on other? Is the agricultural supply chain to be blamed for the sustained rise of food inflation since last few years?
Two different worlds: Farm to fork This double digit inflation really requires answers and action.Look at an article in Economic times by Ajay VirJakhar, Chairman of BhartiyaKrishakSamaj. According to him perishables like vegetables cost 550 percent more at the consumers end. Poor farmer has to sell these vegetables at throw away prices. Prices of gram, barley and mustard have not changed since 20062007 though the consumer pay 350percent more. The procurement prices where farmers have benefitted is for the food grains crop like wheat and rice. But production of wheat and rice has created distortion in cropping pattern leading to decline in area under pulses and non-food crops. This has in a way contributed to the rising prices of these commodities, leading to spiralling food prices.The government support prices do not benefit farmers. Most often, farmers do not even realise their cost of production leading to stressful situations in Indian villages.Farming today is a way of life rather than an occupation. No child wants to take up agriculture as a profession. An abject lack of employment opportunity forces them to stay back home and engage in farming.
insight Low productivity leads to supply shock Strategies for economic reform and regeneration in India cannot succeed without substantial and broad based agricultural development. With changing lifestyle, increase in income of the poorest population in the country, demand for food will continue to see an upward trend. This is accentuated by rise in demand for food by emerging consumers in tier two and three cities. However, agricultural productivity has not increased, while number of people to be fed is increasing every day. This leads to a supply bottleneck in many commodities spurring food inflation. Investment in agriculture has seen steady downward trend. Both public and private investment in agriculture has showed a steady decline. In agriculture, public investment crowds out private investment;more so in developing economies like India. The impact of falling agricultural investment has affected backward regions more. The entire indo-Gangetic belt comprising of eastern UP, Bihar, Orissa and West Bengal are neglected and kept outside the purview of economic reforms. Similarly, seventy percent of our arable landfall under dry land classification. Government has resorted to increasing support prices but farmers cannot respond to higher prices because of constraints due to inadequate irrigation, lack of agricultural extension services and poor transport facilities. It is time we explored the use of Information technology to improve irrigation; research, extension and transport facilities. Widespread adoption of IT will do more for agriculture than waiting for liberalisation induced improved terms of trade to materialise. The fall in investment is accompanied by arising share of subsidies in the plan outlay. The growing share of subsidy in the plan outlay has crowded out public investment in agriculture.This is evident from the fact that 40 percent of the total spending in agriculture goes for non-productive expenditure. India needs a capable and supportive rural infrastructure to take off. This should be supported by availability of seeds, fertilisers and pesticides. This will address the supply bottlenecks in the long run.
Disintermediate the supply chain Agricultural Produce Market Committees constituted as per APMC Acts manage the markets. Most State Governments and Union Territories enacted legislations to achieve an efficient system of buying and selling of agricultural commodities. The Agricultural Produce Marketing (Regulation) Act (APMC Act) provides for regulation of agricultural produce markets. Under this act, farmers are not allowed to sell to open market directly. They have to necessarily go through the Mandi. In order to sell at Mandis, farmers have to travel a distance of anywhere between 2 to 40 Km. In fact even after travelling such long distances, they do not know if they will get the right price for their product, or will they be able to sell all their produce or will they get a premium for quality produce. The Kaccha and PakkaAaditiyas who are well organised intermediaries often form cartels to keep the auction prices low and exploit farmers in terms of prices, wrong grading and wrong weighing. This leads to the poor farmer getting a price which is abysmally low and the buyer, in this case processor and final consumer paying close to 500 percent more. The agricultural chain becomes parasitic. Though it was started with an intention of helping the farmer it has turned out to be exploitative.This is why even when trading community makes a killing due to rising food prices, poor peasantry of this country are grossly exploited. Why should we let APMC help intermediaries with wrong intention to operate the Mandis?Why shouldnot we allow farmers to sell directly to corporates? Why should farmers get rupees five and trader get rupees thirty. Such a parasitical supply chain needs to go. Jaitely is right but he needs to act. Revising the Agriculture Produce Market Committee Act, encouraging competition among traders and promoting efficiency in retailing are some of the steps needed to calm food inflation. The APMC laws must be amended to free farmers from the markets controlled by a few people and provide them access to consumer markets directly. In the recent past an attempt to allow organised retailers and corporation
Strategies for economic reform and regeneration in India cannot succeed without substantial and broad based agricultural development. SCMPr
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This leads to the poor farmer getting a price which is abysmally low and the buyer, in this case processor and final consumer paying close to 500 percent more.
has shown that both farmers and processors along with final consumer stands to gain due to disintermediation of the chain. ITC a global commodity giant was allowed to bypass the APMC route by paying APMC tax and the net result was that farmer’s income rose by 250 percent. ITC could buy its commodity both for food business as well as exportsabout 180 percent cheaper. The final prices for the consumer will also be lower. India needs to allow buying by corporates directly and allowing farmers cooperatives to sell directly to the market and consumers. APMC has outlived it utility except for the intermediaries.
Wastages add to the problem According to a study done by CII,40 percent of total agricultural commodities produced in our country are wasted due to poor storage and transportation facilities. Given the geography of our country, we need to create warehouses suited for around 54 agro climatic zones.Agri warehousing accounts for 15 percent of total warehousing market in India. Even with significant development of storage capacities developed under NABARD and NCDC schemes, 30 to 40 percent of the total food grain harvest is estimated to go waste due to inadequate storage capacity, regional imbalances in warehouses, lack of adequate scientific storage and inefficient logistics management in the country. Each grain bag is handled at least six times before it is finally opened for processing, which leads to higher transportation and storage charge as well as increase in the wastage of food grains during storage and handling. Storage capacity available with state agencies is available only for the central stock of food grains, buffer stock, public distribution system and other central schemes. This leaves marginal capacity for other players to store their produce. Food grain is the main commodity stored. That too primarily wheat and rice. All other commodities face severe storage problems. The government should encourage the entry of private players who can correct these imbalances in Agri warehousing
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space scientifically and thus provide better value added services. The existing Warehousing and regulation act intends to provide farmers credit against harvest collateral, credit to farm processors against their farm produce inventory. The developers also get subsidy under the scheme - Gram BhandaranYojna and tax relief. This can pave way for a collaborative warehousing development which will solve some of problems of Indian agriculture.
The Roads needs to improve‌ For achieving logistics efficiency, Indian roads have to improve. The quality of infrastructure in terms of road and rail has hindered the free movement of goods with acceptable pace adding to the cost of agricultural commodity transported. There is an urgent need, not only to develop better transport infrastructure, butalso to also link rural and urban India in a big and efficient way on the lines of the Golden quadrilateral. Development of multimodal transport networks and parks, and facilities near airport to make perishable goods stay safe and are transported quickly is important. It is also important to design the mesh of cargo networks in such a way that the intersection of various modes of transport are near the production centre of bulk of farm produce. Indian cannot afford to keep its transportation sector backward. This will not only lead increase in prices but will keep our products inefficient and priced out of market.
The way forward India needs to ensure enhanced focus in its agriculture sector. It should become a part of mainstream development. Investments have to increase along with efficiency of the investment. Creating right kind of logistics infrastructure and network will help farm production become efficient. India will not only be able to tackle the problem of food inflation but substantially reduce logistics cost, but will become globally competitive as the world seems to face severe food crisis in future. For all this to happen Modi’s government have to be active agile and forward looking.
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Greening the Supply Chain The issues that have captured the attention of policy makers, governments and corporates from the latter part of the 20th century till date has not been all positive news. Global warming, climate change, rising sea levels, depleting ozone layer, rising air and water pollution has been at the core of all major interactions. Rising consumer awareness and the necessity to protect the environment has led to an upsurge in sustainable practices. The Executive Editor of SCM Pro takes a look at greening of supply chains.
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cross the globe, corporate houses are being forced to become more environment friendly in their operations. At the heart of this drive is the supply chain. Arguably one of the significant contributors to the corporate carbon foot print. And corporate houses have realized one thing- a large part of the carbon foot print of their products lie outside their own offices and manufacturing plants. If at all they have to make a significant positive impact on the environment, firms have to look to greening their entire supply chain. One of the major hurdles to greening the supply chain is the million dollar question – who will pick up the tab? Consumers are becoming increasingly aware of the necessity to protract the environment. However, they are not willing to pay for it. A recent talk we had with the CEO of a transportation firm underlined the consumer attitude. When the customers were offered a greener option for transportation of their goods, either with a longer transportation time or higher cost, no one was interested. Customers prefer the more polluting forms if it entails higher cost or time. Firms have to battle this dichotomy in customer expectations – the product should have a low carbon footprint but should not raise prices. The choice to the firm is clear – chose between what is good for the environment and what is good for the bottom line. (The triple bottom line concept is a corporate solution to this vexed problem)Robert Giegengack, a professor emeritus at the University of Pennsylvania’s department of earth and environmental science, summed up the sentiments aptly at a global conference on “Greening the Supply Chain: Best Business Practices and Future Trends.” - “We are congratulating ourselves that we are becoming more sustainable,but we are not. We are becoming less unsustainable. And we’ll begin to approach the question of global sustainability when we carry this discussion back to the beginning of the supply chain, because in every case but two [water and oxygen], we are extracting natural resources at rates that far exceed the rate at which they are being replenished.”
