Fullmag may 14

SCMPr

n insight n Human Resource n report n Knowledge n Academic Advocacy

Supply Chain Management Professional

May 2014 Vol. 2—No. 3

`150

Outsourcing:

Fast, Forward, Focused

In This Issue insight India’s Foreign policy paves pay for optimistic supply chains.

Page...07

report Transportation and Logistics 2030 .

Page...34

International Feature Recasting Middlemen in the Produce Supply Chain.

Page...38

w w w. s t a r a g r i . c o m

editorial

The Dawn of Hope T

Girish V S Executive Editor

he nation went through 45 days of tumultuous elections. The outgoing government was characterized by policy paralysis, stubborn inflation, persistent slowdown and a general feeling of despair and doom. This was juxtaposed against a resurgent opposition, projecting an assertive aggressive leader whose refrain was – I can and I will. And the nation responded. The pundits were predicting a hung house. No party was expected to get a clear mandate. But the citizens of India showed their maturity – they elected a government with a absolute majority, and a single party managed to get a simple majority on its own.

The seed of hope.

The government, and the new Prime Minster – Mr. Narendra Modi got straight down to business. I like what I see – minimum government, maximum governance. For once the focus is on creating infrastructure.

India has been plagued by the lack of decent road, rail, river, connectivity. Fuel prices and power were erratic. The initial noises from the new team of ministers look reassuring. For once we will have a government that will create infrastructure. A government that is keen on growth. The dawn of hope.

I sincerely hope that the country gets a team that will deliver. For once, I believe, we should refrain from expecting instant results. The only instant things we should expect are coffee and Maggie Noodles. Correcting the structural imbalances that plague us is not something that can be fixed quickly. I hope the government uses its full term, but deliver. And sustain the new hope.

As always, we try to bring you reading that will both engage and inform you. This month we take a look at outsourcing, with three articles looking at three aspects. In addition, we bring you a new feature – Insights – a look at some of the international trends and its impact on India.

Dr. Rakesh Singh will be writing this column.

In addition, we have the Academic Advocacy – a business persons introduction to academic research. We also bring you excerpts from a report – Transportation and Logistics 2030 by PwC and EBS Business School, Supply Chain Management Institute. We hope you find it interesting.

As ever, we look forward to your comments and feedback.

Happy reading.

Executive Editor

SCMPr

May 2014

3

Contents may 2014 4 SCMPr

07 Insight >> Dr. Rakesh Singh on new India’s foreign policy and its impact on Supply Chain Industry.

25 Feature >>

Agri Collateral Management – A SCMPro special on Agri –Collateral Management as a fast emerging options for Agricultural Supply Chain.

32 Knowledge >> Abhijeet Arun, Consultant, Miebach Consulting argues on challenges faced by e-tailing in India.

30 Human resource >> Darryl Judd on why new government in Centre is the fresh start India desperately needed .

34 Report >> Transportation and Logistics 2030: Report by PWC.

10 lead story Outsourcing In India has gone transformation and the companies are looking at integrating the partners to their business goals. SCMPro brings the Industry view on Outsoricing In India, Best practices, and its benefits.

May 2014

38 International Feature >> Recasting Middlemen in the Produce Supply Chain

by Dr. Manish Shukla

SCMPr Executive Publisher Jayaram Nair jayaram.nair@scmp.in 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

42 Column >>

Advertising Soney Mathew soney.mathew@scmp.in

Anil Sathe column of Building customer loyalty.

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.

44 Column >> Prof. Nitin Joshi on why supply chain need to be Business focussed for better results.

48 Academic Advocacy >> A continuous-review model for dual intercontinental and domestic outsourcing

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/-

By Henry C. Co, Israel David, Ping Feng and Eddy Patuwo Academic Partner

SCMPr

May 2014

55

Warehouse

Warehouse Compendium 2014

m u i d n e p m Co

2014

ner Academic Part Published by

SCMPr

Book your copy Now! and Avail an Early Bird Discount of

Launch Date: January 2014 Cover Price: `750/-, (Early bird price: `450/-)

40%

Warehouse Compendium by SCMPro is a resourceful informative handbook with well researched articles on various aspects of warehousing & inventory management.

With expert columns, best practices, Case studies and whitepapers ‘Warehouse Compendium’ is a must have reference handbook for Logistic & Supply Chain Professionals, Supply Chain Students and the industry stake holders.

Payment should be by cheque/ DDdrawn in favour of B2B Media Group and send it to:

B2B Media Group, 211/1, Sona Udyog, Parsi Panchayat Road, Andheri (East), Mumbai-400 069.

Tel: + 91 22 60020121 / 122,

For corporate and bulk booking*, please mail your details to soney.mathew@scmp.in *Special Discount for Bulk booking available.

n INSIGHT

n HUMAN RESOURCE

n REPORT

n Knowledge

n ACADEMIC ADVOCACY

SCM World View The dawn of a new government is always a cause for hope and change. The recent elections have given India a very stable government -a government that has been voted in on the development plank. For a change, India’s foreign policy paves way for optimistic supply chains. Dr. Rakesh Singh takes a look at what the promise of the initial days holds for India and why the government needs to deliver on those promises.

W

Rakesh Singh Distinguished Visiting Professor of supply chain strategy and economics, Great Lakes, Chennai and Chairman, Institute Of supply Chain Management, Mumbai

ith the new government in New Delhi under Prime Minister Narendra Modi, India’s foreign policy is on the move. His foreign policy seems transformative from the way he has set about inviting neighbors for the swearing in. All the heads of state of the SAARC countries were in attendance last week at his swearing in ceremony – including the prime minister of Pakistan Mr. Nawaz Sharif. This was a clear signal of a sea change in India’s foreign policy.

During The UPA government rule of the last ten years, India had lost its élan in dealing with other countries. Modi has his work cut out to march the country out of this rut. The warmth with which Japan has promised to support the new Government in Delhi and the Chinese premier’s congratulatory telephone call makes a warm beginning. In order to make foreign policy more transformative and help India benefit from the changing global world order, this Modi government’s task can be divided into three parts.

The immediate priority for India, as has been demonstrated should be to build a cordial and healthy relationship with smaller neighbors like Sri Lanka, Bangladesh, Nepal and Bhutan. India must engage with Pakistan and understand the limitation of the state visà-vis non state actors and actively contribute

towards deepening democracy in Pakistan.

The trade pact between the two countries under SAARC will be an important link which can help create better engagement between our two nation states. This will pave the way for improved communication and peace, despite J&K issue remaining as it is. A tie with Afghanistan will help further trade and peace in the region. India should play an important role in the region, by focusing on trade, within the strategic framework of foreign policy.

The current trade between these SAARC nations is around 5 billion rupees and has a potential of reaching around 70 billon.

Our next priority should be to see that India engages with and participates in the most prosperous region of the future i.e. Asia Pacific.

In the last decade India along with china were seen to be the rising star of Asian economies.

But in last few years India has lost its sheen, with commentators across the globe almost writing off India as a future power. China has strengthened both its economic and geopolitical hegemony over its Asian neighbors. It is the second largest economy in PPP terms. It is also one of the fastest growing nations, despite deliberately slowing down its economy to avoid a crisis because of overheating. With the new premier Li at the helm of affairs, a nationalist agenda has started dictating Chinas foreign policy. The region’s China centric ecoSCMPr

May 2014

7

insight

The immediate priority for India, as has been demonstrated should be to build a cordial and healthy relationship with smaller neighbors like Sri Lanka, Bangladesh, Nepal and Bhutan.

8 SCMPr

May 2014

nomic growth has seen an unprecedented inter Asia trade on the one hand and a growing conflict between China and almost all the nations on the other. As Edward Luttack writes “China has greatly overplayed its role because of India’s passivity. In recent times Chinas leaders have over interpreted the financial crisis in the west as a sign that they have become all powerful, and loudly demanded territory, reefs, shoals, islands and three million sq. Km of ocean waters from India, Japan and Vietnam, as well as Indonesia, Malaysia and the sultanate of Brunei. In doing so they greatly exceeded the balance of power. India needs to forge ties with Japan to tilt this balance of power in its favor so that China’s over exertion of its power can be controlled and India may gain due to closer ties with its new Asian neighbors. The US, which is eyeing to play a key role in Asian geopolitics knows that India with its Japan and US collaboration can transform the balance of power under the dynamic leadership of Modi. Modi has already put his finger on the starter with one right plug to tilt the Balance of power in India’s favour.

Li’s discussion with Modi will acquire significant meaning and China-India trade will grow benefiting both the countries. This will propel both the countries to be more vibrant players in the Asian subcontinent. India will develop a more sensible policy vis a vis China, building on mutual economic interest but not letting the tail wag the dog by allowing our economic interest ignore china’s overt aggression. This balancing of power will help India acquire greater prominence in the world geopolitics.

The Asian markets are the markets of future with consumerism growing faster than in any other continent. It also is a continent with two future economic powers and many economies transforming from middle to rich economies and poor to middle income economies. ASEAN economies are fast developing towards integrating themselves and with China and India to make Asian markets vibrant and the only continent which could surpass the western economies.

This year sees final preparations for the ASEAN Economic Community (AEC), which will be the regional economic integration of the ten ASEAN nations - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myan-

mar, the Philippines, Singapore, Thailand and Vietnam - into a single economic community from 2015, harmonizing tariff-free flow of goods, services, people and funds across ten countries comprising of over 600 million people. Yet another development – the TPP - the Trans Pacific Partnership - will provide Asian economies - Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam – with preferential-tariff multi-lateral access to the huge markets in Canada, Chile, Mexico, Peru and USA. RCEP – the Regional Comprehensive Economic Partnership joins ten ASEAN nations together with trading partners Australia, China, India, Japan, Korea and New Zealand, forming a trading block containing almost half the world’s population, with USD 21 trillion GDP and a 27% share of global trade.

The Asian region will see sea change in connectivity with Bridges spanning across countries, deep water ports which will help increase trade intermediation, forcing disruptive changes to the supply chain of the region. Supply chains play a critical role in helping trade multiply. The supply chain industry and players in Asia needs to realize this and prepare themselves to be an effective partner in this broader geopolitical reorganization and opportunities.

What then are the challenges for supply chain Industry and professionals? Why is supply chain worth special strategic consideration? A supply chain that is correctly aligned with your business strategy can cut costs, free up working capital, support revenue growth, and help your business to efficiently address growth in scale and new demands from customers. Businesses need to construct supply chain strategies based on opportunities available to it, both horizontal and geographic. A bigger challenge will be to build capability and develop manpower appropriate for the region and dovetail it with right technology and process. Capability improvements required across people, processes and technology, will define successful businesses in future. We need a roadmap of initiatives that will deliver value to business and tap into the opportunities that our neighborhood offer us. We hope that the foreign policy sagacity of the initial days holds for the future. And that it delivers value to our businesses.

lead story

Outsourcing:

Fast, Forward,

10 SCMPr

May 2014

lead story

Focused

In this global and ever changing market dynamics, the buyer vendor relationship has transformed to more strategic partnerships.

SCMPro highlights changing paradigm of outsourcing for this month lead story.

