SUPPLY CHAIN AND LOGISTICS MANAGEMENT

PRIYANKA SHETTY
9, AMBIKA CO-OP HSG SOCIETY
SECTOR-19, NERUL
NAVIMUMBAI-400706

H.R. COLLEGE OF COMMERCE AND ECONOMICS

DINSHAW WACHA ROAD
CHURCHGATE
MUMBAI-400020

DATE OF SUBMISSION: 4th December 2008

DECLARATION
I PRIYANKA SHETTY of H.R College of Commerce and Economics, TYBMS
(Sem5), hereby declare that I have completed this project on SUPPLY CHAIN
AND LOGISTICS MANAGEMENT in the Academic Year 2008-2009, the
information submitted is true and original to the best of my knowledge.

(PRIYANKA SHETTY)

CERTIFICATE
I Mr. INDRANATH BANERJEE hereby certify that Ms. PRIYANKA SHETTY
of H.R College of Commerce and Economics of TYBMS (SEM 5) has completed
the project on SUPPLY CHAIN AND LOGISTICS MANAGEMENT in the
academic year 2008-2009. The information submitted is true and original to the
best of my knowledge.

Project Co-ordinator
INDRANATH BANERJEE,
Supply Chain Analyst
Logistics Consulting Asia, Malaysia

Principal
H.R College of Commerce and
Economics, Churchgate

ACKNOWLEDGEMENT
I take this opportunity to express my deep sense of gratitude to Dr.Mrs.Indu Shahani &
Prof. Gehna Hingorani for giving me an opportunity to undertake this project.
I would also like to sincerely thank my project guide Mr. Indranath Banerjee for his
invaluable guidance and support whenever required, without which this project would not
have been successfully completed.

Executive Summary
Title of the Project: Supply Chain And Logistics Management.
About the Project:

Today industry is the backbone of any economy. Every economy

has its own style of managing its regime. Doing business is not the
same as it was in the earlier. Due to the changing behaviour and
awareness of the customer, which lead to intense level of
competition, businessman has evolved too many new concept for
facing competition and keeping them self a step from the
competitor. Among those concepts supply chain is one of the
emerging and successful concepts, which is used in the business.

Though Supply Chain concept is very old, but with the help of up coming
technology and IT revolution supply chain concept has got a boost. Supply Chain is
not a concept alone but also is a methodology of doing business in todays business
scenario. Effective control of the flow of components and materials to the
manufacturing or assembly line is a key to cost effective manufacturing. In an optimal
supply chain, materials and components are received just-in-time to enable lean
manufacturing, i.e., the right product, in the right place, at the right time, at the lowest
possible cost. In other words, the wrong product, in the wrong place or at the wrong
time, at higher than expected cost.

Objective of the study:

The main objective of this project is to enable me to know and understand the
various aspects of Supply Chain and Logistics Management.

Gain practical as well as the theoretical knowledge about the subject.

Problems faced in maintaining an efficient Supply Chain

Research Methodology:
The methodology used for carrying out this study was by means of secondary data.
The secondary data was collected from various articles, magazines, books and
websites. The research underlying this study that the Supply Chain and Logistics
Management concept have entered the mainstream and in some cases, are the leading
edge of the rapid changes transforming the business economy.

Constraints:
The major constraint faced during making the project was that adequate information
about the concept of Supply Chain and Logistics Management, the technicality of its
operations. Though the concept is very old but very few companies have adopted it with
complete efficiency, hence it was the part of the difficulties I faced while collecting the
data.