The Current State Firms in the developed world today are following some initiatives for at least measuring their carbon foot print. Most Indian firms we spoke to were aware of the necessity, but were reluctant to commit resources towards it. Some of the best practices firms are following are:
Choosing the right vendor: At a time when the vendor’s carbon foot print can seriously affect the sustainability quotient, choosing the right vendor is the easiest the firm can do. An interesting example is that of Walmart. As a part of their efforts in greening the supply chain, Walmart invited over a 1000 CEO’s of their Chinese suppliers to a conference in China. At the conference, they were given the new environmental rules and told – half of you will lose your business and half will double the business. The CEOs had to decide to which half they would belong. Focus on maximum impact: Firms can use a number of approaches to identify the areas of maximum impact. Walmart uses the Pareto’s principle and focuses on helping the 20 or 30 percent of its suppliers become green. GE on the other hand uses Life Cycle Analysis to identify products and suppliers who will have the maximum impact. Yet another way, is to go
One of the major hurdles to greening the supply chain is the million dollar question – who will pick up the tab?. after the low hanging fruit. And as the firm reaps the benefits, it can slowly expand to other areas. Collaborate: At its core, a green supply chain embraces the entire value chain of the firm. Ideas and innovations for improving the sustainability quotient of products can emanate from any member of the value chain. MNC’s encourage their value chain partners to come up with next practices in reducing the carbon foot print, and often work with them to achieve significant gains. Unless the entire supply chain come together as one, greening will be fragmented and results sub-optimal. Firms in the developed world are required by law to disclose their carbon foot print and the steps they have taken to reduce it. As a result, they require their entire supply chain- suppliers and their suppliers to actively report their efforts in reducing the carbon foot print. Suppliers to these firms are required to disclose their SCMPr
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lead story performance metrics and also ensure that their suppliers too follow suit. Enforcement: Knowing what to do is one thing. Getting it done is another. A large number of firms do have a well sketched out greening initiative – duly approved by their boards. But the ability to enforce it across the supply chain is in doubt. In an era where most of the manufacturing is outsourced to third world countries, where environmental concerns are not that high, firms should have the ability to reach out quickly to enforce its policies. And as the effects
It is time firm’s focus on the biggest stakeholder – the consumer. It is time to re-examine our use and throw culture. spill over to the second and third level suppliers, the task can become difficult. Change the mindset: We live in an age defied by conspicuous consumerism, where product life cycles are dramatically shortened. Even in India, where we are used to recycling and repairing the products we use, this phenomenon is catching up – a look at the
mobile phone market should give us an indication. The older generation would fondly remember their 25 year old Godrej refrigerator and the Usha fans which had seen years of service. Remember that most of the energy and resources are consumed during the manufacturing process! Reuse and refurbishment are two significant ways to cut resource use. A case in point is Xerox – Xerox mostly leases out its products to its customers and maintains it for them. At the end of the stated life, they take the product back and salvage whatever can be salvaged. This reduces resource usage and reduces environmental damage. The products do not clutter up the landfills. Firms need to actively collaborate to change the consumer mindset about buying refurbished products. Consumer education is a long term project and will possibly pay dividends over a longer term. It is time firm’s focus on the biggest stakeholder – the consumer. It is time to re-examine our use and throw culture. And as with any effort at bringing about equitable development, governments have an active role to play. An intelligently devised carrot and stick policy will help firms go green faster. Carrots in the form of tax breaks and subsidies (like or energy efficient appliances) and punitive measures for those who violate the laws. Firms need to focus on all stakeholders – consumers, suppliers, manufacturers and service providers to create a truly green supply chain.
www.scmp.in ...live supply chain 14 SCMPr
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Industry Portal for the Supply Chain Professional
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Green Supply Chain and Transportation Transportation is an integral part of a supply chain. And as supply chains go green, there is an emphasis on transportation too going global. Is transportation the real issue here? When transportation spends form a mere 4percent of the global supply chain spend, do we need to focus on it now? SCM Pro takes a quick look at it.
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ransportation is considered to be a major contributor to greenhouse gases and air pollution. However, data suggests that transportation spend is a mere 4 percent of the total global supply chain spends. Some may argue that given the low spend on transportation, firms should focus on other areas if they wish to develop a green supply chain. Agreed, the spend may below – but transportation continues to be the low hanging fruit in green supply chains and can generate satisfying returns. According to an World economic Forum report on Decarbonization of transport, the logistics and Transport Sector has a carbon footprint of around 2,800 mega tons CO2e. Road freight is a major element of this footprint and Minerals and food transportation are the largest contributors by product category. Like all other costs, transportation costs too could be split into direct and indirect. Direct cost is the cost incurred by the manufacturer to deliver the product to the customer. The indirect cost kicks in during product returns. The energy and cost involved in returning a product can add to the overall transportation cost. Walmart measures transportation cost as inclusive of return expenses. 3 As costs stack up, air transport is followed by road, rail and sea, with air being the costliest and sea the
Key characteristics of carbon emissions in the freight sector 1. Road freight is the principle contributor to freight transport emissions globally 2. Air freight is an highly carbon intensive mode 3. Ocean and rail freight are the most carbon efficient modes 4. Minerals and food products are major sources of transport emissions Source: WEO Report - Supply Chain Decarbonization
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Figure 3
Source: WEO Report - Supply Chain Decarbonization
Source: WEO Report - Supply Chain Decarbonization
cheapest. (See figure 3)Firms which can use multi modal transport will reap the benefit of low cost transport for long hauls. Fuel costs are a huge driver for supply chains, particularly in the current market, and that’s why transportation matters. Adding efficiency to any part of the supply chain produces better returns. A significant part of the efforts to improve fuel economy translates to the bottom line as improved profitability. SCMPr
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IT for Green Supply Chains
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We live in an interconnected and wired world. Every action generates huge amounts of data that need to flow up and down the supply chain. Information flow has emerged as the key to corporate efficiency – including its efforts to develop green supply chains. IT has a significant role to play in the success of green initiatives. SCM Pro takes a look at the role of IT in green supply chains.
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he global trend of interconnected and wired world has had its impact on supply chains too. Like in any other aspect of business, supply chains too have benefitted immensely from the use of IT. Developments in hardware, software and connectivity has revolutionized global supply chains. We have the capability to track products across the value chain in real time. The bigger question we need to ask is – are these developments in the technology domain adequate for greening the supply chain? As firms green their supply chains, they need to collect, store, analyze, share and report huge amounts of data on sustainability and at the same time interpolate this with the existing supply chain data for decisioning. There are three aspects to the role of IT in greening the supply chain. One component is the hardware – by both developing energy efficient machines and optimizing resources to run businesses better. The second is software – software should be able to handle the vast amounts of data generated and use it effectively for supply chain network design, planning, deployment and collaboration. The third component of connectivity again has two components – a lower use of resources and real time reliable transmission of data up and down the chain. Both hardware and software are of little use unless they can share data in real time, in an efficient manner. The ultimate goal of the firm should be merging their financial and green initiative data. This will help firms understand the true impact of sustainability measures on firm performance. The second step is to ensure transparency across the value chain. Firms should be able to share the data on green supply chain initiatives with all their stake holders – cus-
tomers, suppliers, plants, regulators and service providers. However, one of the biggest challenges firms have is their attitude towards data – firms invoke the confidentiality clause and are reluctant to share data with their stakeholders. Slowly firms are coming around. In the US, of the 265 of the S&P 500 firms report their CSR initiatives online and 167 of them publish their sustainability reports according to the Global Reporting Initiative guidelines. And some like the Southwest Airlines publish their award winning One Report – a detailed report on its triple bottom line efforts.