C

ompanies have always struggled with strategies to exploit their competitive advantage to increase market share and profits. For most of the past century, the operating paradigm was large integrated companies that can own, manage, and directly control assets and even supply chains. In the 1950s and 1960s, strategy was defined as “diversification to broaden corporate bases and take advantage of economies of scale.” Companies expected to protect if not improve profits. Cut to 1970 through 1980 - organizations attempt to compete globally were thwarted by a lack of agility due to the complex management structures. To increase their flexibility and response apart from profits, many large corporate houses developed a new strategy - focusing on their core business, and identifying critical processes which could be outsourced. Outsourcing entered the business lexicon. Outsourcing was not formally identified as a business strategy until 1989.

During the initial stages, outsourcing was focused more on cost-saving measures. Firms started to outsource functions necessary to run a company but not related specifically to its core business.

The strategy paid short term benefits. As markets expanded and suppliers were located at all corners of the globe, the complexities of the supply chain started to weigh down the corporate savings. Outsourcing underwent a transformation - from a cost perspective to core competency perspective. Firms decided to outsource any activity that was not their core competency - even if it was a core business process. This meant that the outsourced service provider now has to be treated as a partner - not as a vendor. The buyer - vendor relationship transformed to strategic partnerships.

For this issue of SCM Pro, we bring you aspects of outsourcing of supply chains. To begin with, we look at the Power of Outsourcing. The new paradigm for global corporate is global sourcing - the ability to source resources from the cheapest source globally and sell in the best markets. To achieve this, firms need the capability to move products across vast distances cheaply. This can be achieved if the entire process is carved up into smaller units and assigned to specialists – simply put outsource it to the best service provider.

We then bring you the Indian perspective through a series of interactions with firms in India. We wrap it up with an article on the Next Best Practices in Supply Chain Outsourcing. Corporate India has its focus fixed on improving its operating efficiency. Many of them have achieved a fair bit of success in reducing costs, improved operating processes and cut overheads and waste. However, all these have been focused on the internal processes. The boundary between the corporate and its suppliers and customers – the part where logistics and supply chain start – is a largely virgin territory.

Happy Reading

SCMPr

May 2014

11

lead story

Power of Outsourcing in Supply Chain

12 SCMPr

May 2014

Management

lead story

The new paradigm for global corporate is global sourcing - the ability to source resources from the cheapest source globally and sell in the best markets. To achieve this, firms need the capability to move products across vast distances cheaply. This can be achieved if the entire process is carved up into smaller units and assigned to specialists – simply put outsource it to the best service provider. The executive editor of SM Pro takes a look at the power of outsourcing.

V

ery often, management gurus cite the growth of the Internet, changing customer demands, rise of mass customization, severe competition etc. as reasons why companies focus on core competencies. By extension this means that manufacturers and service providers must ideally outsource the noncore processes in manufacturing, assembly, distribution, and support operations. Historically, firms have used the question - Is it strategic to my business? – as the yardstick to determine if an activity can be outsourced. Today, companies are looking at it differently - is it my core competency? If the answer is no, then the activity is a candidate for outsourcing – even if the activity is strategic.

What is Outsourcing?

Outsourcing is defined as the contracting of one or more of a company’s business processes to an outside service provider to help increase shareholder value, by primarily reducing operating cost and focusing on core competencies.

CIO defines outsourcing as “an arrangement in which one company provides services for another company that could also be or usually have been provided in- house.”

Automatic data processing Inc. (ADP) defines outsourcing “as the contracting out of a company’s noncore, non-revenue-producing activities to specialists. It differs from contracting in that outsourcing is a strategic management tool that involves the restructuring of an organization around what it does best — its core competencies.”

SCMPr

April 2014

13

13

lead story Why Outsource?

late to product quality faces budget cut. Consequently, There are many reasons why a firm chooses to out- new investments in IT infrastructures are rare. Instead, partners in the chain make do with legacy systems that source, like: lack supply chain-specific functionality. The need of n To reduce costs today is direct real time access to integrated state-ofn Focus on core functions the-art supply chain systems without all partners havn Acquire new skills ing to invest in the procurement of those systems. In n Acquire better management short, investment in technology is the manufacturer’s n Assist fast growth contribution to an efficient supply chain. n Avoid labor problems n Focus on strategy Principle 3: Outsource – but still retain n Avoid major investments n Handle overflow situations control One of the biggest issues in outsourcing is who will n Improve flexibility control the process and the product? The owner of n Improve ratios IPR and product design alone is responsible for the n Because others do it ultimate execution of the project and delivery of n Enhance credibility products. Outsourcing is a means to an end. As the n Maintain old functions owner of the design, the firms objectives are differn Improve performance ent from those whom it partners to outsource. Today n Begin a strategic initiative multiple subsets of intermediate goods are manufacTo realize the intended benefits of outsourcing, tured across the globe ad shipped to a central unit for final assembly. Each intermediate product has firms need to internalize a few core principles: its own specific process, time line, inefficiencies and Principle 1: The outsourced partners are not obstacles. The result is that the whole process can be mired in missteps and missed deadlines by the non yet supply chain experts.

Strange, but true. Most of the existing supply chain performance or sub optimal performance of a number players know very little about their customers supply of third parties. Any of these problems can cause sechain. Most firms try to produce maximum volume rious problems with manufacturing and fulfillment. of product at a minimum cost. This does not require It is common lore that when everyone is in charge, great visibility into their partners in the supply chains; no one is in charge. Therefore, firms must take direct all they have to do is to focus on their internal busi- responsibility for end- to-end execution or suffer the ness processes. The GIGO (garbage in, garbage out) consequences.

At the same time caution needs to be observed – phenomenon applies here. All that a good partner can do is build to specifications and deliver on time. It is over a long term, outsourcing tends to force reverse the firms responsibility to ensure that the outsourcing dependence – the firm, by virtue of outsourcing will partner knows the current specifications. Apart from lose hands on experience in running the operations this, the supply chain manager needs to have real time and will become overtly dependent on the partner for access to all relevant data and information – includ- their operations. Retaining the knowledgebase and yet ing work in progress, bills of materials and inventory. having partners is a tightrope. Firms need to learn to This will enable the outsourced partners to partner walk it. the firm like true supply chain experts.

Principle 2: Have state-of-the-art information technology (IT) infrastructures.

As firms try to squeeze out the last penny from their operations, they need to embrace technology like never before. Today a fully automated system and end-to-end electronic data interchange or web-based links are no more a luxury. Unfortunately, technology is not all that prevalent among supply chain players.

The reason is that most supply chain service providers have net profit margins in the 2 per cent to 4 per cent range, and any cost centre that does not directly re14 SCMPr

May 2014

Principle 4: Project management is your baby – not the partners

Production is like a well choreographed ballet involving men, materials, machines and money, all linked together by a well oiled supply chain. However, a better alternative is to view these partners as estranged divisions of the company. They will do the job well. But they will do it their way, the processes will be theirs, and they will remain cut off from the systems and data flows of the firm. Firms need to reconcile these apparent conflicts of interest. There are a few facts that need to be borne in mind – the outsourcing partners

lead story have other customers whom they need to serve – they would not be able to deliver reduced costs unless they had many other customers’ who can share overheads.

Second, the partners will be focused only on a small portion of the manufacturing process with which they are concerned— not to the entire supply chain, which is the firms concern. Most firms do not open their entire supply chain to the partners. Outsourcing and retaining control of the supply chain network are complementary, not antagonistic, activities.

Principle 5: Focus efforts on time-to-market One of the most often cited reasons for selecting to go the outsourcing way is the belief that it will reduce the time to market. This may be true in a very general sense. To derive the expected benefits, firms need to get their homework in place. As a very basic activity, firms need to carefully select their partners, provide them with integrated access to their supply chain systems, and supervise the relevant activities. If not, it will be the more nimble competitors who will realize the advantage. This is because the outsourced partners processes and systems have been designed for mass production, for low cost production and for efficiency. Not for customized productions and frequent product introductions. Firms will select their outsourced partners based on demonstrated commitment to agile, low cost manufacturing processes.

They will expect the partners to implement strict management oversight and control mechanisms to ensure that their subcontractors respond rapidly to fast-changing deadlines. But when the partner is half the world away, these remain lofty ideals.

The need of the hour is transparency - enabling the partners by providing them with cost-free access to real-time, collaborative software platforms that can on-line share and distribute management, scheduling and other data to all relevant parties. Failing which, the expected time to market will easily be mistimed.

Principle 6: The key to highly scalable operations.

If Apple had kept the entire manufacturing of their products in their own factories, their growth may not be what we see today. The factors of production – men, material, machines and money inherently grow in a linear fashion. If market dominance is the goal, firms will need to aim at exponential growth. This will happen only if the firm can leverage the efforts of numerous partners, who in turn leverage other contractors - a direct application of the network effect.

To add to the problems, firms tend to be protective of their supply chain network, insisting on direct

control over the entire chain. This will introduce interminable delays instead of expected growth. At each step of the supply chain, decisions need to be taken - some of these can be automated, while others require intervention of experts. Lack of information about outsourcing partners’ activities and visibility into their supply chain networks, will prevent decisions from being made quickly or worse still prevent decisions from being made at all. By offering and requiring all partners to collaborate in real time can help firma achieve the scalability that outsourcing promises.

Principle 7: Outsourcing fulfillment too delivers value All firms – manufacturing and fulfillment, have to optimize their cost structures. Fulfillment firms (a firm where incoming orders are received from affili-

Supply chain outsourcing has proven to be an effective strategy to gain competitive advantage through shared access to best practice processes and assets that might not otherwise be available. ated stores or locations, processed and filled) are reluctant to invest in IT systems that would optimize the management of inventory and accelerate their supply chains. They normally pass on the costs to their customers. Hence there is no market pressure on them to become more efficient. But there are strategies that can be employed to deliver meaningful benefits to fulfillment partners. Systems that automate replenishment of stock prior to stock out is an example. The fulfillment partner will see lower inventory carrying costs and the firm can gain from outsourcing of fulfillment the same advantages as from the outsourcing of manufacturing.

Successful supply chain outsourcing deals allow customers to realize multiple beneficial business outcomes, Supply chain outsourcing has proven to be an effective strategy to gain competitive advantage through shared access to best practice processes and assets that might not otherwise be available. But to realize this value, firms need to get their vision and objectives right.

SCMPr

May 2014

15

lead story

Outsourcing

Indian Voices 16 SCMPr

May 2014

lead story

India is the hub of international outsourcing – especially in the services sector.

The Indian manufacturing sector has embraced outsourcing – though not as extensively as their western counterparts. Jhanvi Menon brings you voices of the Indian supply chain professional on their outlook.

M

ost English speaking people are familiar with the TV serial, Outsourced. In fact, most Indians are familiar with this term as a large number of the populace works for call centres, BPOs and KPOs. Outsourcing is not a dirty word anymore, though there are some who look askance if you tell them that you work for an organizations mentioned above without any successful qualifications to your name.

Similarly, logistics outsourcing has become a common practice in India, and is helpful particularly to those companies who are averse to managing a host of issues that come with it. Yezdi Nagporwala, Director, KPMG, says, “For efficient logistics operations, and especially if you don’t have an in-house logistics operations, it makes sense to outsource. More often companies prefer to outsource warehousing as it saves on land costs.”

