A. K.

Dey Birla Institute of Management Technology

Dr. A. K. Dey

A comprehensive example of supply chain integration with focus on quality is the case of NDDB.
Began with just milk procurement and processing. Over 50 years, they have forward integrated the chain to include distribution, value added products, and retailing. They have backward integrated into animal husbandry, animal feed, and packaging.

Cash logistics, quality assessment, developments of key inputs

By acquiring a technology that enabled mixing of colors and base paints to get the appropriate shade in a few minutes, Asian Paints obtained a competitive edge by delaying their differentiation.
Retail inventory costs have come down, while at the same time, product availability has gone up.

Delayed differentiation (postponement), technology development

HUL has generally sought competitive advantage through a continuous reengineering of the supply chain. Major market segments have driven their supply chain response.
Recently, for their food and FMCG products, the Modern Trade (read organized retail) segment is driving a supply chain that is adding value by cutting down lead times.

Horizontal differentiation and vertical integration, non departmentalised management cadre

The concept of the supply chain has changed significantly for a bicycle company.
 It started from a factory that sourced raw materials, made components, assembled bicycles, warehousing, and delivery to dealer.  And changed to sourcing, kitting, warehousing, delivery to dealer, and assembly.  The factory has lost its significance and the supply chain is leaner and more straight. The bicycle company focusses more on marketing, design, and quality control.

Sourcing, kitting, dealer development, focus on costs

Tata Motors Ltd has improved its inventory levels and inbound logistics costs by using a third party logistics service provider to source, kit, and deliver components. Third party logistics, kitting

The cement industry has changed its production structure to enable greater flexibility in transportation (use of open wagons instead of only covered wagons, coastal transportation) by making cement in two stages, first as clinker near the raw material source, then grinding, blending and bagging near the market. lexibility, postponement

Benetton used to follow the traditional way of making hosiery: dye the yarn (fixing the colour) and then knit the fabric (fixing the style)
Understanding customer behaviour showed that it was easier to predict style choices than colour choices. Consequently, they evolved a technology to change the production sequence for their single colour fabrics to first knit and then dye. This enabled the supply chain to be aligned with the market behaviour choice.

Postponement, technology development

Dell Computers was a pioneer by recognizing the market segment which was (i) computer aware, (ii) customization sensitive, and (iii) price sensitive, and designing a channel for this. The channel offered mass customization and two-day delivery at a low price by leveraging online (remote) ordering, assembling to order, and express parcel delivery. Mass customisation, focus on costs

Amazon was a pioneer by recognizing the non-browser market segment which knew the book it wanted or had the leads that would enable search for the book. The channel offered online (remote) ordering, and ship to order using express parcel delivery. As a significant value add, it also offered recommendations on books based on a profiling of the customer. When large brick and mortar outlets like Barnes & Noble also started offering electronic ordering, then Amazon had to rethink its strategy of not having such outlets. Customer profiling: CRM, value addition

Pizza Hut traditionally had eat-in and take-out channels. Dominos entered the market with delivery and take-out channels, providing more convenience at a lower price. Pizza Hut was forced to respond with a delivery channel. Correspondingly, to stay in the mind space of their customers, Dominos also opened eat-in restaurants at many locations. Value addition: Product + service to Product + service

IT Hardware manufacturers are continuously restructuring their distribution network to enable a responsive supply chain for products, spare parts, and repair and return. Third party logistics service providers have played a significant role here. Spare parts logistics, reverse logistics, third party logistics

Zara, the new role model in fashion retailing from Spain, manages high levels of supply effectiveness (reduced inventory costs and post season discount sales) by
Managing Variety and Scarcity Monitoring early season retail sales to forecast Quick response in manufacturing Continued monitoring of retail sales and Dispatch from warehouses on replenishment basis

Retail monitoring, coordinated and quick response supply chain

Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together. Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from rawmaterial suppliers through factories and warehouses to the end customer.

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Network of firms
Core competency

Managing Demand side & Supply side uncertainties Collection of processes

Demand Management, Order fulfilment, Procurement, CRM, Supplier Relationship, management and Forecasting

Managing smooth flow of material (value), Information and finance Managing value chain: Creating value more than the competitors
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Four major drivers

Facilities Transportation Inventory Information

Two obstacles
Fragmented ownership of supply chain stages Product variety

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Information links all aspects of supply chain E-business

 replacement of physical business processes with electronic ones

Bar code and point-of-sale

 data creates an instantaneous computer record of a sale

Radio frequency identification (RFID)

 technology can send product data from an item to a reader via radio waves

Electronic data interchange (EDI)

 a computer-to-computer exchange of business documents

Internet
 allows companies to communicate with suppliers, customers, shippers and other businesses around the world, instantaneously

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1010-19

The value chain is a systematic approach to examining the development of competitive advantage It was created by M. E. Porter in his book, Competitive Advantage (1980) The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The 'margin' depicted in the diagram is the same as added value. The organisation is split into 'primary activities' and 'support activities.'