This will help firms understand the true impact of sustainability measures on firm performance. IT Challenges in Green Supply Chain Firms across the board agree on one fact – the IT infrastructure for collating, processing and sharing data is rudimentary at best, even in the developed countries. Firms in India will be forced to implement some form of IT systems to collect green supply chain data due to the mandate from their buyers. As reported in the earlier article, firms in the developed world are increasingly asking for sustainability data to continue the relationship. However, IT in green supply chains face a number of challenges. SCMPr
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lead story Getting the direction right: firms who embark on a green supply chain automation program need to map out the sustainability roadmap clearly – both for themselves and their suppliers (sometimes extending to layers below the suppliers too!) Failure to do so will mean costly re-work and waste of time and resources, if they are forced to switch track mid-way. Complex requirements: The Environment Protection Agency guidelines and Europe’s REACH program (Registration, Evaluation, Authorization and Restriction of Chemicals) require firms to collect large amounts of data. (REACH involves over 100 pages of rules and thousands of pages of guidelines on compliance issues.) Doing this without a robust IT infrastructure is a nightmare. For example, firms have to know how much of a given toxic substance is in each and every product individual companies are shipping into Europe. IT systems should be capable of automating and documenting data collection, co-ordination with
ERP can track expenses, but not the carbon footprint of those expenses. all stake holders and keep on top of regulatory changes and updates. Spreadsheet risk: given the pace of automation across firms for collection, processing and sharing green data, firms have come to rely on spreadsheets to cope with it. A typical large corporate will have thousands of locations and suppliers across the globe. Data from across all these locations is collated in spreadsheets and later on merged at various points to generate reports. This is a tedious process and renders the data obsolete by the time reports are generated. At best it can be used to analyze trends. In addition, it is a labor intensive process, creating larger overheads. Are all these efforts worth it? For one, it helps executives at the firm look at the data. Familiarity with data is the first step in developing a robust IT infrastructure. Standardization: The foundation of building a pan global green supply chain IT infrastructure is standardized formats, nomenclature and processes. Absence of standardization will add to the overheads. Across the supply chain, every stakeholder should be 20 SCMPr
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clear of the definitions and data formats. Standardization improves transparency and encourages innovation. However, creating a standardized data dictionary is a task in itself. As firms evolve in their capability and maturity on sustainability issues, they will need to integrate their sustainability tracking and measurement processes into their enterprise solutions. According to some expert estimates, a typical large corporate is looking at an additional IT spend of around a quarter of a billion dollars. Expanding the data set: current ERP modules track expenses and probably can extend it to the product level. What they cannot do is to track the amount of water or energy in each product. Similarly, the ERP can track expenses, but not the carbon footprint of those expenses – what is the carbon footprint of the water the firm uses! Firms need to realize that energy, air and water are scarce resources that need as much attention as other factors of production.A December 2010 study of middle-market to large manufacturers, conducted by IFS North America and Affinity Research Solutions, found very few companies that gave high ratings to their ERP systems’ ability to handle environmental data! RFID Technology: According to a white paper by Cognizant Technologies, an IT service provider, RFID technology can also be a huge enabler for GSCM strategies. RFID-enabled tracking of energy footprint data can make it possible for organizations to IT can also facilitate collaborative planning forecasting understand the “who, why and how” a product reached a particular stage in the supply chain. RFID labels can carry information related to the carbon/energy footprint and help organizations more accurately analyze their supply chains from a variety of environmental perspectives. Given the complexity of data and the geographical spread of data sources, Open Data Registry (Open Data Registry (ODR) links together the data enterprises and consumers need to make better decisions about how to make, buy and use goods) has introduced an open platform that will help firms build their own apps, based on their needs, but by using common data. In the green economy, where N2N (Networkto-network) defines the firm and where whole supply networks race to out-innovate each other, technology becomes the key to collaboration. And Indian firms do not have the luxury of time on their hands.
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SME’s: A curtain Raiser
SME’s: A curtain Raiser
SMEs are a vital cog in the country’s economy. They provide roughly 40 percent of the industrial output, 40 percent of the jobs and contribute about 40 percent of the exports. Across the world, firms are waking up to the benefits of an efficient supply chain. Starting this issue of SCMPro, we bring you a new series – SME Corner, where we take a look at the issues facing SME’s. Our Executive Editor Girish V S takes a look at the SME scene for the curtain raiser.
M
r. O P Bhatt, the past chairman of SBI, had some very interesting observations – around 40 million Indians were joining the middle class every year. We would have around 20 million Indians entering the productive age group every year. As per the current estimates, roughly 16% of our GDP comes from agriculture and around 60% of the workforce is employed by
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it. Clearly, Agriculture is not a big employer of the future. The one sector that can accommodate such numbers is the SME segment, not the large corporate segment. The Small and Medium Enterprise segment (SME), also sometimes expanded to Micro, Small and Medium Enterprises (MSME) have been recognized as the driver of growth of our manufacturing sector. It is a recognized fact that the
SME sector can provide jobs at lower capital consumption than any other sector. To a developing country like India that is the crucial consideration. The SME’s contribute around 20% of the GDP, around 40% of the manufacturing, and around 40% of the organized work force of India and account for 34% of the country’s exports. The SME is not only a growth engine for the economy, but it is also a very powerful me-
SME’s: A curtain Raiser
dium for inclusive growth. Clearly it represents a huge growth story. But this growth story stops at the altar of high capital costs and inability of the SME to raise finances in time. The story is similar across the world. In Japan, SMEs employ more than 70% of the workers and contribute over 55% of value added in the manufacturing sector. In Brazil, SMEs account for 20% of the GDP. 96.8% of the registered businesses in Brazil are SMEs and employ 59% of the economically active population. In South Africa, SMEs account for 39% of labor force and have a 24% contribution to the GDP. In China over 68% of the exports come from the SMEs. China has created more SMEs in the last 20 years than the total number of SMEs in Europe and the US combined. There is no clear idea of the number of SME enterprises in India. The count varies from around 10 Million to 26 million! The problem is that there is no inbuilt component keeping record of SME undertakings that are currently active. There is a significant mortality rate among SME units, where some of them close due to unforeseen circumstances. The SME sector had been fragmented across various ministries, such as SME, textiles, FPI to name a few. To bring in holistic development, the Micro, Small and Medium Enterprises Development Act was enacted on 16 June 2006. This Act provides the first-ever legal framework recognizing the concept of ‘enterprise’ (comprising both manufacturing and service entities), defining medium enterprises and
integrating the three tiers of these enterprises, namely, micro, small and medium enterprises. According to a survey done by the World Bank, Banks see a large role for the government in the area of SME financing. Since the biggest stimulant to SME finances are from the government, The Banking & Finance Research team undertook a study of the various issues with the SME sector and the incentives that the
Government of India offers to the SME sector.
Voice of the MSMEs The SME sector has one major weakness–it is dispersed all over the country and suffers from a lack of bargaining power. The SME sector is plagued by lack of funding facilities and access to bank credit at easy terms. The government recognizes that SME is vital to national employment mission and a
The SME is not only a growth engine for the economy, but it is also a very powerful medium for inclusive growth. Defination of MSMEs Manufacturing Sector Investment in plant and machinery (orginal Cost Enterprises
Excluding land and building and the items specified by then ministry of small scale industries, vide its notifiaction No. S.O.1722(E0 dated 5th October 2006)
Micro enterprises
Does not exceed Rs. 25 lakh
Small Enterprises
More than Rs. 25 lakh and less than Rs. 5 crore
Medium EnterprIses
More than Rs. 5 crore and less than Rs. 10 crore
Service Sector Enterprises
Investement in Equipments
Micro enterprises
Does not exceed Rs. 10 lakh
Small Enterprises
More than Rs. 10 lakh and less than Rs. 2 crore
Medium Enterprises
More than Rs. 2 croroe and less than Rs. 5 crore
Source: Micro, Small and Medium Enterprises Development Act, 2006
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SME’s: A curtain Raiser healthy SME sector can drive inclusive growth in India. However, the realities are different. Capital–by far the biggest challenge to the SME sector is the availability of capital. The SME entrepreneur finds it difficult to raise seed capital for the enterprise. There are no accessible funding agencies that will provide seed capital to the SME. Private Equity and venture capital players look for size and scale which
sought. This could be blamed partly to information asymmetry, where the lender does not have adequate information to take a judgmental call on the quantum of credit. The result is a vicious circle of inflated figures and higher haircuts. Collateral–The current rules enable an SME borrower to avail of credit up to Rs. Ten lakhs without collateral. This limit is too small for most of the SME enterprises
Trade documentation including packaging and labeling is a big challenge for SME sector. precludes the SME from raising funds from this route. The SME starts off with funds borrowed from known sources and hence the plans themselves are scaled down to fit the capital available. The SME units cannot tap any of the normal markets to raise capital- both equity and debt. Bank Credit –access to adequate credit is a challenge. Most often, the quantum of credit sanctioned is lower than the amount
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and the lack of collateral seriously hampers their growth. If the SME belongs to a service sector, the problems are compounded. A CEO of a SME service provider wryly remarked that banks do not know how to evaluate a service industry and that lack of understanding is hampering their access to working capital! Supply Chain–The complexity of supply chain and the globalization of customer base has forced
SMEs to evaluate their supply chains. Trade documentation including packaging and labeling is a big challenge for SME sector. A large number of SMEs are supporting many large companies. Outsourcing to SMEs is a common phenomenon. Their smaller size, smaller operational footprint and meagre resources forces SMEs to ignore their supply chain management capabilities. The lack of funds prevents the SME sector from product innovation, research and development. While banks cite lack of verifiable documentation, the sector is seeing some welcome development in the form of rating agencies. Rating provides the SME with the much needed credibility for accessing bank finance. You can read more about SME rating in the subsequent article.