Since most Indian companies have branches abroad and/or network with foreign companies, they have seen certain logistics capabilities and some complex solutions that are missing with 3PL partners in India. It’s not surprising to find that Indian companies are demanding specific tasks from their 3PL partner and inputs into business processes. A spokesperson handling the supply chain function at HUL says, “There are certain limitations to outsourcing.

While there needs to be an understanding between the two partners, the extent to which companies are willing to outsource will depend on their in-house philosophies, capabilities and an ability and willingness to share information.”

Considering that nothing is certain in supply chain (like manufacturing), there are bound to be issues that will crop up between the two partners.

A few years ago, companies who wanted to grow would expand to numerous cities and go global. Today, according to a McKinsey report, there are fewer companies looking at going to newer cities. This implies that there are fewer chances of upheavals and

constant changes in the logistics process. Vishwas R, Supply Chain Manager at Samsung India, says, “Manufacturing companies have begun to understand that a strong logistics function can make them look good. It offers reliability of their products to customers. As a result, they seek providers whose operation can add value rather than simply keep the costs down. Since most of them stress on zero defect and continuous improvement, some logistics service providers offer an extension to the product line, performing such activities as re-labelling, repacking or even final product configuration at their distribution centres.”

Sujoy Pal, Business Development at FedEx Express says, “Logistics providers are enhancing offerings that far excel those manufacturers can offer. Our electronics capabilities for instance. We have created detailed and critical shipment documentation to multiple parties. Also there were times when the long freight payment processing cycle was considered to be unavoidable delays in the entire logistics management cycle.”

Srinivas Sattiraju, CEO, Delex Cargo India, Pvt. Ltd.,

The Indian companies are no more resistant to the idea of outsourcing, however, most still see “cost reduction or stagnation” as a primary outcome from outsourcing, this needs to change to make the outsourcing initiative a success for all parties involved.

SCMPr

May 2014

17

17

lead story However, almost all 3PL partners have introduced web-based applications and there have been much advancement made in ecommerce that have decreased any hindrances. It has also brought out some new dynamics in the logistics industry and customers are a happier lot.

Today’s times, most shippers aim for cost savings and look for a partner to share risk and avoid capital deployment. However, companies that are seeing a successful run with a well developed and implemented supply chain risk mitigation plans often apply new thinking to traditional risk mitigation strategies. According to a report, about 65% shippers have indicated that they are increasing their use of 3PL services than returning to insourcing (22%) some 3PL services. Nearly three in five (58%) shippers are reducing or consolidating the number of 3PLs they use.

Outsourcing supply chain and logistics functions are increasingly common. However, companies to read the fine line to know what it involves.

A meeting of minds A good partnership such as outsourcing is another step towards supply chain risk mitigation. It pays to invest on training and development of human resources. It is an important investment as one could retain the workforce to reap the benefits of the skills upgrading. Companies and 3PL partners need to consider the risks and look keenly at processes involved, scorecards and address issues that matter to both the companies. It is also imperative that both the partners understand the end to end supply chain and that is possible through business process mapping and developing standard work to address process related uncertainties.

According to Armstrong & Associates 2012 study the global revenues of 3PL operators have risen by 13.7%. The gains are mostly recorded in Asia Pacific Region (21.2%) and followed by North America (7.2%). Whereas regions such as Latin America recorded impressive growth of (43.6%) but on a low 18 SCMPr

May 2014

revenue level and this indicates increasing trends of outsourcing in Latin America and Other Regions.

So what calls for innovation in supply chain? An uncertain economy, the high competition, and a shaky demand that has increased even further due to the increasing number of products not to forget supply chain disruptions are the main reasons companies are looking for continuous improvements in order to survive in the business and do the best. A supply chain professional on condition of anonymity says, “Some of the factors mentioned above can be controlled. However, most companies are unwilling to spend on supply chain. Indian companies prefer to spend the least on supply chain. For them a few trucks or rail will do the trick.�

Simultaneously, outsourcing also brings with it some risks. It is necessary that issues such as legal compliance and security be addressed in formal documentation. Processes that are outsourced need to be managed to ensure there is diligence with legal compliance and system security. Outsourcing commonly results in the need to reduce staffing levels.

Unless it can be planned through attrition, layoffs are inevitable. This is difficult at best and if not managed appropriately, can have a negative impact on remaining employees.

While the contracts signed between both the parties will cover every detail of the service that the 3PL will provide, there are certain risks here. One has often heard of how companies have snapped ties with their logistics partner on small unseen issues. Anything not covered in the contract will be the basis for the company to pay additional charges. Then there could be the possibility of spending on legal fees to review the contracts that have been signed.

For most companies, an outsourcing model works fine when there are numerous products to ship and to multiple states. For instance, Godrej and Proctor & Gamble, while having a strong in-house supply chain do outsource logistics as it saves them the bother of ensuring supply to certain states. There are also instances where companies have failed to appreciate the various departments involved in the transition process and the amount of coordination and communication needed for both sides to be on the same page during implementation. This can inevitably lead to problems among departments and also between the company and the 3PL partner which can lead to lack of coordination.

But overall, considering that businesses are growing, outsourcing has saved companies much heartache, while creating new ways of employment and industries.

n tio

isit V o

t

a

it Inv

08 09 10 July 2014 Pragati Maidan, New Delhi Exhibition & Conference on Logistics & Supply Chain Industry Co-located Show

Co-located Conference

India Warehousing Conference 2014 Foundation Partner

Certified By

Supported By

VIP Partner

Conference theme: ‘Logisticate Your Business - Better Logistics is a Key to Profitability’ For delegate booking contact: Gauri I +91-9873800387 I gauri.srivastava@reedmanch.com www.IndiaWarehousingShow.com Silver Partner

Knowledge Partner

Official Supply Chain Partner

Delegate Kit Partners

Media Partner

Organised By

Visitor Helpdesk: Prashant I +91-9899622090 I prashant.narain@reedmanch.com

Free Visitor Registration at www.IndiaWarehousingShow.com

lead story

Next Best Practices in Supply Chain Outsourcing

20 SCMPr

May 2014

lead story Corporate India has its focus fixed on improving its operating efficiency. Many of them have achieved a fair bit of success in reducing costs, improved operating processes and cut overheads and waste. However, all these have been focused on the internal processes. The boundary between the corporate, its suppliers and customers – the part where logistics ad supply chain starts – is a largely virgin territory. Executive Editor of SCMPro Girish V S takes a look at the possible Next Best Practices of Supply Chain Outsourcing.

F

or years corporate India has had its focus on controlling costs and reducing waste. If we are to go by Pareto Principle, it is safe to assume that for most firms, the 80 percent of achievable gas has already accrued. Further cost reductions bring diminishing returns. Corporate India needs to look at a new frontier – the boundary between its suppliers, customers and itself. This will be its supply chain. Unlike internal processes, one way of achieving optimization in supply chain and logistics is outsourcing. Across the globe the one paradigm that defines the post modern business is outsourcing. In a highly competitive, dynamic and volatile global business environment, where supply chains are multi-layered, complex and extended, companies can be confused by the multiple options and sources available to them when seeking to implement an effective supply chain outsourcing solution. Before making a decision on how to best integrate outsourcing into a company’s supply chain, however, it is more important than ever to evaluate the many existing options today.

India is not a stranger to outsourcing. The Auto sector almost entirely depends on outsourced supply chain. So do some of the retail chains. The problem is with the nature of the outsourcing relationship. Most firms treat the service provider as an external entity, and not as worthy of sharing the strategic vision of the firm. Deep partnerships with their supply chains are largely not heard of.

The postmodern supply chain requires two predominant plays - operating as a demand-driven value network, and creating deep partnership with the elements of the chain.

To create these value driven networks, supply chain managers must understand and adopt and propagate best practices in selecting, on-boarding and managing supply chain partners. This article examines some of the best practices in supply chain outsourcing.

Gartner, in one of their reports on outsourcing say “Supply chain executives are starting to apply more comprehensive analysis to outsourcing decisions, such as factoring in agility, responsiveness and cost. Companies must focus on what they can do best and appropriately outsource activities that value chain partners can do better. This often means using one or more logistics, manufacturing or business process outsourcing (BPO) partners, instead of performing these supply

chain activities themselves.”

For a true partnership to work, supply chain managers must be able to integrate outsourcing partners into their strategic roadmap, sharing with them the near term and long term objectives they have set as their goals from the supply chain. And in turn push for adoption of next best practices in their outsourcing activities.

Next Best Practice No. 1 Focus on inter-company processes: The best place to start looking at practices in supply chains are the intercompany processes. To begin with, firms need to map the existing set of processes (example: product design, supply chain planning, returns processing), identify specific process improvement opportunities and focus on implementation. This will lead to the next step – understanding the firm’s existing strengths and capabilities.

The problem is with the nature of the outsourcing relationship. Most firms treat the service provider as an external entity, and as such not worthy of sharing the strategic vision of the firm.

Next Best Practice No. 2 Understand your current capabilities: Supply chain managers should determine how stakeholders within the firm view and engage with outsourcing partners.

Understanding the current capabilities will help them to decide the type of outsourcing they require as they become more market-driven.

Next Best Practice No. 3 Align the outsourcing strategy with supply chain strategy: Firms that try to create a unique competitive position by personalized customer service need supply chain partners who have flexible and agile deSCMPr

May 2014

21

21

lead story livery models. Conversely, companies that focused on low cost operations need lean, operationally efficient and cost optimized partners. However, a firm may operate across the customized vs. commoditized service spectrum. It is essential to understand the expectations from each of the components of the supply chain before selecting an outsourcing partner.

Next Best Practice No. 4 Create Inter Company Incentives: Supply chain managers are used to dealing with incentives for their own internal supply chains. But when it comes to their outsourced partners, they have a different yardstick. Looking at supply chain partners through an ‘us vs. them’ prism often leads to a reduction in the overall gains from an optimized supply chain. Managers need to think of the entire supply chain as opposed to intra firm supply chains. The incentive structures and gains have to be explored across the entire chain, not just the bits under the company’s control.

Best Practice No. 5 Understand core competencies: Supply chain managers need to evaluate their core competencies and identify the common elements with those of their partners. This is all the more important as the distinction between the different services by the entities in the outsourcing domain are fast disappearing. Identifying the core and non-core services across service providers is crucial to decide the activities for service providers.

Best Practice No. 6 Use Technology: Firms need to harness the capabilities that new technologies offer – that promises to reinforce the gains made through business process improvement and strategy alignment initiatives.

Technology can be used to build low-cost and flexible connections between diverse applications already installed in companies.

Best Practice No. 7 Make cost the last on the list: Supply chain managers should make outsourcing decisions based on strategic and tangible factors. Cost should be the last thing they need to examine. Many firms that have outsourced supply chain functions based on direct costs have experienced problems later. The problems ranged from not attaining the planned cost reduction (something they can live with) to the more disastrous effects on customer service and quality problems. Essentially, firms need to focus on the impact on quality, flexibility, performance and risk as decision criteria, apart from just cost analysis in their outsourcing decision making process.

22 SCMPr

May 2014

Best Practice No. 8 Understand local practices across the supply chain: local practices and laws play an important role in planning the supply chain. If the supply chain originates or passes through countries whose stand on intellectual property rights or ethical corporate behavior is suspect, it should be factored into outsourcing decisions. The same should carry over to policy definition, governance and operating procedures.