Table of Contents
1. INTRODUCTION ...........................................................................1 - 2
2. Distinguish between Logistics and Supply Chain Management ....... 3
3. The Evolution ................................................................................. 3 - 17
Table 1 - Chronological Dates

16

Events in SCM Evolution

16

Definition and Explanation

Basics of Logistics

Outsourcing/Third party Logistics

Supply Chain Optimization To-Do List

12

Traditional Functional Performance Measures

12

Supply Chain Management - A Continuous Replenishment

13

4. Supply Chain Process ..................................................................18 - 22

Process view of the Supply Chain

20

Push-Pull view of Supply Chain

22

5. Supply Chain Flow ......................................................................23 - 25

6. Decision Phases in a Supply Chain ................................................... 26
7. Supply chain strategy or design .........................................................27
8. Supply chain planning ................................................................ 28 - 29
9. Supply Chain Obstacles/Challenges ................................................. 30
10. Supply Chain Drivers .............................................................. 31 - 35
Inventory

31

Transportation

32

Facilities

34

Table of Contents (Contd.)

a) Warehousing/Storage

34

b) Material Handling

35

c) Packaging

35

Information

36

Order Processing

36

Planning

37

11. Achieving strategic fit in Supply Chain Management ............. 38 - 39

Achieving Strategic Fit

38

12. Fit Between Competitive and Functional Strategies ...................... 39

13. The Bull Whip Effect ............................................................... 40 - 45
Causes of the Bullwhip Effect

41

How to Counteract the Bullwhip Effect

44

How to Reduce the Bullwhip Effect

45

14. Supply Chain and IT ................................................................ 48 - 50

Enterprise Resource Planning (ERP)

49

EDI (Electronic Data Interchange)

50

15. The Postponement Strategy ..................................................... 51 - 53

Optimal Postponement Preconditions
Demand Preconditions:

52

52

Product/product line preconditions:

52

Production preconditions: 53
Postponement benefits .......................................................................... 54
The Postponement Strategy Examples ................................................. 54
Paints Insta Color 54
Hewlett Packard

55

16. The Integrated Supply Chain Strategy .....................................57 - 58

17. Logistics Performance Measurement .............................................. 59
8

18. Job Scope Available ......................................................................... 60

19. Going For Gold In The Supply Chain ...................................... 61 - 64
(A case study on Marico Industries)

61

20. CONCLUSION..........................................................................................69
21. BIBLIOGRAPHY......................................................................................71
22. ANNEXURE..72

INTRODUCTION
Since the early 1980's, supply chain management has developed rapidly as companies
have been seeking to improve their competitiveness in respect of cost and service levels,
and to attain sustainable growth.
Supply chain management has gained increasing recognition in business, both as a
function in its own right and as a cross-functional discipline. At the same time, supply
chain management has moved from operational level to broad level within the corporate
organization. Never before, the supply chain management played such an important role
in the corporate strategy of many companies as it is today. This development has led to a
much broader scope in supply chain management in the 1990's as compared to that of the
1970's.
With the logistics industry becoming more crucial as its relevance ever increasing it
moved into new areas, involved in outsourcing projects and design and implements
supply chain management strategies and enable enormous increase in output. Given the
growing importance of supply chain and logistics management, one has to determine how
the calculation of transport and logistics costs has changed over the last decades as a
consequence of improved supply chain management and the increasing significance of
supply chain management.
The concept of Supply Chain Management has recently stepped into the limelight of
corporate professionals and academia. However, its roots can be traced with the evolution
of trade itself. Evidences show that supply chains were present right from the time when
mankind understood the need of merchandising and distribution.
In fact now one of the strategies is to choke all the supply feeder lines, which either
harbour or encourage terrorism of any variety. This is referred to as 'Operation Endurance
Freedom' in the recent times.
We can characterize the significant events that reflect the evolution of the supply chain
management in a chronological manner. However, it is to be observed that the impact of
each event on Supply Chain Management (SCM) is varied. Change can be implemented
easily when tough times reign. Companies in India have been looking at ways of cutting
costs and improving process efficiencies, in their quest to become globally competitive.
One such initiative is Supply Chain Management (SCM). SCM recognizes that distinct
1

functions like Purchases, Inventory Management, Distribution and Production Planning

work best when integrated.
Supply Chain Management offers, at the least, reduction in costs across functions, better
planning for purchase and production, and much more efficient use of capital. It also
offers a 13% of Indias GDP-opportunity for a variety of services - trucking,
warehousing, IT, personnel, ancillaries and a host of others.
Today all the four key elements of SCM materials, time, money and information- are
being tackled to squeeze out the maximum possible savings. Almost every leading
company in India now has an SCM drive in place. In HLL, chairman M. S. Banga
considers SCM as one of the key factors contributing the bottom line and enabling
growth of the power brands.