Government’s Role The Government of India has recognized the importance of SME sector to nation building and has put in place a series of measures to help the SME sector. Some of the serious efforts have focused on policies for infrastructural support, technology up gradation, preferential access to credit, reservation of products for exclusive manufacture in the SSI sector, preferential purchase policy etc. The urgency to improve the SCM capabilities of the SME sector are evident to all stakeholders. We at SCMPro wish to contribute in a small way to strengthen the SME sector. Over the next few months, we will carry a series of articles focused on the SME sector. In addition, in association with our editorial partner Institute of Supply Chain Management, we will create a series of training programs for SMEs. We hope to see more SME news in SCMPro.
Enterprise
Amazon –
Masters of The Supply Chain
Amazon has become trite in the e-commerce world. Amazon. com, Inc. – to use its real name - is an American multinational e-commerce firm headquartered in Settle Washington, United States. It is the world’s largest online retailer. What started as an online bookstore is today a multi-product firm offering music downloads, furniture, food and basically almost all consumer electronics. Amazon is a major a provider of cloud computing services. Amazon.com owes much of its success to its enhancements to the shopping experience, but its real strength liesin its supply chain and fulfillment capabilities. SCM Pro takes a look at Amazon’s supply chain management.
A
mazon has a very simple corporate mission – “We seek to be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators.” This statement captures the very essence of Amazon – customer centricity. The common perception about Amazon is that it is the world’s largest ecommerce firm. And unlike other e-retailers, Amazon has been consistently investing heavily in backend supply chain and fulfillment 26 SCMPr
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technologies. Amazon acquired the robotics firm Kiva for its warehouse robots. Amazon currently owns around 50 million sq. ft. of warehouse space. According to a research published by SCM World in December 2012, Amazon was more widely admired for its supply chain excellence over Apple Inc. 58 percent of the 1136 supply chain professionals surveyed admired Amazon for the way in which it operates its supply chain. According to the SCM World survey, 62 percent voted for Ama-
zon on agility (defined as the ability to quickly and cost-effectively shift amounts and/or types of production and delivery to improve operational performance in volatile conditions) 59% on collaboration (defined as the ability to work across organizational boundaries to solve systemic operational problems and create new value for both customers and partners), and 57% for execution (defined as consistent and reliable delivery against commitments and within budg-
Enterprise
eted expenses). However, on innovation, Apple won 78 percent of the vote, compared with just 19% for Amazon.Like all other retailers, Amazon too had a humble start. In the words of its founder CEO Jeff Bezos “Nineteen years ago, I drove the Amazon packages to the post office every evening in the back of my Chevy Blazer. My vision extended so far that I dreamed we might one day get a forklift. Fast-forward to today and we have 96 fulfillment centers and
are on our 7th generation of fulfillment center design. Our operations team is extraordinary – methodical and ingenious. Through our Kaizen program, named for the Japanese term “change for the better,” employees work in small teams to streamline processes and reduce defects and waste. Our Earth Kaizens set energy reduction, recycling, and other green goals. In 2013, more than 4,700 associates participated in 1,100 Kaizens. Sophisticated software is key in
our FCs. This year, we rolled out 280 major software improvements across the FC network. Our goal is to continue to iterate and improve on the design, layout, technology, and operations in these buildings, ensuring that each new facility we build is better than the last.” Amazons supply chain management stars from predicting customer demand. An inaccurate forecast or failure to optimize and operate fulfillment centers successfully could result in excess or insufficient SCMPr
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Enterprise inventory or fulfillment capacity, resulting in increased costs, impairment charges, or both. Or worse, harm its business in other ways. A key to Amazon’s supply chain function is its fanatical customer centricity. It is reported that in many internal meetings, Bezos leaves one empty chair next to him and tell people that they should also think on behalf of one important customer who can’t manage to be there. The word “empty chair” becomes a symbol of customer centric business practices inside
our operating results and customer experience. In addition, our ability to receive inbound inventory efficiently and ship completed orders to customers also may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, acts of God, and similar factors. Third parties either drop-ship or otherwise fulfill an increasing portion of our customers’ orders, and we are increasingly reliant on the reliability, quality, and future procurement of their services. Under some of our commercial agreements, we maintain the inventory of other companies, thereby increasing the complexity of tracking inventory and operat(http://files.myopera.com/CHIEMKIMNGAN/blog/amazon.JPG ing our fulfillment centers. Our failure to properly handle such
fillment centers in excess of forecasts, we may be unable to secure sufficient storage space and may be unable to optimize our fulfillment centers. There can be no assurance that we will be able to operate our network effectively. We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact
Many of the SME businesses are based on needs and not as a conscious choice or an opportunity to build upon. Amazon. Amazon starts its supply chain planning with its customer and then moves backwards. Amazon invests heavily in things or areas which customers really like. This means constantly investing in and innovating its supply network.
Challenges to Fulfilment The 2014 annual report of Amazon has the following to say about the challenges to its fulfilment. “Orders from several websites are fulfilled primarily from a single location, and we have only a limited ability to reroute orders to third parties for drop-shipping. We and our co-sourcers may be unable to adequately staff our fulfillment and customer service centers. As we continue to add fulfillment and warehouse capability or add new businesses with different fulfillment requirements, our fulfillment network becomes increasingly complex and operating it becomes more challenging. If the other businesses on whose behalf we perform inventory fulfillment services deliver product to our ful28 SCMPr
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Kin
Enterprise inventory or the inability of these other companies to accurately forecast product demand would result in unexpected costs and other harm to our business and reputation.”
The word “empty chair” becomes a symbol of customer centric business practices inside Amazon.
Focus on Automation In March 2012, Amazon ordered a USD 775 million automated warehouse management product – called the “magic Shelf” from Kiva, a company based in Massachusetts. A warehouse running Magic Shelf would look like a more traditional operation, at least until the system is switched on and the shelves start moving. The shelves themselves aren’t robotic. Kiva designed a special shelf it called the pod, which the robot can safely pick up and transport. As the order comes into the warehouse, the WMS orders a robot – a squat, or-
ange self-driving dolly that resembles an oversize computer mouse - to the shelf location where the item is placed. The robot travels under the raised shelf, leaving the aisles for movement of the robots carrying the shelves. As the robot reaches the shelf, it rotates like a jack, lifting the shelf off the floor. It then moves along the aisles to the place where human pickers are stationed. A set of lights and laser pointers guide the pickers directly to the shelf and bin containing the item ordered. Once the items have been removed by the picker,
the robot takes the partially empty shelf to a location at the back of the store, ready for the next load. The robot, then waits for the next command.
Moving to the Customer Amazon has pushed the envelope with its same day and next day delivery promise. To help achieve this, Amazon is building its distribution centers closer to its customers. To reach its customers faster, Amazon is now running a pilot for last-mile delivery by partnering with neighborhood mom-and-pop stores.
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reverse logistics
Reverse Logistics Reverse logistics is a problem waiting to be addressed. The rapid rise of e-commerce and fast changing customer preferences has placed a huge burden of manufacturers – how to collect the goods once sold, and now not in favour in the market from the consumer or the point of sales. Unlike the past, customer today prefers replacement over repairs. SCMPro takes a look at the phenomenon of reverse logistics and its implication for the manufacturing sector.
F
irms in India are slowly waking up to a stark reality – supply chain management does not end with the delivery of the product to the customer or point of sales. The volatile customer demand and the changing tastes are forcing CEO’s and supply chain managers to ask – what happens when the product does not work as expected? What
30 SCMPr
May 2014
happens when the product does not sell? What happens when the product is discontinued? Welcome to the flip side of the supply chain – reverse logistics. Guide and Van Wassenhove in their article in Harvard Business Review in 2002, labelled the reverse supply chain as “the series of activities required to retrieve a used product from a customer and either dis-
pose of it or reuse it.” Reverse logistics is also referred to as reverse supply chain, the aftermarket supply chain, Aftermarket logistics, or Retrogistics. Fortunately for us, we are accustomed to reverse logistics. From the house wife who exchanges a few old clothes for a vessel to the sale of old newspaper, we do it on a daily basis. In spite of this,
reverse logistics reverse logistics is not become a service worthy of professional consideration. The no returns policy followed in most stores has a big role to play in this. Unlike in the west where there is a fixed window within which a product can be returned without any questions for a full refund, we in India force rarely give cash refunds. The objective in reverse logistics is to minimize the handling cost while maximizing the value that can be extracted from the returned goods. Products can be returned for a variety of reasons including customer rejection, damaged products, product recalls, incorrect shipment, exchange, reusable packaging materials and product
ply chain, goods arrive at the factory neatly palletised, labelled and packed, in definite quantities. The date and sometimes the time of arrival too is known. The reverse flow, on the other had is unpredictable in both quantity variety and timing. Unlike the forward chain, there is no urgency to the reverse flow. They arrive with no specific periodicity, and in different condition. The reverse chain could contain damaged goods,
The cost of Inefficiency It is estimated that a firm typically incurs accost of around 3 percent of their profits on the reverse flow of goods. As of now, most firms do not track these costs separately. However, realization is slowly dawning that reverse logistics is a straight hit on the bottom line of the firm. They reduce the return on assets and investments. Firms do not report or track the returned goods. Sometimes they
The objective in reverse logistics is to minimize the handling cost while maximizing the value that can be extracted from the returned goods. just occupy warehouse space. A study by the consulting firm A T Kearny found that roughly 80 percent of the money generated through asset sale goes straight to the bottom line.