Best Practice No. 9 Be transparent: Supply chain managers need to establish and maintain a seamless flow of ideas, information and data about the entire chain. All relevant data like inventory levels and customer orders should be visible across the supply chain, preferably on-line. Any information or decision that will impact the outsourcing partner should be updated and communicated immediately. However, any suggestions or improvements for the overall supply chain performance can be exchanged and discussed at regular intervals by operational and management personnel.

Best Practice No. 10 Track KPI: The devil is in the details. Having the right set of key performance indicators (KPIs) makes the task of the supply chain manager easier. Firms need to define and track KPIs. The KPIs should be linked to the business goals and objectives. Firms that align KPIs with key business goals will have a more positive relationship with their outsourcing partners and achieve better results. But care should be taken when identifying KPI. The key word is “key”. Firms tend to go overboard with KPIs. I know a firm which defined 1700 KPI!

Best Practice No. 11 Share Process Knowledge: Supply chain partners should leverage each other’s processes, technologies and capabilities to generate better performance, savings and flexibility. Often, one partner of an outsourcing chain can perform an activity or process better than others, which means that embracing that provider’s process will improve overall supply chain performance. Having the partner use their own technology can also prove beneficial, because it should be faster and easier for the provider to perform the functions and processes required.

Firms that can clearly identify their core strengths and the capabilities of their supply chain partners, and are willing to create a winning combination, leveraging both these positives can create successful supply chains. After all, future belongs to those with the better supply chain.

Officially Supported by the Ministry of Transport of the Kingdom of Saudi Arabia

THE ONLY Transportation, Materials Handling, Warehousing & Logistics Exhibition and Conference

IN SAUDI ARABIA

Book Your Exhibition Space Today!

8-10 December 2014 Dhahran International Exhibitions Center Dammam, Kingdom of Saudi Arabia

www.sauditranstec.com Organised by IES srl International Exhibition Services

Dhahran International Exhibitions Company

lead story feature

Agri Collateral Management 24 SCMPr

May 2014

feature

Farmers in India face multiple challenges. As the harvest reaches the markets, traders form a cartel to beat down prices. This limits the farmers income and exposes the sector to dramatic changes in food prices. The ability to store products and release them for the right price can boot rural incomes and create a healthier economy. But for that to happen, the farmer should be able to store the produce at the right environment to avoid losses. One such area is inventory management – not from the traditional perspective, but the inventory at the warehouses – the ability to realize higher value from storage.

Collateral management is fast emerging as an option for firms to realize higher value from their supply chains. SCMPro provides a simple introduction to Collateral management.

T

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

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

But his produce was too small for a warehouse to attain optimal performance. He tried to sell the idea to other farmers in Buldana. The farmers had a small problem – they

needed the money immediately to square off their debts. The traders used this urgency to crash prices.

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

That is the power of collateral management.

To get around this problem of poor perceived creditworthiSCMPr

May 2014

25

25

feature

Collateral Management Operations Process A good collateral operating model aligns people, processes and technology, supported by clear objectives; products and services and well-defined controls. Daily actions include: n Managing Collateral Movements: To record details of the relationship in the collateral management system, monitor customer exposure and collateral received, call for margin, transfer collateral to counterparty, check collateral to be received for the eligibility, reuse collateral according to policy guidelines, deal with disagreements and disputes and collateral valuations, reconcile transactions. n Custody, Clearing and Settlement.

Valuations: To value all securities and cash n positions held as collateral. Valuations may be done on an end-of-day or pre defined periodicity.

Margin Calls: To notify, track, and resolve n margin calls.

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

ness, banks evolved a innovative financial instrument – the Warehouse receipt. A warehouse receipt is a documentary proof of ownership of commodities (e.g., bags of wheat) that are stored in a warehouse, vault, or depository for safekeeping. The Warehouse receipts guarantee existence and availability of the commodity quantity, type, and quality in an identified storage facility. It may also show transfer of ownership for immediate delivery or for delivery at a future date.

Rather than delivering the actual commodity, negotiable warehouse receipts are used to settle expiring futures contracts. The process of entering into a warehouse deal, storage, retrieval and despatch of stored commodities form the core of collateral management.

Typically collateral management deals with the process of posting and managing collateral in the financial markets. However, in the real economy, collateral 26 SCMPr

May 2014

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

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

Collateral management services allow banks to ignore the borrower’s financial strength and rely on the warehouse receipt issued by the agency for measuring creditworthiness. Contrast this with traditional lending for working capital, based on the balance sheet of the borrower. Warehouse receipt financing is more secure due to the collateral manager’s intermediation. The collateral manager guarantees the quality, quantity and availability of the collateral, provides price information and aids in disposal of the commodities, if necessary. The collateral manager also ensures that the commodities are adequately insured for natural calamities, theft and quality deterioration.

One of the challenges faced by collateral management service providers is the complexity of securing multiple warehouses spread across remote areas of the country. The Warehousing Development and

Regulatory Authority (WDRA) was set up to regulate and ensure implementation of the provisions of the Warehousing (Development and Regulation) Act, 2007 for the development and regulation of warehouses, Regulations of Negotiability of Warehouse Receipts and promote orderly growth of the warehousing business. However, only 365 warehouses are registered with the warehouse authority, and an additional 555 applications are pending approval. 115 Agri Commodities and 26 Horticulture Commodities are registered for issuance of Negotiable Warehouse Receipts.

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

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

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

– An Integrated Post-Harvest Solutions Firm w w w. s t a r a g r i . c o m

S

tarAgri is one of Asia’s leading post harvest solutions company with a global footprint. StarAgri is focused on empowering small and large farmers so that they gain more from their harvests. The goal is to help farming communities protect their produce and reduce post harvest losses, and thereby increase food availability without placing additional burden on the environment. As agriculture moves up the global growth agenda, StarAgri is addressing one of the world’s most pressing challenges today food security in an era of depleting natural resources and global climate change.

To help the farmers, StarAgri has an integrated agri-solutions strategy across post harvest needs of both producers and buyers. StarAgri has tied up with some of India’s leading financial institutions to hold commodities worth INR 45 billion across over 200 collateral management locations. This unrivalled farmer reach, in-depth understanding of the agribusiness and appreciation of the challenges facing the country’s rural sector have enabled it to grow into one of India’s most preferred agribusiness service provider.

With a pan-India network of 800+ warehouses across 16 states and over 1.2 million tonnes of warehousing capacity, StarAgri caters to customers ranging from banks to international bulk commodity buyers, food, health & FMCG companies and commodity exchanges, delivering integrated post harvest solutions that include warehousing, collateral financing, origination & procurement and value-added services to enhance efficiency across the entire food supply chain.

StarAgri helps create an efficient platform between producers and consumers, from harvest to home. The farmers realize better prices for their produce by bypassing intermediaries. Buyers can source quality produce at best prices by aggregating and storing commodities directly from the farmers, ensuring quality and quantity parameters. These services help create an efficient marketplace where farmers and buyers can interact in a direct and transparent manner.

StarAgri’s mission is to strengthen the agriculture sector, empower farmers and

add value to commodities – issues that are critical in addressing the need for food security in a sustainable manner. In the next 24 months, the company plans to set up offices across key global commodity centres for buyers across Asia, Europe and USA as part of a near-to-the-customer strategy.

Warehousing: StarAgri provides state-ofthe-art storage infrastructure through an integrated and modern pan-India warehousing network to maximize efficiency and reduce post harvest losses. Through the development of large-scale owned warehouses with modernized silo storage and handling solutions, it significantly maximizes harvest produce with highquality storage, protection from pest infestation and pilferage to increase agricultural income.

Collateral Management: Financial constraints owing to the lack of liquidity are a major challenge in unlocking the potential of the agriculture sector in emerging economies. This not only limits the farmer’s ability to compete but also exposes the vulnerability of agriculture to sudden and dramatic changes in food prices. StarAgri addresses these constraints by going beyond conventional measures. For example, Warehouse Receipts financing will improve the availability of secure, low-cost credit by directly easing collateral constraints whilst enhancing the risk profile of farmers. The aim is to foster improvements in output markets to help farmers realize higher incomes.

Procurement: Agro industries depend heavily on procuring raw material at the right time given the seasonality and perishability of agri-produce. This cyclicality contributes to quality and price variability of the produce. To enable buyers source the right quality and quantity at the right price and time, StarAgri facilitates integration with farmers for secure and reliable raw material supply.

The in-depth knowledge of various commodities and the extensive backward linkages with farmers provide a highly cost-effective procurement system. Buyers can efficiently source agri-produce leveraging the nationwide network of warehousing, logistics and transportation facilities across the country’s largest agricultural producing regions.

Quality & Testing – Star Labs: One of the biggest challenges facing the rural distribution network is the right assessment of the quality of the produce for farmers, buyers and financial intermediaries. StarAgri’s state-ofthe-art quality and testing laboratories – StarLabs - provide a distinct measure to create a process driven transparency in the area of rural procurement. StarLabs adopts internationally recognized procedures and standards as well as latest technology to provide multidisciplinary laboratory services to customers across the agriculture value chain. With a pan-India laboratory network and a comprehensive range of state-of-the-art analytical techniques to support clients’ increasingly stringent quality standards, it establishes the composition, authenticity, origin, traceability and purity of agri-commodities.

Logistics: StarAgri provides responsive and flexible logistics solutions with the ability to service the last mile. Leveraging capabilities in warehousing and procurement, end-to-end transportation solutions effectively reduce intermediary costs and maximize profits for buyers.

Value-added Services: With professional services in the areas of rural retailing, agriinsurance, logistics and bulk procurement, value added services cover the entire gamut of post harvest operations. The integrated offerings are aimed at creating value for banks and financial institutions, agri-processors, commodity exchanges and the large network of farmers spread across rural India.

Agri Exports and Imports: Leveraging India’s comparative advantage in agriculture, StarAgri aims to create and deliver value across the agricultural exports supply chain.

As one of Asia’s leading post harvest agrisolution providers it is uniquely positioned to understand the stringent demands of international agri-buyers and match it with onground understanding for strategic sourcing.

Clearly, StarAgri has chartered a course for itself. And the international investment community has reposed its faith in StarAgri, with Temasek investing INR 250 Crores to enhance its warehousing and collateral management capacities.

SCMPr

May 2014

27

www.scmp.in

...think supply chain

22 SCMPr

April 2014

Industry Portal for the Supply Chain Professional

Global trade fair for Commercial Transport, Global trade&fair forAccessories CommercialIndustry Transport, Automotive Auto Automotive & Auto Accessories Industry

Reviving & Gathering the Commercial Reviving &Industry Gathering the Commercial Transport Transport Industry Connect, Network & Upscale Connect, Network & Upscale your business in 2014 your business in 2014 In Partnership With

Media Partner

Organised By

In Partnership With

Media Partner

Organised By

All India Transporters Welfare Asso.

All India Transporters Welfare Asso.

Contact Us : Akash Goyal I +91-9582323533 I akash.goyal@reedmanch.com I www.CommercialTransportShow.com Contact Us : Akash Goyal I +91-9582323533 I akash.goyal@reedmanch.com I www.CommercialTransportShow.com

n INSIGHT

n HUMAN RESOURCE

n REPORT

n Knowledge

n ACADEMIC ADVOCACY

Is This The Fresh Start

India Needs?