Distinguish between Logistics and Supply Chain Management

Logistics

SCM

It is concerned with getting goods and SCM

encompasses

of

all

those

services where they are required and activities associated with movement of
when they are desired.

goods from raw material stage to the

end user.

No manufacturing or marketing can This includes sourcing, procurement,

accomplish without logistical support.

production

scheduling,

processing,

inventory

transportation,

order-

management,

warehousing

and

customer service.
It

involves

the

integration

of SCM integrates and coordinates all the

information, transportation, inventory above

activities

into

seamless

warehousing, material handling and process. It embraces and links all the
packaging.

partners in the chain.

Logistics add value when inventory is The best SCM practice is when it
correctly positioned to facilitate sales.

excels in reducing operating costs,

improves

asset

productivity

and

compressing order cycle time.

It is mainly concerned with optimising It recognizes the internal integration
flows within the organization.

by itself.

It is essentially a planning orientation It builds upon this framework and

and framework that seeks to create a seeks

to

achieve

single plan for the flow of product and coordination

information through a business.

between

linkage
processes

and
of

other entities in the pipeline i.e.

suppliers

and

customers

and

the

organization.

Definition and Explanation

Logistics Management is primarily concerned with optimizing flows within the
organization while Supply Chain Management recognizes that internal integration by
itself is not sufficient and all the channel partners i.e. all stages of a supply chain need to
be integrated.
Logistics becomes a large portion of the tools that we use to operate and analyze the
supply chain.
Further, a Supply Chain is an interconnected system containing suppliers, manufacturing,
assembly, distribution, and logistics facilities. This manufacturing unit procures raw
materials from suppliers, built to produce materials and move them to the customers,
through distribution units. Logistics are responsible for transportation of materials from
one unit to other.
Risk Reduction as a Goal of SCM

Supply Chain management (SCM), has now became a very vital part of management.
Good Supply Chain Management can result in
-

Decreases Cycle Time

Reduces the inventory level

Decreases cost of production

Let you decide strategy

Following figure shows a typical Supply Chain:

Suppliers

Manufacturers

Distributors

Retailers Customers

The goal of supply chain is to move material quickly while maintaining the lowest
possible levels of inventory.
What is a supply chain?
A supply chain is the link that moves products between suppliers, manufacturers,
wholesalers, distributors, retailers and finally consumers. For most of the last century, the
supply was an inflexible series of events that some-how managed to get products out the
door. A paper-heavy adventure, it often involved questionable inventory forecasts,
ironclad manufacturing plans and hypothetical shipping schedules.
What is supply chain management (SCM)?
Supply chain management is a way to supervise the flow of products and information as
they move along the supply chain. Supply chain management is the combination of art
and science that goes into improving the way your company finds the raw
components it needs to make a product or service, manufactures that product or
service and delivers it to customers. The following are five basic components for
supply chain management.

1. Plan - This is the strategic portion of supply chain management. You need a
strategy for managing all the resources that go toward meeting customer demand
for your product or service. A big piece of planning is developing a set of metrics to
monitor the supply chain so that it is efficient, costs less and delivers high quality
and value to customers.
2. Source - Choose the suppliers that will deliver the goods and services you need to
create your product or service. Develop a set of pricing, delivery and payment processes
with suppliers and create metrics for monitoring and improving the relationships. And put
together processes for managing the inventory of goods and services you receive from
suppliers, including receiving shipments, verifying them, transferring them to your
manufacturing facilities and authorizing supplier payments.
3. Make - This is the manufacturing step. Schedule the activities necessary for
production, testing, packaging and preparation for delivery. As the most metric-intensive
portion of the supply chain, measure quality levels, production output and worker
productivity.
4. Deliver - This is the part that many insiders refer to as "logistics." Coordinate the
receipt of orders from customers, develop a network of warehouses, pick carriers to get
products to customers and set up an invoicing system to receive payments.
5. Return - The problem part of the supply chain. Create a network for receiving
defective and excess products back from customers and supporting customers who have
problems with delivered products.
The ultimate goal of SCM is to optimize the supply chain, which can not only reduce
inventories, but may also create a higher profit margin for finished goods by giving
customers exactly what they want (and of course charging for it).