The Push to Cost Advantage
upgrades. Whatever the reason, the firm has to handle it in an efficient manner. Unfortunately, most firms do not know the cost of processing returned goods or even worse, the value that can be realized from the returned products. Operationally, reverse logistics is vastly different and complex as compared to normal or forward supply chain. In the forward sup-
recalled goods or perfectly working products returned by the customer. If forward supply chain is neat and ordered, reverse logistics is chaotic and unpredictable. This is because reverse logistics encompasses the management of products returned by customers, their repair, refurbishing, recycling or disposal in an environmentally friendly manner.
Firms have worked hard to ensure that the products reach their customers at the right time, in the right condition and at the right price. The time has come to now address the reverse flow. A returned product is always a cause for concern – the firm will lose the customer if the complaint is not handled properly. However, reverse logistics should not be looked at as a cost minimization exercise – do it at the least cost motto. Instead, firms need to focus their energies on opportunities to add value to their supply chains. One method that has been advocated is the Return on Assets (ROA) approach. Reclaiming parts that can be used in the forward chain can sharply lower the cost of goods sold. These returned assets can be seen as free inputs. The firm has already paid SCMPr
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reverse logistics for the raw materials once. Neither has the firm to totally transform them again in order to push it back to the market. Firms who lease their products are prime us-
A fourth advantage is that the refurbished product can find an alternate market segment that the original could not attract. A prime example is the luxury car
A returned product is always a cause for concern – the firm will lose the customer if the complaint is not handled properly. ers of this service. A second benefit from a good reverse logistics process is that it can lead to product improvement and innovation by shining the spotlight on what does not work. A third benefit is that if the firm can get the product back in time, they may be able to re-route it to some other point of sale. Waiting for returns may render the product un-usable.
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market which has developed a vibrant pre-owned car market. Customers can aspire for a preowned merc today.
Conclusion No doubt, under the current conditions reverse logistics may be a pain point, a loss leader, and a difficult one to maintain. However, it holds out a promise to become
an integral part of supply chain management and a potential revenue stream for businesses that do it right. Mastering reverse logistics is no longer a luxury. It means proactively managing the complete lifecycle, including end of life cycle, actively seeking opportunities to either refurbish or cannibalize parts to reduce costs and managing the recycling and disposal processes. In many European countries, strict waste disposal liabilities are imposed on the manufacturers. Firms need to decide on the level and involvement in reverse logistics based on the value chain and statutory requirements. Firms which can integrate reverse logistics into their value chain will emerge winners. And as trade moves on-line and mobile, the manner in which the firm handles customer returns will decide if they will be loyal to the firm or look for value elsewhere.
n INSIGHT
n Knowledge
n SURVEY
n ACADEMIC ADVOCACY
n HUMAN RESOURCE
Managing Supply Chains Why do some find it so challenging to manage their supply chains? SCM pro brings you the first of a series of articles on managing supply chains by Raymon Krishnan, Joe Lombardo and Stephanie Krishnan. This article focuses on on optimising Supply Chain performance.
34 SCMPr
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Knowledge formance and results. Customer surveys and feedback can show spikes of dissatisfaction, which direct a manager’s focus on specific incidents but distract from analysis of trends that can point to causes of problems, rather than management of crises. This is the first article in a series which will look at managing supply chains holistically. We start this by first identifying that some business leaders find it difficult to manage their supply chains effectively. Is it really due to the complexity of the supply chain or is there something more fundamental within the organisation
Reading the signals
A
s Supply Chains are complex, and are becoming increasingly challenging with additional stresses from globalisation, increased trade compliance pressures and customer demands. This is a sentiment that is echoed across many industries, and conversations often centre around this complexity. The problem of managing complexity within supply chains is one that is evidenced by business per-
The pleasant hum of what we think is an efficient organisational machine can be shattered by a strong complaint from a customer. Poor service performance or failure to meet a crucial KPI can cause us to start down the path of a fix to the immediate problem at hand, where the problem must be addressed, assurances must be made and the blame game begins. Signals are the first alert that attention is needed, and many supply chain manager’s primarily daily focus is dealing with these signals - lurching from one crisis to another. These signals can encourage a silo mentality, reducing the organisation’s ability to recognise the internal and external signals that give an indication of a problem in the works. Must we wait for that external signal before we realise there is an issue? Having our daily routines prioritised by customer complaints is not only draining to morale, but highly inefficient and ineffective use of a true supply chain manager’s time. Reducing impact on external customers is usually the result of an increase in awareness of the internal signals from our
systems - the key is being able to read them. The internal signals are the most obvious and yet they are the ones so frequently missed or dismissed as they may not be attributed to logistics functions or supply chain issues. We see the internal signals all the time - increasing staff turnover, open disagreements & squabbles amongst department managers, controversial and unilateral decisions at the expense of others, poor communications and even imposing spontaneous decisions by senior or high ranking directors. Supply chains are systems interrelated parts that function together to achieve a common goal. Continual failures in the form of complaints from customers often stem not from a function of the supply chain, but rather from the dysfunction of the system. Rather than focusing on the relationships between components of the system and the working of the supply chain system as a whole, we focus on the parts. Usually these parts are easier to understand and address - the warehouse, or the customer service department - and quicker “solutions” often propose themselves. If we continue to apply similar solutions, how can we but fail to get similar, disappointing results?
Where is the problem? Internal signals are often pointed to and identified as the cause of the problem. Taken alone they may appear as causes, however independent signals considered one-by-one can mask much larger issues. If we take a wider view of the system as a whole, then ultimately we must attribute the reasons for a dysfunctional or under-optimised supply chain to the key decision-makers of the SCMPr
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Knowledge organisation, as they ultimately should have enterprise-spanning (or supply chain-spanning) perspectives that should allow for patterns to be spotted. Are customer complaints related to high staff turnover? Are poor internal communications related to declining sales? Systemic problems may only become apparent when some distance is given between the signal and the solution, and when multiple signals from a variety of sources are able to be evaluated with a true systems thinking approach. Operational personnel who are responsible for logistics and other
Can we identify these divergences in the supply chain? There are several factors that can contribute to a divergence. Some of the more common causes can be attributed to: 1. Organisational changes 2. Changes in adequacy of skills and competency 3. Economic and financial changes 4. Changes in suppliers and procurement policies, resulting in changes in supplier service & quality performance 5. Transformation in delivery models - in-house versus outsourced and/or moved to low cost area
Business leaders find it difficult to manage their supply chains effectively. Is it really due to the complexity of the supply chain or is there something more fundamental within the organisation that needs to be addressed? functions within supply chains must continue to support the business, ensure continued operations and put out fires as they occur. It is the responsibility of business leaders to ensure that a control-tower approach is taken, operational activities are aligned with the overall business strategy, and signals are monitored collectively to ensure that systemic problems can be identified and solved. Failure to align activities and ensure that a control-tower is effectively in place to monitor performance and identify issues will result in a wider divergence between company objectives and supply chain functionality and performance. 36 SCMPr
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6. Customer-differentiated requests, resulting in changes to demand levels, performance and reaction times It will be evident that not only have there been new imbalances introduced in the supply chain, but also different expectations from participants within the supply chain. Changes could also see a new demand for fast and aggressive KPIs. These may in-turn be in conflict or collision with the existing ones, resulting in departments with conflicting objectives. These conflicts can be a key indicator of divergence in the supply chain, and a signal that participants need to be brought together to re-establish common objectives in order
to ensure supply chain continuity and growth.