30 SCMPr

May 2014

talent Regulatory uncertainty under the previous government has prevented the kind of growth all anticipated. Darryl Judd says with Modi government in centre may be this is the start India need, says Darryl Judd

W

ith India’s general election now largely out of the way and The BJPled 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

SCMPr

May 2014

31

31

Knowledge

Supply Chain Challenges in Indian e-tail There is no denying the bright future of e-tailing in India; however there are several challenges ahead.

T

he Indian retail industry is majorly unorganized and it’s only in the last few years that efforts have been made to organize it. As per the 2013 Global Retail Development Index (GRDI), modern retail contributed to 7% of total retail in 2012, but is expected to grow as the country urbanizes and retailers make new investments. With increased number of online users, the e-tail business has been prospering in India and has significantly contributed to the organized retail sector of the country.

Inadequate logistics infrastructure

Abhijeet Arun The author is consultant at Miebach Consulting. He can be reached at abhijeet.arun@ miebach.com

32 SCMPr

May 2014

Logistics infrastructure is key to success of e-tail. Road and aviation are two important modes of transportation. Goods vehicle in India travels an average of 200300 km/day by road against 800-1,000 km/day in developed countries. Indian aviation suffers from infrastructural bottlenecks — congestion at the terminal because of capacity constraint, higher waiting time, shortage of skilled manpower, to mention a few.

Complexity in sourcing and vendor management Dependable demand forecast is essential for optimal sourcing. However, a fragmented market, unpredictable demand and SKU complexity in the e-tail business have had a negative toll on forecast accuracies. The packing style, logistics methodology, billing, product measurement and IT system are vendor-specific, thereby making reconciliation an oppressive task.

Warehouse location Decision of a warehouse location is dependent on various economic, regulatory and geographic parameters.

Impact of tax is a primary parameter in deciding the establishment of a warehouse. Storage and distribution to various geographies is subject to various taxes like Central Sales Tax (CST), Value-Added Tax (VAT). Firms have to strike a balance between tax impacts in their P&L statements vis-Ă -vis service level and operating expenses to customers.

Region-specific taxation policies such as Octroi & Local Body Tax (LBT) have been

knowledge fluctuating highly in the recent past, thereby making a location decision and return policies highly difficult for. The expected introduction of Goods & Services tax (GST) would revamp the market dynamics for e-tail.

High Value Item

Quality Assurance

Last Mile Delivery

Ensuring that the customer receives only good quality material at his doorstep has an added cost and logistics implication. Quality assurance process starts from the warehouse which includes quality check before receipt of material from supplier and before dispatch from the warehouse. Goods with quality issues before receipt have lesser implication since they can be returned to the vendor. However, if quality issues are found during the time of dispatch, the rejects add on to the dead inventory in the warehouse since vendors refuse to take them back.

Packing is another factor which is critical to ensure quality during transit. Selection of packing method and packing material varies depending on the type of material shipped.

Given the fact that logistics provider charges are based on the weight and the volumetric space occupied by the shipment, optimal packing becomes very critical.

Last mile delivery is critical to business as it not only decides the customer experience but also because of its high contribution to the logistics outspend (as high as 60% of total logistics cost). Upon arrival at the customer doorstep, the entire delivery experience, from the attitude to the attire of the delivery person determines the overall satisfaction of the customer, and how that customer perceives the brand or retailer in the future. Some of the challenges faced by the e-tail industry related to last mile delivery are: n Multiple trips per successful delivery n Manpower skill n Handling COD n Unpredictable city traffic n Route optimization for last mile n Handling returns n Delivery time window constraint

3PL vs. Own Logistics

Last mile delivery is critical to business as it not only decides the customer experience but also because of its high contribution to the logistics outspend.

Outsourcing last mile delivery to 3PL sounds strategically the right way forward but it has several implications from e-tail business perspective. Reputation and business enhancement of e-tail firm depends on on-time intact delivery of ordered goods. Varying quality of logistics providers in terms of adherence to delivery promise adds to the woes of e-tail firms.

Order tracking, ensuring intact delivery and enhancing customer experience during delivery have forced the e-tailing companies to adopt the strategy of either self-controlled or self-owned logistics functions. The capital intensive nature and scaling up complexity associated are major challenges of firms which insource their logistics activities.

Size of the Product Logistics providers charge based on weight and volume of the shipment, hence logistics cost for big size products are higher. It results in either exclusion of such material from the product portfolio or working with lower margin.

Secure transportation of high value products like jewellery, electronic goods are critical. Requirement of motor and cargo insurance adds to the logistics cost.

COD and Returns Though launch of cash on delivery (CoD) initiative has expanded the online retail market in India, it has emerged as a necessary evil for the industry. All the risks and cost are borne by the e-tail company and hence requires higher working capital.

Returns – COD and customer friendly trading terms gives customers the leverage of cancelling the order any time before delivery. Returns come with an added cost component of reverse logistics.

Limited 3PL Options – Complexities and steady cash flow requirements involved with COD handling dissuades small scale logistics providers from engaging with e-tail firms for last-mile delivery. Compulsion to employ big players has a major impact on logistics cost.

Despite the innumerable challenges, e-tail business has a major role in shaping the retail landscape of India. Influx of market investments and international expertise has enabled the e-tail firms go a long way in overcoming the logistics challenges through innovative supply chain solutions and best practices.

SCMPr

May 2014

33

n INSIGHT

n HUMAN RESOURCE

n REPORT

n Knowledge

n ACADEMIC ADVOCACY

Transportation and Logistics 2030: Volume 4:

Securing The Supply Chain In a five part series, PwC and EBS Business School, Supply Chain Management Institute undertook a Real Time Delphi survey among 80 panelists from 25 countries on various aspects of the transportation and logistics sector. The Volume 4 of the T&L 2030 series is a multi-faceted analysis of supply chain security and its impact on global supply chains as well as how global transportation & logistics companies will operate in the future. SCM Pro brings you selected excerpts from a report released by PwC. The entire report can be accessed at http://www.pwc. com/gx/en/transportation-logistics/tl2030/

34 SCMPr

May 2014

report

A

s the number of man-made attacks on supply chains increases, how will companies need to react? Where will the critical points on the supply chain be – and how can companies stay flexible if situations heat up? How can companies make sure their people and technology are up to the task of securing the supply chain over the next two decades?

There are no easy answers, but the urgent need to ask these questions is clear. Threats from terrorism and piracy, for example, are on the upswing. That’s already starting to have an impact on sup-

ply networks. Total direct costs of piracy in 2010 were estimated to be between US$ 7 billion and US$ 12 billion. And when you look at the indirect costs too, the figure is much higher. Piracy damages the tourism industry, causes losses in revenues for canal fees and the costs “loss of use” and “loss of man-hours” while ships and their crew are held hostage are also significant. Many shipping companies are now hiring special security, working together with UN troops or altering their shipping routes.

Terrorism remains a concern too, particularly since there are a number of locations that are particularly crucial to the smooth flow of supply chains – and therefore potentially most vulnerable to attack. Logistics hubs and gateway regions are one concern. As just one example, a full 14.8% of containerized and air freight traffic moves through the Hong Kong - Shenzhen freight cluster, so a disabling attack here would have a huge impact. Because logistics hubs drive economic activity, successful attacks could also threaten economic stability. Chokepoints, geographic features where there’s only one narrow way across a strait, valley or bridge, are another potential weak point. Disrupting traffic through the Panama Canal, Suez Canal or the Strait of Malacca, for example, would slow down freight flows significantly.

Supply chains will face more direct attacks.

Terrorist acts, also called manmade attacks, are nothing new. In the 70’s, 80’s and 90’s, the Irish Republican Army (IRA) conducted attacks on British police and army, and Germany’s Red Army Faction (RAF) organized bombings and assassinations, to name just two well-known examples.

In the past decade, though, media and public attention has gone up dramatically around the world and the focus has shifted from national to international threats.

The 9/11 attacks on the World Trade Center in New York and the Pentagon in Washington D.C. in 2001 marked one defining moment. There have been others too.

A bomb set off in Madrid in 2004 caused an explosion in a public train which killed more than 190 people. And several explosions in underground trains and busses in London killed and injured more than 200 people in 2005. Both events dominated news headlines around the world.

Ensuring secure passage Where are global supply chains most at risk? Countries that are less stable, either politically or economically are often hot spots.

Gateway regions where there are very large flows of cargo are particularly important for global supply chains, and are therefore also of special interest to those looking to disrupt them. And just like military troops, goods often need to pass through certain chokepoints, geographic features where there’s only one narrow way across a strait, valley or bridge.

Transportation and logistics companies will need to take security concerns into account when choosing transport routes. They’ll need to take a close look at how dependent their business is on particular logistics hubs or chokepoints, and then assess how they can reduce the impact of threats to particular locations.

Transportation and logistics companies will also need to be prepared to respond quickly if risk levels change. Supply chain managers across all industries will need to take into account higher transport costs, longer travel times and poSCMPr

May 2014

35

rep0rt tential problems meeting schedules when alternative transport routes are used. Even without disruptions, more security will mean longer transport times. That could have a far-reaching impact. In some cases business models based on timecritical deliveries may be squeezed out of the market.

Keeping cyber space safe The transportation and logistics industry already relies heavily on Information and Communication Technology (ICT), and as shown in previous reports, the trend is

performance. Planning ahead is critical in other ways, too. When it comes to security, it’s especially important to look at future scenarios and manage security proactively. Reacting to crisis situations is not enough. Companies have to find the right combination of preventive and reactive measures to achieve the optimal level of supply chain security.

Companies need to consider the possible, not just the probable.

Executives should keep an eye on so-called wildcard events too. That means looking at the possible fi-

Terrorism remains a concern too, particularly since there are a number of locations that are particularly crucial to the smooth flow of supply chains – and therefore potentially most vulnerable to attack. upwards. Virtual threats need to be taken just as seriously as physical ones. Indeed, cyber attacks designed to induce physical damage will be an increasing threat for the transportation and logistics industry. Greater investment to secure technologies from cyber attacks will be absolutely mandatory. Data will be at risk too, and while privacy concerns won’t go away, the need for greater security will become paramount.

Investing in a more secure future Does all this emphasis on improving security measures mean profits will decline? Not necessarily. Well-planned security investments provide a payback not only in terms of loss prevention, but also by enhancing supply chain 36 SCMPr

May 2014

nancial impact, the relative vulnerability of their business model and their company’s ability to react to low-probability, high impact events.

Stricter standards and the need to take the lead And while they won’t need to go it completely alone, transportation and logistics companies shouldn’t expect government to pick up the slack. Governments won’t take a leading role in executing supply chain security, although they will continue to regulate security measures.

Transportation and logistics companies will need to work together with governmental institutions to develop new security standards that are not only effective, but also efficient. Security au-

dits along the entire supply chain will become a requirement to maintain effective levels of security.

But even with stricter standards and better technology, no supply chain will ever be 100 percent secure. Technology can help increase security, but people are needed too, to provide human intelligence and good governance.

Supply chain security is challenging, but there are opportunities too. Companies that are able to develop flexible, agile systems that can respond quickly and appropriately to crises – and avoid threats when possible – will have a competitive advantage.