1010-20

Value chain
every step from raw materials to the eventual end user ultimate goal is delivery of maximum value to the end user Value is from the point of view of customer for which he is willing to pay

Supply chain
activities that get raw materials and subassemblies into manufacturing operation Focus is on minimize cost by increasing efficiency or economies of scale

Terms are used interchangeably

1010-21

Value chain
every step from raw materials to the eventual end user ultimate goal is delivery of maximum value to the end user Value is from the point of view of customer for which he is willing to pay

Supply chain
activities that get raw materials and subassemblies into manufacturing operation Focus is on minimize cost by increasing efficiency or economies of scale

Terms are used interchangeably

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One goal in SCM:

 respond to uncertainty in customer demand without creating costly excess inventory

Factors that contribute to uncertainty

 inaccurate demand forecasting  long variable lead times  late deliveries  incomplete shipments  product changes batch ordering  price fluctuations and discounts  inflated orders

Negative effects of uncertainty

 lateness  incomplete orders

Inventory
 insurance against supply chain uncertainty

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Integrated Supply Chain

In order to have smooth flow of materials all the components of a supply chain must be seamlessly integrated Integrated supply chain can be established by facilitating sharing of information between members in advance Overall cost of a supply chain can be reduced only if
It is an integrated supply chain Total view (end-to-end) is taken

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Integrated Supply Chain

Phase 1: Independent supplysupply-chain entities Suppliers Purchasing Production Distribution Customers

Figure 11.5
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Integrated Supply Chain

Phase 1: Independent supplysupply-chain entities Suppliers Purchasing Production Distribution Customers

Phase 2: Internal integration

Suppliers

Purchasing Production Distribution

Customers

Internal supply chain Materials management department

Figure 11.5
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Integrated Supply Chain

Phase 1: Independent supplysupply-chain entities Suppliers Purchasing Production Distribution Customers

Phase 2: Internal integration

Suppliers

Purchasing Production Distribution

Customers

Internal supply chain Materials management department

Phase 3: SupplySupply-chain integration

Suppliers

Internal supply chain

Customers

Integrated supply chain

Figure 11.5
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Information sharing among supply chain members

Reduced bullwhip effect Early problem detection Faster response Builds trust and confidence

Collaborative planning, forecasting, replenishment, and design

Reduced bullwhip effect Lower Costs (material, logistics, operating, etc.) Higher capacity utilization Improved customer service levels
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Coordinated workflow, production and operations, procurement

Production efficiencies Fast response Improved service Quicker to market

Adopt new business models and technologies

Penetration of new markets Creation of new products Improved efficiency Mass customization

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Process for two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand Parties electronically exchange
past sales trends point-of-sale data on-hand inventory scheduled promotions forecasts

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Procurement
 purchase of goods and services from suppliers

On-demand (direct response) delivery

 requires supplier to deliver goods when demanded by customer

Continuous replenishment
 supplying orders in a short period of time according to a predetermined schedule

Cross-enterprise teams coordinate processes between company and supplier

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Two levels of decisions

 Design decisions  Operations decisions

Design decisions
 Which activities should be carried by nodal firm and which should be outsourced?  How to select entities/partners to perform outsourced activities and what should be the nature of relationship?  Decisions pertaining the capacity and locations of various facilities.

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Operations decisions
Demand forecasting Procurement planning & control Production planning & control Distribution planning & control Inventory management Transportation management Customer order processing Relationship management

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Demanding customers Intensive competition Higher level of product proliferation Shorter PLCs Higher disposable income Declining brand loyalty Cross category competition Crossover behaviour of consumers: splurgers and Bargain hunters

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Five major trends have made SCM a critical success factor in most industries: Proliferation in product lines: More variety & More SKUs Shorter PLCs High level of outsourcing Shift in power structure in the chain Globalization of manufacturing

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More varieties and more SKUs Large number of substitute products Forecasting becomes challenge Supply chain starts with better forecasting!