What can SCM do?

A good SCM initiative gives visibility to all the players in the supply chain so that they
are able to react to the order. The moment a retailer receives an order, the retailers
supplier also sees it. The supplier checks inventory. If inventory is low, a manufacturer
also with access to the system produces more products and ships it to the supplier via
a distributor that is also connected to the system.
Meanwhile the supplier has sent the product to the retail for shipment to the
customer. The customer, in turn, can track the shipment of the order and perhaps
even check inventory to make sure an item is in stock before ordering. With Web
technology, all the players in the chain simultaneously manage inventory, controlmanufacturing schedules and deliver an order on time to a customer.
Also, Supply chain management projects should also rethink the chain. Most
businesses establish their supply chains around product lines. But today, customer
orders touch multiple product lines and multiple channels of distribution. Modern
supply chains focus on the customer and on delivering one order at a time rather
than moving one product line at a time. The focus has to be on filling, delivering
and managing inventory for every order that a customer places. Every order should
penetrate the same system that manages inventory and connects to suppliers and
distributors.

Basics of Logistics
Logistics is unique. It never stops! Logistics is concerned with getting products and
services where they are needed and when they are desired. Most consumers in highly
developed nations take a high level of logistical competency for granted. When they go to
the store, they expect goods to be available and fresh. It is difficult to visualize
accomplishing any marketing or manufacturing without logistical support.
Logistics and distribution are being accorded high priority in Supply Chain Management.
The priority arises not only due to possible costs savings but also because of their impact
on responsiveness and services levels. In-fact, the latter would be more important reasons
since logistics costs per se are not very. Not all organizations seem to share the view that
Logistics and distribution is a strategic function. Few companies seem to be adopting
leading SCM practices in the area though can be substantial.
Logistics and distribution are the nuts and bolts of SCM.
A leading-edge supply chain program can create competitive advantage for your
company. The service and cost benefits can distinguish you from competitors. Customers
have strong requirements on how they want their orders and shipments handled. Your
compliance with those requirements can enhance your status as a supplier. Whether for
company-wide or selected portion, we will analyze the key logistics elements-movement
of product (inbound, outbound, intra-company), movement of information, service/time,
cost and integration-within your company, with customers, and with your suppliers.
The scope of your supply chain organization can be complex- imports, exports, diverse
market requirements, differing customer expectation, shortened lead times, and more.
Organization, teamwork and information technology are among the issues that impact
supply chain effectiveness. It is no longer distribution, not shopping and receiving; it is
supply chain management.

In the global market where competitors and suppliers are worldwide, firms want to have
supply chain operations. Asia is a key area for product sourcing, the start of the logistics
process-the suppliers. Today companies are also seeking out 3rd party Logistics providers
(3PLs), who handle not just physical distribution but also functions like warehousing,
billing, tracking and insurance. But outsourcing of Inventory Management has not caught
yet.

Outsourcing/Third party Logistics

Third-Party Logistics (3PL) is defined as the outsourcing of transportation,
warehousing, inventory management, distribution and other value-added services such as
pick-and-pack, assembly, repairs, and reconditioning, etc. It can be said that outsourcing
is, calling on external resources to provide distribution service to maximize your
efficiency and focus on your core competencies. As we approach the 21st century,
outsourcing activities have been a hot topic often red hot. The practice is no longer
confined to transportation and warehousing activities.
3PL - third party logistics represents the outsourcing of the logistics function.
One of the most significant trends that continued to gain the attention of forward-thinking
firms is the option to outsource logistics activities. Outsourcing has grown for many
reasons and is now a major part of economy. Like all growth industries, the provision of
third party logistics services has diversified. Its offspring 4th Party Logistics is an
example of such diversification. Logistics providers are developing competitive
advantage by coordinating different customers logistics solutions. They are presenting
some of the basic factors that are taken into considerations for a 3PL firm when
coordinating its customers. The possibilities to coordinate are dependent not only on
activities of different customers, suppliers and customers customers but also the attitudes
and behaviour reflected from their strategies.
What is Outsourcing?
An important characteristic of the Supply Chain is outsourcing. This concept has its
route in both core competency and cost control. Core competency basically means do
what you are best at, and leave all other non-value-added activities to more suited
players. During 1990s, phase with rising cost accelerated like the gulf war in 1991, an
9