How to optimize the Supply Chain security profile The report has a section that deals with what can be done to stresstest and improve supply chain security. The report takes a comprehensive look across five dimensions of supply chain security: n Personnel security n ICT security n Process security n Physical security Supply chain security partnerships and offer suggested activities for each area, supported by a key performance indicator (KPI) and the time horizon for when the activity could be put into practice.

Some areas highlighted are most relevant for customs, law enforcement officials and governmental regulatory bodies, others may apply more to private sector businesses spanning the supply demand network, including tiered suppliers, 3rd party service providers, OEMs and customers. But everyone will need to work together.

As a result of a generally increased focus on improving security, advanced technology to monitor and ensure the security of global trade flows has been refined and improved. Some govern-

report ments have passed tighter security regulations and in some cases new standards have also been developed. These include the establishment of the supply chain security standard ISO 28000, the 24 Hour Advanced Manifest Rule, Authorized Economic Operator and CTPAT certifications, as well as joint cooperation between international military and private shipping firms sailing in high risk international waters (combating piracy). Most recently, the US has passed legislation introducing a 100% scanning requirement for all US bound maritime cargo. The European Commission is currently assessing a similar endeavor. These regulations and technologies can be viewed as today’s state of the art in the field of supply chain security. These initiatives are likely to continue in the future and could develop into oth-

Transportation and logistics companies will need to take security concerns into account when choosing transport routes. er opportunities. What might such opportunities look like? There is a wide range of possibilities for improving supply chain security. The report sketches a range of possible options. The list is not exhaustive, and not every activity will be a good fit for every organization, particularly as existing legislation varies around the world. It should, however, serve as a pragmatic starting point for thinking creatively about how firms can optimize their security profile. It can also help promote discussion with supply chain partners about how to work

together to improve the security of shipments throughout the entire supply chain.

Note on methodology This study is based on a multifaceted analysis of the importance of supply chain security for the transportation and logistics industry. Our methodology draws upon a rigorous mix of desk research and the results of a Delphi survey among 80 selected subject matter experts from 25 countries around the world, including both emerging and mature economies.

www.scmp.in ...live supply chain Industry Portal for the Supply Chain Professional SCMPr May 2014 37

International Feature

Recasting Middlemen in the Produce Supply Chain Anecdotal evidence points to the huge wastage in the agri supply chain. India lacks cold chains because of which fruits and vegetables are damaged during all stages of the supply chain. Or that was what we were led to believe. In a recent research by Dr. Manish Shukla, Postdoctoral Research Associate, MISI points to the contrary. We bring you his research synopsis published in Supply Chain Frontiers issue #53 in May 2014.

Dr. Manish Shukla Postdoctoral Research Associate, MISI points to the contrary For further information, contact the author at mshukla@misi.edu.my.

38 SCMPr

May 2014

International Feature

A

s much as 40% of overall fresh produce (fruits and vegetables) production is discarded. Middlemen in the supply chain receive much of the blame for this high level of waste.

However, research carried out over the past five years or so suggests that this view is incorrect.

Based on initial work completed by the author and a team at the Malaysia Institute for Supply Chain Innovation (MISI), the preliminary finding warrants further research.

Fresh produce is moved hundreds if not thousands of miles before reaching the consumer’s table.

During this journey, the fruits and vegetables are traded, graded, inspected, and packaged several times.

The surviving product is subject to

a final weeding out process by consumers at the point of sale.

There are about a dozen middlemen in the fresh produce supply chain who, according to most researchers and consultants, are one of the main sources of waste because they make a minimal contribution to operational efficiency while taking the largest share of the profits. As a result, it is argued that profit margins for farmers and other stakeholders are reduced.

There is an expectation that modern food retailers will introduce advanced technology and infrastructure that will eventually eliminate the intermediary role.

The underlying assumption is that large retail organizations have the experience, resources, and product

volumes to do a much better job at providing the operational support that middlemen supposedly offer.

However, changing the supply chain in this way appears to be easier said than done. Several initiatives to eliminate intermediaries from the supply chain have failed miserably.

In light of these failures, what do middlemen add to the fresh produce supply chain that large organizations are unable to replicate?

To answer this question, the research focused on the rural areas and wholesale markets of Uttar Pradesh, Bihar, West Bengal and New Delhi in India. The work involved engaging in detailed discussions with middlemen at different levels of the fresh produce supply chain.

These parties included wholesalers at the village, local market, district, state, and national levels, and village collectors (local agents, usually farmers, who buy fruit and vegetables from other growers and sell the produce in auction markets).

These entrepreneurs fulfilled various operational roles in the fresh produce supply chain such as consolidator, grader, inspection agent, transporter, and storage provider.

It became apparent that middlemen contribute more to the supply chain than is often described in research papers and consultancy reports.

For example, in general the region’s farmers lack the cash as well as the motivation and resources to optimize their yields. They prefer to receive their money as soon as the auction for their produce comes to an end. Once auctioned, the ownership of the produce transfers to middlemen, who generally play a dual role as commission agents and wholesalers. The wholesaler is responsible for selling the produce to retailers in the local market (wet market), or to transport it to larger wholesale markets with an expectaSCMPr

May 2014

39

International Feature tion of higher returns. However, by paying the farmer in advance, there is a risk that the wholesaler might not find profitable buyers. It transpired from various research efforts that this is indeed the case: in most instances, the wholesalers made a loss. Thus, one of the reasons for higher margins is the risk involved and the losses incurred by wholesalers during the selling cycle.

Farmers also rely on intermediaries for financial help to meet a wide range of needs including the purchase of supplies, to pay expenses related to various activities, and to cover emergency situations.

Farmers are unattractive customers to most financing institutions and government agencies due to a lack of collateral, the absence of a fixed source of income, and scant documentation. Moreover, small land holders do not wield much political capital. Middlemen fill these funding gaps, even with the knowledge that a high percentage of their farmer customers default on loans. To mitigate the risk, they charge farmers high interest rates.

An obvious question is whether

Farmers sorting out potato in a cold storage in Joypurhat

40 SCMPr

May 2014

farmers who enter into loan agreements are obliged to sell their produce to middlemen who provide the loans. It was confirmed by both parties that there is no enforceable commitment of this type. Farmers might offer their produce to these sources of finance as a courtesy, but there is no formal obligation.

The research also shed light on the wholesaler’s relationship with retailers. Again, an early observation is that the wholesalers have an important role to play.

Small retailers rely on the turnover of a small amount of produce for their income. Unlike giant retailers in the west, these hand-tomouth storeowners/ hawkers are largely dependent on the credit made available by wholesalers. They attend the auction market to buy produce, but due to a lack of cash are unable to buy directly from the farmers who want immediate payment. Thus, the role of middlemen is to conduct an auction to derive a mutually agreed price, and then pay the farmers cash and give the produce to the retailer on credit with a one-day limit. This is anoth-

er risk that middlemen take on. In most cases, retailers are either unable to return the cash within the same day or even at all.

Middlemen have to bear the losses, and there are only a limited number of ways to recover their investments. Moreover, these intermediaries have to continue taking the risk in order to keep the business going, assuming a certain percentage of default.

The middlemen can decide to sell the produce in other markets that promise higher returns. In such cases, they take on the additional risk of underwriting the transportation of the produce, as well as the costs of loading and packaging. Here too, they might fail to secure higher prices for their wares and suffer losses through the wastage of produce while in transit.

Again, in an effort to offset these risks, wholesalers charge a high margin to farmers.

Can it be concluded from these findings that middlemen not only play a key role in the fresh produce supply chain, but also execute this role efficiently? Not necessarily.

While they are a critical component of this supply chain in India, intermediaries are also a source of inefficiency. Moreover, in addition to a lack of trust between trading partners, the supply chain is impaired by communications gaps and poor infrastructure. These problems generate a huge amount of waste that inflates unit prices for storage and transportation.

Reforms are needed, but at the system rather than functional level.

The changes should be holistic in order to achieve sustainable improvements for farmers, retailers, and wholesalers. Further, instead of developing new systems, it would be better to improve existing practices by educating the middlemen and better aligning market returns across the supply chain.

subscription form

SCMPrSCM r P M P SC An U Agenda for r actice

n pr ends n tr dge owle n kn per te pa urce n whi reso man No.4 n hu Vol. 1— 0

n KNOWLEDGE n STRATEGY n BEST PRACTICE n TRENDS n humAN RESOuRCE

`15

13 May 20

al Supply Supp fessionChain Management Professional ly Ch ent Pro a in M g a n a g em

July 2013

it 2013

Summ

ly Chain

c k intial n th U n lo Porte Grow a Supp

the

Pharm

ing: hous ware

of the in t r a e H ly Cha Supp

Vol. 1—No. 5 `150

a na g

Phar emen t Pro ma S fessio uPPl na l y Ch ain

nlChan the Pockinge oten g tial

Highe 2013, Mumbai

for

C Supply

hain M

ted receden from of unp midst varying vators in the e options inno ay is , and tipl ring withtheir own stry tod with mul partne rma induies faced ment, kets with an Pha pan develop ng new mar The Indi with com ecule Supply turi growth for new mol ts to cap s on the never – ed focu and ng righ going . anc keti ent ions and enh ver consist for mar formulat a new service deli existing brings lore and s and s DAT E user ario exp 3 ortunitie together This scenforcing to E 201 TH brings ges and opp – in cies.

2013 Chain 14 JUNING llen ply cha efficien Summit te the cha TIM by sup before Chain bera 0 pm adapted Supply to 5:0 and deli tegies Pharma to discuss 9:30 am UE the stra s re to VEN provider exposu erts in the LIT Chain and get stry exp Drivers ply age T H E LA indu y Sup Eng AI rma Visibilit onal and MU MB Chain es in Pha professi Skill Set Supply ign Issu

14th

Optimiz

it Focus

Summ

FOR

By:

tegic

and Des in ply Cha

Stra es for Chain Strategi led Sup Supply Control ceutical Pharma perature g Tem sor: Managin Spon ciate Associate

d Organise

ation

June

Partner:

HID TO: RAS

gy &

Media

Partner:

Partner:

/ 122

0121

AL@

SCM

- 6002 ON 022 L US KERS OR CAL I O N M A P.IN ECIS

WITH E RA CT

.IQB

NT WRI TE I TY TO I ASE RT U N N PLE ATIO OPPO ISTR KING TE REG E TW O R DEL EGA H I G H N A

Technolo

ledge

Know

Asso

THE

D

Ports as an Economic Unit on its own, provides lifeline for trade in the country.

Pg.14

In Thise Issu

speaK guru ui: Siddiq Arif A. mpetitive For Co ouse Wareh 1 Page..1

Ware Fe hous In ThIs ing AFI srsou entie ature: utom rs in ation P

CUS LSP FO w: Inter viene, Saha mn Milind & CEO , colu InsI tor ec AcAdemic the: gh Dir DIESLcolumn t ve uti ThEx Anil Sa s in AdvocAcy e Precom 2 ge Competitive allen ain Pitfalls ise an Page...4 ModellingChSupply Ch Strategy for Data of Big d Supply Chain Dynamics Future Today ...38 LsP Page...8 Page Fo Page Page...36 Pirojsh cus ...07 CEO, aw Sarkar i Mah indra Logi stics Page ...36

FeAture Frontiers in Supply Chain Educatione

Page...46

g.40

In I s sThIs ue

hR Empl Enga oyee Step ement: Fi s to Read ve iness Page ...46

n B ES n R T PRACTI ES CE n Sk PonSE Il n R lS ESEA RCh n h u m

An R Augu ESo st 20 uRC 13 E Vol. 1—N o. 6 `150

SCMP is a monthly magazine for Supply Chain Professionals for Enterprise Users as well as Service Providers. The magazine contains specialist artcles, news and information designed to update the readers on the developments in supply chain industry. Specialised articles are contributed by the Industry Leaders and Academicians. Besides, there are other updates published to keep the readers keep pace with the Industry. Published in the 1st week of the month, the magazine is distributed to the readers through courier.