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Products getting outdated fast Competition driving down the useful life of a product Window of opportunity to recoup investments is shortening Efficient firms like Dell with just seven days of inventory as compared to industry average of 35 days need to worry about product obsolescence Competitors of Dell with higher level; of inventory will end up writing off huge amount of inventory as obsolete

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Firms increasingly focus on core activities and outsource the rest This trend is irreversible Higher level of outsourcing make Supply Chain vulnerable Forcing firms to develop different types of capabilities within the organization

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Same retail space is being chased by

Increasing number of products Increasing number of competitors

Shelf space in retail has not increased at the same pace as product variety Retailers are asking manufacturers to be more responsive to their demands Discount retailers like Wal*Mart have been asking manufacturers to replenish the stock on daily basis depending on the actual sales data from their point of sales system
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Supply chains have become very long Goods & services have to travel through different
Lands Using different modes of transport Complying with various rules and regulations

Managing supply chains have becomes very complex

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Common issues
 Taxation structure drives location decisions  Poor state of logistics infrastructure

For other issues: Context of FMCG sector

 Managing product availability  Working with smaller packs  Entry of national players in traditional fresh products sector  Complex tax structure  Counterfeit goods  Opportunistic games played by distribution channel  Emergence of 3PL and 4PL  Emergence of modern retail  Reservations for Small Scale Sector
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Customer service issues should drive this decision Pharma firms located at Baddi, HP: reason tax benefits Air conditioning and diesel power generating firms at Silvassa Special Economic Zones attract many firms To avoid multiple tax, firms keep stocks in each state Various taxes: delivery by road gets unusually delayed VAT & GST may bring relief

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Both transportation & warehousing dominated by unorganized sector Over 90% trucks in the country belong to owners who have less than 5 trucks each Unorganized trucking industry results in unreliable lead time and high transit damages

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Driven by the emergence of a vast domestic market and relatively low-cost workers
Ford, Hyundai and Suzuki all export cars from India in significant numbers LG, Motorola and Nokia all either make handsets in India or have plans to start ABB, Schneider, Honeywell and Siemens have set up plants to manufacture electrical and electronic products for domestic and export markets

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A clutch of globally competitive Indian manufacturing companies -- many of them in the automobile industry -have inserted themselves into the global supply chain
 Sundram Fasteners makes generator caps for General Motors  New Delhi-based Moser Baer has established itself as a global manufacturer of data storage media such as DVDs and CDs  An aggressive group of pharmaceutical companies Led by Ranbaxy & Dr. Reddys Lab-- India has about 60 plants that meet the stringent quality standards of the U.S. Food and Drug Administration, the largest number outside the U.S. itself -- are opening new markets around the world.

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Innovative solutions are required to overcome

Complex distribution structure Large number of customers at the bottom of pyramid Poor infrastructure Complex tax structure

Innovative SCM implemented by

AMUL Mother Diary ITC Shakti Project of HUL Dabbawalah (Tiffin Carriers) of MUMBAI
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Managing product availability in complex distribution set up

Order fill rate; Line fill rate & Cycle Service Level

Small pack sizes

Large Rural population & Economically weaker section Problem: Increased per unit transportation & packing cost Companies have to find innovative ways to balance market penetration & logistics costs

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Entry of national players in traditional fresh product sector

Fresh products were marketed by local players National players work with centralized plants
 Can manage quality  Enjoy Economies of scale  ITC Flour & Nestle Yoghurt

Have to establish decentralized network of manufacturing plants fixed cost may rise

Dealing with complex tax structure

Multiple stocking points Delays, tax avoidance tricks
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Dealing with counterfeit goods

More popular brand; more counterfeits Rules are not strictly implemented Detection is costly Legal expenses

Opportunistic games played by distribution channel

Try to grab significant portion of promotion budget Divert goods from one market to another violating the norms set by company- poaching

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Emergence of 3PL and 4PL

 Good for the industry  Customer will benefit  Expertise will increase

Emergence of modern retail

 Extract higher discount because more demand  In India share of retail sale is very low  Still they demand high margin  Manufacturer wishes to bypass distributors likelihood of channel conflict  Impact of higher discounts on overall distribution system  Threat of private labels

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Reservation for the small scale sector

Many items are reserved for the small scale sector Big FMCG firms have to source material/products from small scale sector Risk of Quality & uncertain delivery Making the sourcing process complex.

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Thanks

Dr. A. K. Dey Professor Supply Chain & Operations Management Birla Institute of Management technology India

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