increasing cost competition from cheaper countries around the world, companies
undertook a serious bit of sole searching. Thus originated for, Third Party services
providers. The business activity of farming out identified non core activities to external
agencies came to be known as outsourcing. In Logistics and Supply Chain Management
too, companies have been outsourcing the activities of transportation, warehousing,
clearing and forwarding to different operator.
The future shape of business is being redefined through outsourcing
Benefits of Outsourcing
A key question that a company has to ask before considering the outsourcing option is:
What is it in there for us? Here we list some potential reasons that may argue in favour of
outsourcing.

Improve company focus: More organizations are eliminating internal functions that
are not considered core competencies.

Access to world-class capabilities and new technology: Often these third party
logistics companys capabilities are the results of extensive investments in
technology, methodologies and people, over a considerable period of time.
Sometimes, these capabilities include specialized industry expertise gained through
working with many clients facing similar challenges. Therefore, this expertise is
translated into skills, processes, or technologies uniquely capable of meeting these
needs.

Accelerate reengineering benefits: Outsourcing to a 3PL already reengineered to

world-class standards allows the company to realize those anticipated benefits
immediately.

Share (pool) risks: There are tremendous risks associated with the capital
investments an organization makes. A 3PL can share these risks across the many
companies that it serves. This allows a 3PL to lower risk relative to a company
performing the function itself.

Free-up resources: Outsourcing offers a way to conserve capital and allows a

company to redirect its resources from non-core activities toward activities, which
have the greater return in serving the customer.
10

Cash infusion: Sometimes, outsourcing involves the transfer of assets from the
company to the 3PL. These assets have a value, and in fact are sometimes sold to the
3PL.

Reduce and control operating costs: Outsourcing to a 3PL most likely will give
access to a lower cost structure, which may be the result of a greater economy of
scale or some other advantage based on specialization. When calculating the cost
benefits it is very important to consider total costs since coordination costs often
increase when all or part of a function is outsourced.

Resources not available internally: Companies might simply not have access to the
required resources within the company.

Eliminate labour problems: While companies are rarely willing to concede this fact,
many view outsourcing as a way to eliminate labour problems. This is a two edged
sword and one has to be extremely careful here. Perceived benefits do not always
materialize.

11

Supply Chain Optimization To-Do List

Migrate electronic data interchange (EDI) transactions to the Web. Many

companies have been using EDI since the 1980s to automate purchasing of
production materials. Third-party value-added network (VAN) providers charge a
premium to connect organizations with different equipment. Using the Web for
EDI can slash costs.

Use Product Data Management (PDM) to manage product development data from
design through manufacturing and maintenance.

Engage in Collaborative Planning, Forecasting and Replenishment (CPFR), which

involve sharing forecasts among suppliers to enable automatic product
replenishment.

Take part in collaborative product design (CPD), the joint development of new
products by supply chain members.

Traditional Functional Performance Measures

Manufacturing

Sales & Marketing

Engineering / R&D

Unit cost

Market share

Functions/features

Labour cost

Revenue

Labour & material cost

Labour productivity

Sales growth

Time-to-market

Quality, scrap rate

New "hot" products

Award-winning designs

Plant utilization

Customer satisfaction

Design for

Plan vs. actual

manufacturability,

production

assembly, etc.

12

Supply Chain Management - A Continuous Replenishment.