Currentxly the print copy of the issue is available only for readers based in India. cover Price `150/-

Get Your Subscription Now! One year Subscription Rs.1,500/- Two Years Subscription Rs.2,850/Name: . ..........................................................................................Designation.....................................................................

Company Name:...............................................................................Industry...........................................................................

Address ................................................................................................................................................................................ .............................................................................................................City: . .............................................................................

State:........................................... PIN Code: .......................................................... Country: .....................................................................

Tel: ................................................... Mob. .......................................... E-mail:.......................................................................................

DD/Cheque No. ........................................ Bank ..........................................Dated .............................For

`...............................................

Your DD/Cheque should be drawn in favour of B2B Media Group Subscription form alongwith your payment should be sent to:

, 211/1, Sona Udyog, Parsi Panchayat Road, Andheri (East), Mumbai-400 069.

Tel: + 91 22 60020121 / 122

column

Build Sustomer Loyalty:

Invest in Spare Parts Supply Chain Anil Sathe writes investment in service supply chain is an investment for repeat business in future.

W

e very often see most companies invest in expanding markets; bring in new customers, spending huge amount in developing new products etc. Obviously all this brings more revenue/greater profits but it is clear that companies who have invested in their existing customers have not only shown sustained growth in revenues but profits too.

This investment in existing customers brings in customer loyalty and hence more business from same customers and best way to ensure this is to have a strong supply chain for service during the life cycle of the product.

We are all aware of changes Maruti has brought in with strong service network. We also see some Insurance company advertisements, where it is highlighted that when you buy policy relationship has just begun. There could be many more examples of how companies have made strong service as one of the important success factors.

Spare parts management and supply chain for spares has evolved, most in Auto industry, and also in few specialized industries like elevators and many equipment, where maintenance /service contract is a norm. For most others, there is scope for lot of improvement in design and operational side as well.

Unique challenges and complexities Anil Sathe “Founder and Principal Consultant - ACE SCM Solutions”

42 SCMPr

May 2014

Spare parts supply chain brings together, the diverse disciplines of maintenance management, inventory management, warehouse

management, procurement and logistics. This adds a layer of complexity and throws up some unique challenges. Some major ones are: n The life cycle of spare parts is longer than that of product itself, and spare parts need to be maintained for many versions of the product, that may get introduced during the life cycle of that model. This dramatically increases total number of SKUs being handled. n Forecasting will depend on many factors, such as product reliability, ageing data of the population, and other external factors leading to failures. This makes the demand for parts relatively unstable. n Data management and traceability at component level is crucial to identify the parts required, and valuable time is lost even before action for replacement can start. n Warehousing and distribution needs to be designed for smaller shipments with very diverse delivery destinations. Another unique part is reverse logistics, which is far more important, to ensure abuse of defective parts is avoided.

Ten features companies must have in service parts supply chain 1. Most of the good companies begin their commitment to service, at design stage itself.

This should cover “design for service” and part standardization (particularly for common parts like fasteners). Any new product release must be accompanied by ‘exploded view’ of the assembly, and identification of wear parts/spares.

column

Last mile delivery is critical to business as it not only decides the customer experience but also because of its high contribution to the logistics outspend.

2. Company must have contracts with suppliers, which cover complete life cycle that we are committing to customers. This means that even if part gets discontinued for fresh production, supplier is bound to retain tooling, dies, and fixtures as required.

3. Spare parts catalog from suppliers is a big problem, particularly for imports from China, and this must be addressed upfront.

4. For components like PCBs, we run into software issues for maintenance as well as up-gradation from time to time, and this can be serious service problem coupled with obsolescence issue in PCB components. We must have complete understanding of software and test related issues for all PCBs being introduced.

5. Component level traceability is crucial to ensure that spares requirement can be quickly determined, once installation details /customer details are known.

6. Stocking and distribution network has to be different from finished goods, and so will be the SLAs with service providers. Remember customer interface has to be given supreme importance, and this should cover communication, tracking mechanism etc.

7. Despite best of our efforts, we do get into situations where spares are stock out, and under these situations best recourse is data base where alternates /options are available as reference, and these need to be stored as ready information along with stocking part numbers.

8. If servicing is being done through dealers, then it is very important to have complete visibility of pending calls, spares stock at their warehouse, etc.

9. Replaced parts represent wealth of information, in terms of failure related data, as well as any external factors (like corrosion, high voltage) causing failures. It is also critical that these parts are destroyed in controlled condition to avoid any abuse /recycling.

In view of this we must have established process, for reverse logistics and capture all the data from these returns 10. Use of spurious and cheap parts is a common problem in Indian market, and so are many repair shops which are not authorized. Make sure that company service network is adequately stocked, to avoid customers getting diverted to unauthorized sources.

Key areas to ensure operational effectiveness 1. Improve data base on customer and also understand the number of customers still not coming back for any service needs.

2. Have data to understand ageing, and relate the same to mean time between failures (MTBF). This can dramatically reduce downtime and hence lead to customer satisfaction.

3. Improve forecasting accuracy using modern tools to cut down on inventory levels.

4. Re-look at warehouse network every 2 years to ensure all the markets have adequate reach.

5. Modernize warehouses and practices, to cut down on ‘Purchase order to ship cycle’ and reduce errors.

6. Let technician’s productivity be the guiding factor for various packing, identification and shipment decisions.

Servicing at sites – a different challenge Having worked on spare parts supply chain for many years, I have realized that the spare parts challenge is very different for items like machinery or elevators which cannot be brought to service centers for repairs, like mobiles or even cars. Quite often what happens at site would be that, the technician would be working in an environment, where he cannot even get job or machine references, and items being asked will be on the basis of history /records of the original shipment.

Today all such data is available on company intranet and can be accessed thro’ mobiles. One of the key issues in service is to exploit this technology. Other way could be, to connect with people sitting in R&D or Quality with site photos etc. to diagnose and arrange for materials.

Summary Investment in Service Supply Chain protects business and extends product life with increase in the bottom line. So begin today if not already done.

As always, looking forward to your feedback/ suggestions/comments on feedback_scmexcellence@yahoo.com SCMPr

May 2014

43

column

Making Supply Chain Business Focused Prof. Nitin Joshi says Effective management strategies aligned with a well-defined plan and the right tools will help reduce pressure and ready managers for changes in the future.

T

he past few years have been marked by increasing economic uncertainty, as reflected by both domestic as well as the global economic recession. The instability of customer demand pattern and buying pattern change at the real consumer level has been serious cause of concern for supply chain professionals. Supply chain executives are under tremendous pressure to develop more efficient, customer-centric supply chains and find innovative ways to reduce costs. It is also expected out from every professional to come with solutions and opportunities that will give a boost during difficult time.

With no option left many professionals are prioritizing their projects that reduce inventory and logistics expense. This may be a short term survival plan but as they do not have too many options and resources to invest in they are left with no choice but to survive and save every penny. Leaders must prepare themselves for some turbulence as responding to the market conditions is going to be very important.

Demand-driven approach

Prof. Nitin Joshi (PHD) Dr.V.N. Bedekar Institute of Management, Thane. nmjoshi@gmail.com

44 SCMPr

May 2014

One of the most difficult tasks in today’s business is forecasting the demand. We have been talking about the right prediction and contingency planning tools that can help organizations take care of uneven demand pattern, but the variables in the demand are so high that it becomes impossible to give correct information on the forecast. The challenges in the demand and supply can come from various channels such as suppliers going out of business, political

upheaval, natural calamities affecting manufacturing and many more. The other part of the constraint is even more difficult especially in the B2C market where you are never sure of the consumer. It is felt that one has to bring in the combination of some of the important elements of services management which include speed, reliability, flexibility and quality. The need here is how fast can we deliver if there is a demand and still maintain the brand image of reliability, quality with built in flexibility into the system to cope up to the need. The differentiators in the business will have to create effective supply chain which will continuously move in sync with the demand pattern and still provide solutions to the customers effectively. The most important point here is to have the agility in the system and to have the foresight to leverage opportunities and mitigate challenging events so that business not only survives, but succeeds.

Planning and integrated approach If one starts capturing demand pattern and start moving the value chain with demand as a reference point there is a need to plan things in place to meet this varying demand pattern.

There is also a need to modify the entire supply chain to changing market opportunities and events. Concept of dynamic planning has to be brought in place which will ensure continually fine-tune operations for the demand value chain. The traditional model of planning and seeing the result and then modifying the plan in the next month or quarter does not hold good any more. Organizations are not in a position to

column absorb losses based on errors in forecasting and planning. With the dynamic demand pattern also comes dynamic integrated planning. Planning department alone cannot be held responsible, along with the department entire organization has to become dynamic so that planner’s plans is implemented Integrated approach is important as inclusion.

Else it will be good planning with poor execution where organization still has not achieved what it has decided to achieve. The new approach demands for more continuous, dynamic supply chain modifications to rapidly respond to market changes. This can eventually minimize or even eliminate shocks across the supply chain network. The output of this effort will results better visibility, enhanced collaboration across various departments, better and speedy decision making and at the end better profitability.

Accelerate innovation-based approach

A good process management in terms of supply chain process improvement can result in value creation and thereby profitability.

Process improvement and modification in the supply chain is important but flavour of innovation will be crucial to being one step ahead of the competition. Continuous improvement in the processes with customer in view and making things desirable can be part of innovation. Important thing here is speed of innovation. As rightly said speed is the name of the game, organization who believe in speed and that changes are important are going to succeed. Cost effective innovation is the order of the day. Most importantly the need is to bring in the culture of innovation in demand chain professionals. With many things going online and available with a click of a button, consumers have been looking for that ease in every process where information to him is available by a click. Innovation in the supply chain, also means that suppliers should be with innovation as their background or at least they should demonstrate readiness to adapt to be innovative. This is going to be very crucial in the long run.

Once organization starts setting into the above culture of innovation with speed, there is every likely possibility that they will be in a better position to manage their resources and will drive the business, customer way resulting in achieving strong dividends and market leadership.

Design-based platform There exist a service quality gap in terms of sales committing and operations delivering.

This is a part of the service design gap as per the servqual model. Sales and outgoing supply chain should be well informed about the customer as these are the representative of the organization who interfaces with the customers. The experience of the customer with operations and sales may be crucial and small errors here can be disasters. These require a lot of anticipation and on the spot thinking. Customers’ behaviour pattern is changing with every new experience they encounter while purchasing. Sales and operations will have to have a lot of transparency in the information they share about the customer. The thought that customer is our customer instead of my customer is important or else everybody should serve him as if it is his customer. One of the ways to bridge gaps is with integrated business planning. A good process management in terms of supply chain process improvement can result in value creation and thereby profitability. It also provides a lot of real-time information to all the key people and will help achieve better value for the customer.