Can we fix the problem quickly? Managing the corrective factors to re-align the divergence will require major effort by the organisation and solid management leadership. How many organisations are willing to this, is however the question. A lack of understanding of what Supply Chain really is, other commercial pressures and a slew of other distractions often result in little or insufficient effort and resources being given to this crucial area. As a supply chain can touch many departments, functions and people in the organisation, managing changes needs to be a structured process. If done haphazardly it could result in even more difficulties in managing corrective actions. The people factor is still a high influencer in the effective management equation. In a supply chain we can expect to see many clusters of operations, people, processes, systems & resources. If all of these areas are experiencing some difficulties and internal turbulence, then we can only expect to see problems riddled throughout the entire supply chain. Managers often resort to “quick fix” solutions to fix problems. This can lead to a weakened culture of problem solving and the opportunity to better understand and address the root cause of issues. The result of “quick-fix” or “firefighting” due to business pressures or in some cases the lack of knowhow or empowerment of managers in supply chains is detrimental in the long run. Adding more resources to fix the individual issues or to immediately cut a process or resource to
Knowledge avoid any potential crisis is simply reacting. Reactive solutions do not usually add any effective long term value to supply chain deliverables nor the enterprises performance goals. So why is Supply Chain Management, something that has been around for more than a decade, so complex and difficult to manage effectively? The contributing factors to this question are many. Often, as alluded to earlier is the there is simply a lack of understanding of what a supply chain is, and how it is intended to work in and between organisations. The ability of business process owners to understand the big picture is weakened when there is no alignment to the management strategy. If the link between the business strategy and the supply chain are not clear within the organisation, it likely that this is also not clear to the management. Consequently the leadership and priorities to making the supply chain work effectively, are neither visible nor seen as relevant to the business strategy and therefore success of the organisation. It is a reality that business models change and evolve to suit the conditions in their market environment. If these dynamics are not effectively coordinated across the entire organisation, the natural tendency will be to see departmental or functional silos grow and independent “sub-organisations� emerge. This is where we will see performing results optimised at departmental levels but underperforming at the overall company level.
The supply chain management challenge As we analyse more closely the organisational dynamics, func-
tional structures and management roles, we will identify where the problems and difficulties arise in managing the supply chain. The problems and difficulties to effective management lie fundamentally in the misalignment of key business processes,
performance capabilities. It may be surprising to read that these basic conceptual failings are being experienced in many companies, large and small. Left unaddressed for too long (as is often the case) realignment to restore the correct bal-
Failure to align activities and ensure that a control-tower is effectively in place to monitor performance and identify issues will result in a wider divergence between company objectives and supply chain functionality and performance. and the imbalances in the performance capabilities of the organisation. These misalignments and imbalances are the direct consequence of both the lack of focused management leadership, and in the various independent changes made by stakeholders in the supply chain. Attention to these key elements, will immediately transform the organisation’s
ance at later stages of strategic development will be costly and time-consuming. All is not lost however. If every CEO or Senior Executive decision maker take a direct interest and commitment to working with the supply chain professionals in their organisation this backbone of any organisation can be made to perfume at its optimal level.
In Part 2 of this 6 partseries we will elaborate on the principles of managing supply chains. At the end of the day, business decision makers and supply chain professionals will better understand the value of a supply chain structure that supports the business goals of the organisation. About the Authors: Raymon Krishnan currently serves as President of The Logistics & Supply Chain Management Society. Stephanie Krishnan is an Honorary Fellow and lectures for the University of Wollongong. Joe Lombardo with over 30 years experience in corporate global supply chains & logistics management, has founded ESP Consult.
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Connecting to Compete Trade Logistics in the Global Economy Since 2007, World Bank has been bringing out the Logistics Performance Index Report, once every two years. The LPI measures the on-theground efficiency of trade supply chains, or logistics performance. This year’s edition covers 160 countries.The LPI and its components help countries understand the challenges that they and their trading partners face in making their national logistics perform strongly. SCM Pro brings you summary and key findings from the report. The whole report can be accessed at lpi.worldbank.org.
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he Logistics Performance Index from the World Bank is an interactive benchmarking tool created to help countries identify the challenges and opportunities they face in their performance on trade logistics and what they can do to improve their performance. According to the World Bank, “The LPI is based on a worldwide survey of operators on the ground (global freight forwarders and express carriers), providing feedback on the logistics “friendliness” of the countries in which they operate and those with which they trade. They combine in-depth knowledge of the coun5 tries Survey in which they operate with informed qualitative assessments
of other countries where they trade and experience of global logistics environment. Feedback from operators is supplemented with quantitative data on the performance of key components of the logistics chain in the country of work.” India is ranked 54 among the 160 countries surveyed in 2014. The LPI consists therefore of both qualitative and quantitative measures and helps build profiles of logistics friendliness for these countries. It measures performance along the logistics supply chain within a country and offers two different perspectives: international and domestic. Since the first edition, the LPI has shown that good policies matter to develop efficient supply
chains but also that many developing countries still lag behind. The “logistics gap” evident in the first three editions still prevails and underscores the importance of consistent policies across sectors (trade, customs, and transportation, for instance). The agenda and priorities are evolving. The imperative of facilitating trade through more transparent and consistent border clearance is now universally recognized - and set in stone in December 2013’s World Trade Organization Agreement on Trade Facilitation in Bali, Indonesia. New challenges of environ- mental sustainability, spatial planning, and the regulation and organization of services are receiving more attention, and not only in rich and emerging countries. Improving logistics performance is at the core of the economic growth and competitiveness agenda. Policymakers globally recognize the logistics sector as one of their key pillars for development. Trade powerhouses in Europe like the Netherlands or in developing countries like Vietnam or Indonesia see seamless and sustainable logistics as an engine of growth and of integration with global value chains. Indeed, inefficient logistics raises the costs of trading and reduces the potential for global integration. This is a hefty burden for developing countries trying to compete in the global marketplace. Since 2007, the Logistics Performance Index (LPI) has been informing the debate on the role of logistics for growth and the policies to support it in such areas as infrastructure, service provision, and cross-border trade facilitation.
Logistics performance continues to converge—slowly The results of Connecting to Compete 2014 point to Germany as the best performing country SCMPr
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survey with an LPI score of 4.12, and Somalia as the worst with 1.77 (on a scale of 1 to 5). (Germany was also the best performer over 2007–14) A slightly converging trend from previous LPI surveys in 2007, 2010, and 2012 is also found in 2014, with lower performing countries improving their overall LPI scores more than higher performing countries (figure 1). The modest convergence since 2007 is explained by a perceived improvement in trade- supporting infrastructure in low- and middle- income countries—and to a lesser extent in their logistics services and customs and border management (figure 2). This 6 perceived improvement attests to the success of developing countries in closing the transport infrastructure gap with high-income countries.
provide is perceived better than the quality of the corresponding infrastructure they operate. This “divide” between services and infrastructure quality is wider in air and maritime transport. Railroads, again, have low ratings almost everywhere. And low income countries still score poorly on road freight services, despite having given them more policy attention recently. Acceptable services in infrastructure can be achieved in less-than-ideal circumstances, but differences in service quality can be substantial for similar levels of perceived infrastructure quality, for operational excellence cannot be replaced or necessarily equated Survey with good physical “hardware.”
Trade facilitation and border management reforms matter Supply chain reliability is a major concern for traders and logistics providers alike. In a global environment, consignees require more certainty about when and how deliveries will take place. This increases the demand for quality in logistics services, posing challenges for private agents and for governments, all of which face pressure to facilitate trade while safeguarding the public against criminal activity, health concerns, or terrorism threats. Efficient border management is critical for eliminating avoidable delays and enhancing predictability in border clearance. Coordination among government
If service delivery is poor, good physical connectivity is not enough Infrastructure development has assured basic connectivity and access to gateways for most developing countries, a fact consistent with trends in the LPI since 2007. Yet countries have been more successful in delivering quality for some types of infrastructure. Qualityof information and communications technology infrastructure is regarded not only as the highest across all respondents, but also where the gap between lowest and highest performers has narrowed the most, partly due to automation in border management. Conversely, rail infrastructure inspires general dissatisfaction. Ratings for other types of infrastructure vary by region. Infrastructure services are delivered by logistics providers that operate under very different environments globally. Usually, the quality of the services they 40 SCMPr
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Blurb 1 Since the first edition, the LPI has shown that good policies matter to develop efficient supply chains but also that many developing countries still lag behind. Blurb 2
survey control agencies will remain essential in trade facilitation efforts—as will introducing best practices in automation and risk management in non-customs control agencies, which have generally been less open to reform. Accordingly, customs agencies have obtained higher LPI ratings than all other agencies in border management, particularly sanitary and phytosanitary control agencies, and less so those enforcing standards. The World Trade Organization Ministerial Conference Agreement on Trade Facilitation, in December 2013 in Bali, marked the importance of the facilitation agenda for expandingtrade. After more than a decade of negotiations, the Bali Ministerial Declaration renewed the impetus to reform trade facilitation. It also created some urgency for the donor community to support developing countries in this endeavor.