Supply chain management is a driving factor in today's business world. Supply chain run
from vendor's right through to customers' door. With international sourcing and
international sales, the scope and complexity of supply chains can be significant.
Customers, and their requirements, drive the process. They demand that their orders be
shipped, complete, accurate, on tine, and in the manner they require.
The purpose of SCM is to drive out excess inventory and unnecessary costs. We work
with companies to understand what is required and the impact, both financial and
operational. With this base we work to develop and implement SCM. We can work with
clients to evaluate their present supply chain and to identify what must be done to gain
the cost and service benefits of a quality SCM program. The SCM must work at all
levels, strategically and tactically to be effective.
If you have customer who have placed supply chain requirements on you that you may
not understand, we will work with you to understand each customer's needs. Then we can
evaluate your supply chain process to see if it meets your customers' requirements. Each
customer has different requirements that you must comply with. Your supply chain
program must be tailored to each customer's special requirements.

13

The Evolution
The evolution of the SCM has moved from disparate functions of logistics,
transportation, purchasing and supplies and physical distribution to focus on integration,
visibility, cycle time reduction and streamlined channels. The new integration has a
variety of activities such as, Integrated Purchasing Strategy, Supplier Integration, BuyerSupplier Partnerships, Supply Base Management, Strategic Supplier Alliances, Supply
Chain Synchronization, and finally simply SUPPLY CHAIN MANAGEMENT.
The activities of logistics are centuries old as discussed earlier. During World War II,
military forces made effective use of logistics models and forms of systems analysis to
ensure that the required material was at the right place on time every time. The term
logistics is widely used in military and military type applications even today.
Until about mid 1950's, the field of supply chain management was in a state of dormancy.
The piecemeal and isolated fragmented set of activities was rampant. Production and
manufacturing were given uppermost attention. The inventory was the responsibility of
the marketing, accounting and/or production areas and order processing was an
accounting or sales responsibility.
During the Ethiopian famine relief efforts of the 1980's, the term logistics was applied to
the food-supply activities. World Vision International, one of the many relief
organizations at work there, produced a manual entitled Getting It There- A Logistics
Handbook for Relief and Development.

SCM formerly known as logistics management now includes more aspects apart
from the logistics function. SCM is one of the most powerful engines of business
transformation that basically means delivering the right product to the right place at
the right time and at the right price. SCM is the one area wherein much operational
efficiency can be gained, thereby reducing organizations costs and enhancing
customer service. Gradually, the marketing people started giving greater emphasis to
distribution, giving rise to physical distribution management or in today's parlance
'outbound transportation'.

14

In 1991, the international Council of Logistics Management (CLM), defined logistics as

"the process of planning, implementing, and controlling the efficient, effective flow and
storage of goods, services, and related information from the point of origin to the point of
consumption for the purpose of conforming to customer requirements".
Some of the terms like logistics, inbound logistics, materials management, physical
distribution, supply chain management seem to be used interchangeably. Very briefly,
inbound logistics covers the movement of material, components and products received
from the suppliers. Materials management describes the material handling part of the
movement of the material and components within the factory or firm. Logistics describes
the entire process of material and products moving into, through, and out of a firm.
Finally as of today, it is the Supply Chain Management that is conceptualized as
something even larger than logistics, that links logistics more directly with the user's total
communications network and with the firm's engineering staff. It is sufficient to know
this much at the present juncture on supply chain management, as in the chapter Process
View of SCM

where we will explore different views on supply chain management.

A supply chain is, in fact, a network of facilities and distribution options that necessarily
performs the functions of procurement and acquisition of material, processing and
transformation of the material into intermediate and finished tangible products and finally
the physical distribution of the finished tangible products to the customers, whether
intermediate or final ones. As already indicated, supply chains exist in both
manufacturing as well as in service organizations.
Supply Chain Management is a set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and
distributed at the right quantities, to the right locations, and at the right time, in order to
minimize system wide cost while satisfying service level requirements.

15

Table 1 - Chronological Dates

Duration

Events in SCM Evolution

Ancient
Times

The Barter System evolved as an answer to the trading requirements.