Sustainability approach Sustainability or the triple bottom line approach has been talked about for quite some time. Organizational heads will have to include sustainability as one of the core components of the supply chain other than technology. Professionals should focus on the basics of saving energy, packaging material, use of technology, using recyclable material, etc., to name a few initiatives that can give them visibility. This will directly lead to reduction of carbon inefficiencies, minimized energy consumption, and less waste. Implementation of continuous improvement practices can keep the momentum by ensuring continuous development through systemic measurement, audit, and knowledge management.

The opportunity for supply chain professional is pretty large as top management intervention in the supply chain issues as cropped up only recently when markets did not behaved as per expectations. Need is that supply chain managers to rapidly respond to change and increase profitability.

SCMPr

May 2014

45

n INSIGHT

n HUMAN RESOURCE

n REPORT

n Knowledge

n ACADEMIC ADVOCACY

A Continuous-review Model for Dual Intercontinental and Domestic Outsourcing

By Henry C. Co, Israel David, Ping Feng and Eddy Patuwo 46 SCMPr

May 2014

Academic Advocacy

When making sourcing decisions, many firms consider only the direct and most visible supply-chain costs, such as unit production costs and ocean-shipping costs.

Often ignored are the hidden direct and indirect costs in long supply chains, and their impact on profitability. As supply chains lengthen, their disruptions undercut the ability of manufacturers and retailers to satisfy market demands. SCMPro brings you excerpts from the article originally published in International Journal of Production Research; Vol. 50, No. 19, 1 October 2012, 5460–5473

T

he key aspect characterizing intercontinental outsourcing is the length of haul, averaging between 5,000 and 8,000 miles. Long haul means that the lead time of intercontinental supply chain can be five to 10 times longer than the lead time of a domestic supply chain. For instance, ManufacturingSourcing.com (2007) lists the estimated port-to-port shipping times from Shanghai, China, to various destinations in the United States (Table 1). The shipping times do not include loading, unloading, customs clearance, or transferring lessthan-container-load shipments to a container-freight-station warehouse (3–4 days). Shipping times are longer if the container vessel stops at another port before reaching its final destination.

When making sourcing decisions, many firms consider only the direct and visible supply-chain costs. As supply chains lengthen, hidden direct and indirect costs of supply-chain disruptions can undercut the ability of manufacturers and retailers to satisfy market demands. Supply chain disruptions add costs by forcing companies to increase inventories, to juggle production and shipping schedules, to incur excessive backordering, and to airfreight or discount the prices of goods that weren’t in the right place at the right time. In a survey of shipper focus group in fall 2005, Clancy and Hoppin (2005) find 38% of airfreight shipments

were due to delays in maritime shipments. Not surprisingly, in a survey on leading US importers’ concerns, Clancy and Hoppin (2005) find reliability (variability) at the top of the list, way ahead of price.

Problem Businesses compete in the marketplace on the basis of cost, differentiation, quality, and service.

The term ‘time based competition’ was coined by George Stalk. Stalk (1988) has noted that ‘as a strategic weapon, time is the equivalent of money, productivity, quality, and even innovation’. Shorter lead times improve quality, reduce cost and eliminate non-value-added waste within the organization while simultaneously increasing the organization’s competitiveness and market share by serving customers better and faster. In today’s less differentiated global markets, the way businesses manage time has become a powerful source of competitive advantage.

Congestion at North America’s West Coast ports and continuing capacity problems at major European ports has caused supplychain managers to rethink costs and benefits of intercontinental outsourcing. ‘In their rush to source from China, many companies are blindly walking into a strategic trap’, Stalk and Waddell (2007) write in a report published by the Boston Consulting Group.

The trap ‘is thinking that sourcing

from China will result in lower product costs, when in reality the supply-chain dynamics will, in many cases, drive up overall costs and reduce profitability, thereby creating an opening for a competitor’. The authors analyze the hidden costs that arise from fluctuations and challenges in the supply chain, and illustrate how a domestic supply chain, with integrated information flows and shorter cycle times, can gain substantial operating margin advantage to offset the manufacturing cost advantage of a China-based supply chain.

Time-based competition is a concept that time is a resource and a firm that makes better use of time acquires a competitive advantage.

Information flow between seller and buyer is often delayed and distorted. As supply chains lengthen, distortions in information flow worsen. The longer it takes to move a product from seller (A) to buyer (B), the more difficult it is to manage the chain without fluctuations, which increases costs.

A very small but unanticipated change in demand at (B) can produce a change in demand at (A) that is three to five times greater.

This phenomenon was coined ‘the bullwhip effect in supply chains’

by Lee et al. (1997).

Model Unit production costs and oceanshipping costs are only part of a very complex picture to consider in outsourcing. Often ignored SCMPr

May 2014

47

47

Academic Advocacy are the hidden direct and indirect costs in long supply chains, and their impact on profitability. To illustrate the significance of these costs, Stalk and Waddell (2007) compare the economics of a typical domestic supply chain anchored in North America with one based in China. The authors found that the China manufacturing ‘advantage’ quickly disappears when companies have problems getting goods to market in a timely fashion. For Western Europe, Stalk and Waddell (2007) simulate three different supply chains: one anchored

cerning lost sales with regard to the standard EOQ model. The Theorem establishes the conditions for domestic sourcing only, for intercontinental sourcing only, and for dual sourcing.

(3) Theorem 2 in Section 3.3 is a mathematical statement of the problem of finding the ordering policy to minimize the long-run average cost of sourcing. A search procedure is proposed.

(4) Section 4 presents an illustrative example to provide numerical and graphical insights to the mathematical model.

Time-based competition emphasizes the beneficial effect of reducing internal and external lead times. Long lead times and less reliable shipping schedules often result in higher incidence of service failures in Western Europe, one in China, and one in Central and Eastern Europe (CEE). The authors suggest that West European companies that now source from China may want to switch all or part of their manufacturing operations to Central and Eastern Europe.

The question is, can higher incidence of supply-chain disruptions in intercontinental supply chains justify keeping the domestic suppliers? To address the question, this paper presents the following theoretical model for dual outsourcing: (1) Section 3.1 presents an expression for the long-run average cost of sourcing (domestic and intercontinental).

(2) Theorem 1 in Section 3.2 generalizes a well-known result by Hadley and Whitin (1963) con48 SCMPr

May 2014

This paper presents a hybrid continuous review (Q, r, v) system for dual intercontinental and domestic outsourcing. Inventory position is defined as the inventory level plus the amount ordered (outstanding units). The inventory level, in turn, is the inventory on hand minus backorders. In the (Q, r, v) system, an amount Q≥0 is ordered each time the inventory position reaches the reorder point r. Within a time window (t, t+L), where t is any epoch when a reorder is made and L is the lead time of intercontinental outsourcing, the maximum intercontinental outsourced quantity is v ≥0. The remainder of the demand within this time window is sourced domestically. Consistent with periodic review inventory models found in the literature, the authors use

three cost parameters to capture the added costs of intercontinental supply chains: (1) ordering cost (k) – the added costs of cultural and coordination challenges, customs and duties, shipping and import/ export processing, etc. in intercontinental sourcing; (2) inventory-carrying cost (h) – the costs associated with increased inventories, juggling of production and shipping schedules, write-downs of excess inventories, etc.; and (3) shortage penalty cost (p) – the penalty costs related to excessive backordering and lost margins (lost sales/ goodwill, airfreight, or discount of the prices of goods that were not in the right place at the right time), etc.

The problem is to balance the higher unit production costs of domestic outsourcing, with the higher ordering cost (K), inventory-carrying cost (h), and shortage penalty cost (p) associated with intercontinental supply chains.

Time-based competition emphasizes the beneficial effect of reducing internal and external lead times. Long lead times and less reliable shipping schedules often result in higher incidence of service failures (disruptions in operations, excessive backordering and/ or the need to airfreight goods).

Shorter lead times improve the business organization’s competitiveness and market share by serving customers better and faster.

Unfortunately, the lead time of intercontinental supply chain (mainly, from Asian suppliers to American and European buyers) can be 5 to 10 times longer than domestic supply chain. Stalk and Waddell (2007) recommended that companies in the United States ‘diversify supply with multiple suppliers and supply points or produce critical components

Academic Advocacy and products domestically, accepting higher production costs as a trade-off for lower supply-chain costs and reliable delivery schedules’. For Western Europe, the authors suggest that companies that now source from China may want to switch all or part of their manufacturing operations to Central and Eastern Europe. The question is, can higher incidence of supply-chain disruptions in intercontinental supply chains justify keeping the domestic suppliers? To justify their recommendations, Stalk and Waddell (2007) used simulation and numerical analysis to compare the economics of a typical domestic supply chain with one based in China.

Section 3 of this paper provides a theoretical framework for analyzing the rationale for keeping domestic/ regional supply chain. The authors propose a modified (Q, r) control model. The authors assumed that dual outsourcing is available: a domestic supplier and an intercontinental supplier.

The unit cost of intercontinental supplier is lower but the lead time is long, while the domestic supplier has much shorter lead time, costs more. Section 3.1 presents an expression for the long-run average cost of sourcing (domestic and intercontinental).

Consistent with periodic review inventory models found in the literature, the authors use three cost parameters to capture the hidden costs of lengthening supply chains: ordering cost (K), inventorycarrying cost (h), and shortage penalty cost (p).

In Section 3.2, the authors made some investigations on the parameters for which it is economically preferable to use the hybrid system. For these parameters, the authors proposed in Section 3.3 an efficient computational scheme for the optimal policy identifiers Q, r, and v. The analysis greatly simplifies the effort that would normally be associated with the simultaneous triple-parameter optimization of the (Q, r, v) system. The illustrative example provided in Section 4 considers various values for the three cost parameters: K¼1, 50 or 1000; h¼0.1 and 0.05; and p¼0.1, 0.5, and 0.9. Table 2 shows 10–20% savings in dual outsourcing, consistent with the recommendations of Stalk and Waddell (2007).

The inflated lead times of intercontinental supply chain result in increased stocks and bullwhip effects.

Thus, it becomes necessary to use an input-control policy such as that proposed in this paper. Intuitively, if the cost of service failure (excessive backordering and/or the need to airfreight goods) outweighs the cost differential between domestic and intercontinental outsourcing, keeping domestic suppliers may be a good option.

SCMPr

May 2014

49

Certified By

Global Exhibition & Conference on Cold Chain & Logistics Industry

5

th

Edition

Connecting Cold Chain Industry Build Influential Networks 300+ Brands, 150+ Exhibitors Business. Learning. Networking

Technology Partner

Delegate Kit Partners

Supported By

Chamber of Cold Storages Industry Andhra Pradesh

Media Partner

Organised By

Contact Us: Prashant Narain I +91-9899622090 prashant.narain@reedmanch.com I www.IndiaColdChainShow.com

High density storage achieved with Schaefer Orbiter System.

Many logistics managers are unaware of the potential optimisation and streamlining of homogenous goods storage that modern warehouse systems can offer. The Schaefer Orbiter System allows you to compress your storage and speed up operations with storage and retrieval speed at 1m/second. Contact us today, we can show you how you can achieve effective storage needs.

P: +91/22/6111 4700 路 E: schaefer@ssi-schaefer.in 路 www.ssi-schaefer.in