Increased complexity, no more low-hanging fruit Previous editions proposed a typology of four broad groups of countries, based on how friendly their logistics environments are. The most in need of attention from the international community and their neighbors are those with governance challenges - such as post-conflict countries and fragile states - as well as those challenged by their economic size or geography in their connectivity to global markets - such as landlocked developing countries and small island states. Long-standing, but still mainly unresolved, implementation challenges in these countries, such as regional transit regimes, remain key for future progress as many now have the basic connective infrastructure in place. Despite least developed countries’ efforts to improve their logistics, there is a growing need
for consistent action plans where complexity is higher, as in most middle-income countries. The notion that there may be low-hanging fruit that countries can pick easily is less and less true. Further, reforms with many stakeholders can be slow to implement, or even reversed by governance weaknesses, as in Tunisia. More detailed, accurate data for policymaking and information sharing is needed. For instance, the trade facilitation concept of “single windows for trade”
shipping to countries in the Organization for Economic Co-operation and Development recognized a demand for environmentally friendly logistics solutions, compared with just 10 percent for lowincome destinations. Governments will need to make long-term policy changes that improve and maintain the competitiveness of these services, consistent with fast-changing industry practices. So developing countries will have to not only consider the environmental foot-
Since the first edition, the LPI has shown that good policies matter to develop efficient supply chains but also that many developing countries still lag behind. re- quires alignment of several government control agencies, which takes time, but can be implemented in least developed countries, as in the Lao People’s Democratic Republic. Countries that introduce far-reaching changes have combined regulatory reform with investment planning, interagency coordination, and incentives for operators. The LPI shows that the quality of services is driving logistics performance in emerging and richer economies, too (see figure 2). Yet developing services like third-party logistics, trucking, and forwarding may be the most complex policy agenda ahead, with few success stories so far. In “logistics friendly” countries, manufacturers and traders already outsource logistics to third - party providers, and focus on their core business while managing more complex supply chains. Supply chain sustainability concerns are stronger in this edition. About 37 percent of respondents
print of their logistics, especially in trading with developed countries, but also revisit governance and operational models for environmentally friendly infrastructure and related transport modes, especially railways, that seem to perform poorly relative to those in the top performers.
Conclusion Logistics performance is strongly associated with the reliability of supply chains and the predictability of service delivery for producers and exporters. Supply chains - only as strong as their weakest links - are becoming more and more complex, often spanning many countries while remaining critical to national competitiveness. Comprehensive reforms and long-term commitments from policymakers and private stakeholders will be essential. Here, the LPI provides a unique reference to better understand key trade logistics impediments worldwide. SCMPr
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Green Supply Chain Management in Retail Sector
For this issue of Academic Advocacy, we bring you the work done by three students at Great Lakes Institute Management Studies, Chennai. The purpose of the research was to analyzeGreen Supply Chain Management Systems in the Retail Industry in South India and its impact on the economic performance and competitiveness. By Aashima Sharma, ArunRajan and Richard Jose at Great Lakes Institute of Management Studies, Chennai.
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reen Supply Chain Management has grown in popularity in the last few years. It is about incorporating concernsabout the environment and its sustainability into the Supply Chain. GSCM is applying Green principles to the various processes of the Supply Chain such as usage of environmental friendly materials, recycling products and reducing the usage of certain chemicals which have adverse effects on the environment.Few of the benefits of GSCM are cost reduction, increased efficiency, resource sustainability, public relations benefits, adapting to regulation and risk reduction, and improvedquality of products. The role of supply chain in the organized retail sector in India should be a shelf- centric partnership between the retailer and the manufacture for this will create supply chains that are loss free. This will also give rise to top and bottom line growth.Organised retail supply chain in India poses many challenges like product sourcing, transparency, specialised skills, man power management, kirana stores, multiple taxes, inadequate infrastructure, real estate cost, quick response, customer loyalty, high connectivity, op-
erational cost, forecasting etc. They can be classified as strategic challenges, environmental challenges, customer challenges, and supply chain (SC) challenges. In the organized retail market in India, the role of supply chain is very important. The Indian customer demands a variety of products at affordable prices. Lately, this integration has taken yet another leap and the focus of supply chain management is gradually shifting from supplying at minimum cost to supplying sustainably. The interaction between sustainability and supply chains is the critical next step from recent examinations of operations and the environment and operations and sustainability. In India, environmentally and socially responsive supply chains are in the early adoption stages. A number of companies are realising the need to ‘go green.’ Customers are the key drivers, they want to know how the products are made, what impact future environmental legislations will have on the products they buy. Practitioners with this knowledge and a vision suggest that there is a need for the business to be environmentally sustainable and to communicate this effort to their customers, partners and the public. However, the question remains whether greening the supply chain will be economically profitable for the business and how it will affect competitiveness in the market. Literature reviews have shown that adopting techniques to green the supply chain leads to improved efficiency and performance. By re-evaluating a company’s supply chain, from purchasing, planning, managing the use of materials to shipping and distributing final products, going green can often identify benefits to the firm. Introduction of GSCM in companies will increase its performance with several benefits like lowered costs, sustainability of resources, positive
impact on financial performance, product differentiation and competitive advantages, risk reduction and adapting to regulation. This research is targeted at studying the impact of greening the supply chain on a company’s economic performance and competitiveness.
Inbound Function Inbound supply chain in general comprises of activities or actions required before the production or processing of goods and services begin, which includes handling of raw materials or merchandise, inventory control, and such activitiesrelated to suppliers and procurement of materials.As far as the retail industry is considered, inbound activities are related to the procurement of merchandise from the manufacturers and producers. The activities related to implement green methods in the inbound activities of a supply chain is considered as inbound function. The relationship between the inbound function and the economic performance and the competitiveness of the firm is researched through this paper. According to Dan Wanget al, suppliers are one of the most important stakeholders in ensuring Green Supply Chain management is competitive. The study has empirically verified the positive relationship between the competitive advantage of the manufacturer in winning orders and his criteria in selecting suppliers.Even if one of the suppliers fails in conforming to the Green methods, GSCM will not yield required success in competitiveness and economic performance.
Internal Function The internal function refers to the greening activities done as part as the firms initiatives towards environmental sustainability. It basically includes efficient waste management techniques, cost reduction, SCMPr
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Academic Advocacy transportation, warehousing and distribution of finished products to the ultimate consumer. Currently, most products come in a form of packaging that prevents product damage and makes the product easy to handle. The use of packaging whether, it is made of glass, metal, paper or plastic, contributes heavily to the solid waste stream. Few areas where Greening can be introduced in Outbound Logistics are Environmental friendly packaging, Environmental friendly transportation, Environmental friendly Waste Management. The benefits of Green Supply
less handling, shorter movements, more direct routes, and better space utilization. But, each of these issues includes trade-offs among delivery time, responsiveness, quality and cost, as well as environmental performance. Warehousing and delivery packaging design are two important issues in outbound (and inbound) logistics and distribution. Standardized reusable containers, good warehouse layouts, easy information access all cut storage and retrieval movements and save on operating costs and are environmentally sounder.
However, the question remains whether greening the supply chain will be economically profitable for the business and how it will affect competitiveness in the market.
Companies that have high environmental ethics and standards can not only avoid the troubles thatcome with environmental protection protests, but alsoimprove their corporate image. Companies can acquire a competitive edge with the support of green initiatives which will change the perception of customers towards the firm and its products. Environmental sustainability image of the company can be treated as an intangible asset which will improve the goodwill of the company. The empirical results demonstrate that corporate environmental ethics positivelyaffects corporate competitive advantage. Competitiveness will be directly related to the economic performance of the company in the future. Greening effects of the inbound, internal and outbound segments of the Retail Supply Chain can be evaluated through the increase in the competitive advantage to the company.
eco efficiency etc. which are directly related to the firm. In the retail industry, internal activities can be green design, greening in internal transports, internal packaging and labelling, store management etc. Green design is defined as the systematic consideration of design issues associated with environmental safety and health over the full product life cycle during new production and process development. It encompasses many disciplines, including environmental risk management,occupational health and safety, product safety, pollution prevention, resource conservation
and waste management all of which can ultimately lead to environmental and economic performance. Green operations includes activities related to product manufacture/ remanufacture, usage, handling, logistics and waste management once the design has been finalized.There is research that shows consumers are prepared to pay more for environmentally friendly goods.By implementing relatively simple steps it is possible to save between 10 and 25 per cent of energy costs.Firms can stress on energy savings by switching over to low energy devices and usage of green energy. Other easy techniques are green home delivery by using electric vehicles, online sales and green travel plans.