This was the first supply chain.
Caesar made trading posts in East Asia to grow his trade. This was the
first retailer supplier relationship. Establishment of the silk route to India.
First known fire and plague insurance offered in Iceland.
House of Taxis operated courier messenger service for the rich European
clients. (A kind of primitive Outsourcing)
Dutch West India Co. formed to trade with America and West Africa.
(A pseudo third party logistics (3PL) by the Dutch Companies.)
Charles S. Rolls became selling agent for cars made by F. Henry Royce.
(The first traces of outsourcing).
Warren Buffet started investment partnership in Omaha with money from
family and friends and he went on to become a billionaire. (An overseas
3PL)
The essence of SCM understood. This first phase is characterized as an
inventory 'push' era that focused primarily on physical distribution of
finished goods.
The earlier approach changed. Companies began migrating from an
inventory push to a customer pull channel as power began to move the
downstream to the customer.
In the last phase, companies realized that the productivity could be
increased significantly by managing relationships; information and
material flow across enterprise borders. This resulted in the present
concept of supply chain management.
IBM outsourced almost all of its activities and built a full computer.
Wal-Mart introduced the concept of Cross Docking and replaced K-Mart
as the leader in retail stores.
Cisco removed itself from the supply chain by providing to the customer
directly from the vendor.
Computer changed the way business is done.
Internet revolutionized the information pathway and the distribution
system of the business.
The concept of e-commerce changed the definition of business itself.
Currently concepts like t-commerce and digital TV are beginning to take
shape.

300 BC
1151
1305
1621
1904
1956

1960-1975

1975-1990

1980
1981
1985
19851990
199619982000-

Reasons for the Big Breakthrough in the Past 20 years

The breakthrough revolution in the past 20 years is due to the following differences in the
attitude of companies and customers alike.
16

Earlier
Companies

Today

No two companies at the same level Competition at all levels.

of competition.
The main motive was to increase
production.

Main motive is customer service.

Production differentiation very

early and far from customer.

Product differentiated nearer the

customer.

Reaction approach of industries.

Customer

Customer did not care about

specifications.

Action approach of industries.

Customers demand exact
specifications.

Less market moving powers

More power devolved to the customer.

17

Supply Chain Process

The concept of supply chain management encompasses four main decision areas:
location, production, inventory, and distribution. Within these areas decisions fall
into two main categories: Strategic decisions deal with the long-term future; and
operational decisions deal with the short term running of the company.
Location
In order to create a supply chain you must first decide on the geographic location of the
facilities that the organisation uses. These facilities include production plants, warehouses
and distribution points, suppliers, and buyers. A supply chain is essentially the interaction
between these facilities and the processes by which products move between them.
Strategically the location of the above facilities must be determined by the location of the
target market for the organisation. It will have an effect on running costs, taxes, local
content, distribution costs, and service.
The decision to locate a facility commits the organisation to allocating resources and, in
some cases, very large amounts of capital. Therefore it is imperative that the location is
determined on a strategic level. Operationally the location of facilities may affect the
efficiency of the running of the business.
Production
A supply chain is useless unless it has a product to pass through it. The decision on which
product to produce is directly affected by the organisations target market and therefore is
a strategic decision. Other strategic issues include the allocation of resources to the
production plants (i.e. suppliers), and the capacity of the plants.
Operational issues include the day to day running of the plants. Examples of these are
production scheduling and quality control.

18

Inventory
Decisions in this area affect all stages of the supply chain. The inventories through out
the chain will probably be at differing stages of development. For instance the inventories
at the beginning of the chain will be raw materials, at the end they will be the finished
products. These inventories, no matter what stage they are at have a value that is not yet
being realized. In order to minimize the unrealized value of the goods efficient
management of the inventories must take place.
Most of the issues involved with inventory are operational, for instance the maintenance
of stock levels within safety boundaries. On a strategic level management set the goals
that are to be achieved in this area and determine the reorder strategies (i.e. JIT).
Distribution
The key decisions in the distribution area involve the trading-off of inventory levels of
buyers with the costs of freight. Another matter to be considered is the nature of the
product. It is no good sending a shipment of perishable goods via sea or rail to save
money if the goods are not in a suitable condition once they reach their destination. On
the other hand shipping by sea or rail is cheaper but necessitates higher inventory levels
to counter the uncertainty associated with these methods (i.e. bad weather when shipping
by sea).
Strategically, forecasts of the demand for the product allow for the co-ordination between
the distribution by various methods and the buyers inventory levels.