Outbound Function Outbound logistics consists of activities involving materials handling, order fulfilment, packaging, 44 SCMPr
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Chain approach to Industrial Packaging are significant. In addition to Environmental benefits, these also include savings in packaging, waste disposal as well as other efficiencies. Eco-friendly packaging offers a vast potential for Indian manufacturing companies in terms of cost reduction and resource conservation. With a growing consumer demand, limited resource availability and high wastage rate (40%), manufacturers will have to focus on sustainable packaging alternatives. While some progressive steps have been taken by companies in this direction, the sector is still at a very nascent stage in India. The design of a logistics network and its planning are two of the more strategic issues facing logistics managers. Some of the design and management criteria that support environmental planning in this area include fewer shipments,
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Economic Performance Economic Performance evaluation and benchmarking is very essential for identifying the ‘best practices’ for an organisation. Thus it becomes critical to measure various processes in Green Supply Chain in
Academic Advocacy terms of Economic performance. Performance measurement and metrics have an important role to play in setting objectives, evaluating performance, and determining future course of action. Performance measurement and metrics pertaining to SCM have not received adequate attention from researchers or practitioners. To meet objectives, the output of the processes enabled by the supply chain must be measured and compared with a set of standards. In order to be controlled, the process parameter values need to be kept within a set limit and remain relatively constant. This will allow comparison of planned and actual parameter values, and once done, the parameter values can be inuenced through certain reactive measures in order to improve the performance or re-align the monitored value to the deďŹ ned value. Research and studies have shown that Greening the various phases of Supply Chain contributes to improved economic and environmental performance. But greening all the phases need not necessarily impact financial performance. The extents to which the various functions in the Supply Chain affect the Economic and Financial performance need to be measured. This research concludes that greening the supply chain has the same potential to lead to competitiveness and economic performance. The first contribution of the study is that it considers the green supply chain not in sections but in its entirety. The authors consider the distinct environmental initiatives in each phase as different indicator variables. The second contribution is that it establishes with empirical analysisthat the green supply chain does lead to increased competitiveness and better economic performance. The third contribution is that this research has a theoretical basis and an empirical analysis where the model converged statistically with acceptable chi-square and p-values using Structural Equation Modelling. The results obtained from the Research demonstrates that the greening of Inbound function and production significantly lead to greening Outbound, which results in better competitiveness and economic performance of the firm. From an industry perspective, firms are continuously striving to achieve competitiveness in their business activities in both the domestic and the global arena. These research findings suggest that if they green their supply chains not only would firms achieve substantial cost savings, but they would also enhance sales, market share, and exploit new market opportunities to lead to greater profit margins, all of which contribute to the economic performance of the firm. SCMPr
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Taking Risks and Other Things…. 46 SCMPr
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talent
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.
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ith India’s general election now largely out of the way and The BJP-led party having emerged victorious with a landslide victory, business leaders throughout India and the world await for signs that will kick start the Indian economy. Narendra Modi, the new PM, campaigned predominantly on issues of development and anti-corruption. But is this enough? And more importantly, can he really deliver the kind of changes needed to inspire international business to invest in India? Last five years, the Indian economy has faltered with business growth stalling and the currency witnessing huge volatility. This volatility continued its severity and affected major macro-economic data, including investment growth, inflation, trade and investment. Managing volatility in the currency markets has become a big challenge for policymakers and Modi’s BJP party will face the same challenges. Despite a series of measures taken by the central bank as well as the government to curb the volatility in the markets, the rupee continues to depreciate. The trend is unlikely to reverse any time soon. The rupee depreciation is hurting the Indian economy. It’s fuelling inflation and has hurt economic growth. Growth that is desperately needed if India is to reverse it is ever increasing unemployment rate. The failure of the previous government to unify the states and to stamp out unnecessary bureaucracy and corruption, both organized and unorganized, has reduced the appetite of multinational business to
invest on the scale needed to ensure India continues a growth needed to support its growing population. Structural reforms have fallen foul of political gridlock in the past and the hope is that Modi can clear roadblocks. Analysts say India needs to simplify its tax code, encourage foreign investment and streamline agricultural production. Modi will have to move fast if he’s to meet the expectations of international businesses and encourage their investment in India’s recovery. Modi likes to emphasize his management credentials. He campaigned on a record of low unemployment and high foreign investment in Gujarat, the state he has led since 2001.He has promised to end policy paralysis, reduce inflation and tackle corruption. He has also pledged to establish manufacturing hubs and industrial corridors, improve the tax code and reform the banking sector. This all sounds good and certainly has the potential to drive economic growth, spurring on employment. But can he deliver on the kind of infrastructure necessary to make a difference to supply chain? According to DHL’s recent Global Logistics Report, a vital step in India’s further development is expanding the road and rail networks, and modernizing harbors and airports. An increasing globalization has raised volumes of transport without a commensurate increase in logistics infrastructure. Modernization of systems, facilities and import/export duties are keys areas to attract overseas investment. Transshipping times for ships in Indian harbors are three to four times longer than the average time
in the West. So the cost of logistics. For this reason, India will have difficulties positioning itself as a global logistics hub unless firm commitments are made. Road Transportation is an important link that facilitates productivity and competitive efficiency, leading to rapid economic development. It also brings about the development of remote regions by opening them to trade and investment. And it’s not just infrastructure development that needs commitment. It’s cultural issues such as corruption that businesses will be looking at Modi for. The culture of acceptance must cease and Modi must be true to his commitments to stamp this out at all levels and lead cultural change. This will ensure future levels of necessary employment growth if India Is to reduce its long-term unemployment and improve the prosperity of more than 30 percent of India’s population who live below extreme poverty. Let’s hopes that this is the fresh start that India so desperately needs.
Darryl Judd COO, Logistics Executive darrylj@logisticsexecutve.com
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SCMPro Classroom
Transaction costs and supply chain Management Transaction cost analysis (TCA) is the study of trade prices to determine whether the trades were arranged at favourable prices - low prices for purchases and high prices for sales. The main challenge of TCA is to determine whether a trade price is high or low given market conditions at the time the order was processed. Dr.Rakesh Singh explains the role of transaction cost in supply chain management.
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he global business environment has evolved into a layered network joining a multitude of international partnerships and alliances. Because of the developing reliance between purchasers and suppliers the requirement for connection and trade has increased. Today, supply chain management is an interdisciplinary concept, drawing on aspects of marketing, economics, logistics, organizational behaviour, etc. Transaction costs impacts the vertical co-ordination within an industry and, hence, on supply chain management. The Nobel Prizein economic science in 2010 was conferred on Oliver E. Williamson for his 48 SCMPr
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work on how transaction cost defines the boundary of a firm. Williamson’s analysis of economic governance – focusing on the boundariesof the firm – is of special interest to SCM scholars. His work examines vertical exchanges within firms and in the marketplace, and the way these exchanges have been shaping supply-chain architecture. Williamson is also the economist who popularised the concept of transaction cost (the cost involved in any economic exchange) – a useful tool used in exploring supply-chain collaborations, partnership and alliances. According to neoclassical economists, “the normal economic
system works itself ” (to borrow a phrase from Sir Arthur Salter, whose work contributed to the neoclassical vision). The theory assumes that the price mechanism dictates the flow of resources in an organisation – a theory which equates the behaviour of an organisation to that of an organism, to reword another phrase from Sir Salter. Thus, neoclassical economists were only geared to understand why firms buy from the market. Their understanding of relationships between firms had left much to be desired. It was Ronald Coase, a Nobel Laureate (1991), who in an article titled “The nature of the firm” (1937) identified limitations that the neoclassical paradigm had in its
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understanding of relationships between firms. Coase argued that in order to understand what a firm does, one must understand why a firm exists and therefore what forces govern the organisation of economic activity. These ideas later formed the foundation of new institutional economics. Williamson’s transaction-cost theory not only built on the foundation provided by Coase but also widened the scope of transactioncost research as a tool to understand relationships within and between firms. According to Williamson, transaction costs within firms determine different relationships between firms and hence determine governance structure of supply chains. He
classified transaction costs into information costs, negotiation costs, monitoring and enforcement costs. An information cost is incurred when firms and individuals look for information about products, prices, input and buyers or sellers. Negotiation costs arise from the physical act of the transaction such as negotiating and writing contracts (costs of managerial or legal expertise, etc.) or paying for the services of an intermediary in the transaction (such as an auctioneer or a broker). Monitoring and enforcement costs arise after an exchange has been negotiated. This may involve monitoring the quality of goods obtained from a supplier or monitoring the behaviour of the supplier or buyer to ensure that all the
pre-agreed terms of the transaction are met. Neoclassical economist operated within the rationality and the self-correcting framework of markets and assumed that the best market-governance structure emerges by itself. On the other hand, the new institutional economists like Coase and Williamson dismissed the assumption of a selfsustainable market mechanism and offered an alternate theory of market coordination. Williamson, on his part, argued that “to the degree the production cost of buying from the market are high and transaction costs are great, alternate supply arrangement deserves a serious consideration.” Transaction costs also rise with the degree of uncertainty associated with these transactions. So firms come up with alternate economic governance structures, and in most cases these firms are forced to vertically integrate and form a supply chain on their own. For instance, to an automotive firm, if buying spare parts over the counter becomes uncertain, the company is forced to build a supply chain of its own. The “vertical formations’ or the supply chain in this case, require that transactions are recurring and firms are willing to commit asset-specific investment. On the ground, the transactioncost approach has helped a large number of construction and agricultural firms to appreciate, build and manage efficient supply chains. The transaction-cost advantage and its effect on supply-chain management merits further research, measurement and quantification so it could become a popular tool with practitioners and consultants. In any case, Williamson’s gift to supply chain management is a cross-functional tool which can help firms understand and improve supply-chain dynamics. SCMPr
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