19

Process view of the Supply Chain

Cycle view
1.

Customer Order Cycle

Customer arrival
Customer order entry
Customer order fulfillment
Customer order receiving

2.

Replenishment Cycle
Retail order trigger
Retail order entry
Retail order fulfillment
Retail order receiving

3.

Manufacturing Cycle
Order arrival
Production scheduling
Manufacturing and Shipping
Receiving

4.

Procurement Cycle
Supplier / Manufacturer interface

Sources

Converter
s
Product and Service Flow

Retailers

Information Flow
Funds Flow
Suppliers

Distributors

Consumers

20

21

Push-Pull view of Supply Chain

Execution is initiated in response to a customer order
(increased responsiveness)

Pull Process:
Push Process:

Execution is initiated in anticipation to a customer

order (increased efficiency)

Push-Pull Boundary:

Which processes are of each type

Push Systems

MRP supported

Pull Systems

Require fast information transmission and sharing

Cycles
Customer
Order

Pull

Customer arrival
Customer order entry
Customer order fulfillment
Customer order receiving

Replenishmen
t

Manufacturi
ng

Retail order trigger

Retail order entry
Retail order fulfillment
Retail order receiving
Order arrival from distributors
Production scheduling
Manufacturing and Shipping
Receiving (distributors, retailers,
customers

Push

Procurement

22

Supply Chain Flows

Information
Product
Funds
The industry is in the midst of a revolution, and Web technology is the firebrand stirring
up the masses. We can now order anything from home - from computers and flowers to
vacations on faraway tropical islands. The Internet is a merger of content and commerce.
We can shop, compare competitive offerings, review data sheets, get pricing, and even
order all in one session. The Internet takes inefficient channels and makes them efficient,
thus reducing the trivial activities we take for granted. So what does it all have to do with
logistics?
The efficiencies the Internet offers consumers are not going unnoticed by corporations
constantly looking to grow market share and reduce cost. Somewhere in your company,
people are gathered right now to design an e-business strategy. The strategy may be
driven by a senior manager at the request of a forward-thinking CEO seeking to replicate
performance gains he has seen in other companies. Perhaps it's a tiger team assembled to
respond to a competitive threat.
Either way, customer service will define it. Your company must be able to commit
product availability, price, and delivery date at time of order entry to the customer. If the
product is not immediately available to ship, your company must know when it will be
available and allocate it to the customer through a Capable-to-Promise (CTP) transaction.
Performance has to be close to flawless, because supplier-switching costs for your
customer on the Internet are next to zero.
It doesn't matter if you have a vertically integrated company, owning everything from raw
materials to finished goods, or a company depending on service providers and contract
manufacturers for execution. Nor does it matter whether the product is built to order or
built to inventory. Distribution channels will change. You will have to ship directly to
customers rather than send bulk orders to distributors. You may even find it more
efficient to ship directly from a supplier's dock to the end-customer. The e-business
23

model requires that all members of the supply chain act as a part of one seamless
fulfillment process. So now we have our marching orders: Increase logistics productivity
while radically transforming the supply chain. Impossible tasks? You don't really have a
choice, since your competitor will be doing the same. Besides, the two goals are
compatible. As in e-commerce, the trivial is eliminated and channels are made more
efficient, adding up to less cost and better customer service.
Defining Web-based systems is controversial and there is no one right answer.
However, one point is clear: Systems built using Web technologies offer significant
advantages over the green-screened UNIX systems common with SCE vendors today.
Navigation is vastly improved, application integration is simplified, and with component
architectures, benefit realization should be much quicker with less complex system
installs. Reductions in the cost of ownership should come, as functionality is more
centralized on servers. Web-based technologies are generally regarded as superior. The
real question becomes, "What is my migration path and what vendors should I be looking
at?"
Stage One: Internet Presence Is Established
Four levels of system evolution exist for the Web-based supply chain. The vast majority
of today's users are in the first stage - Internet Presence Established - while a growing
percentage are moving to the second - Commerce Is Initiated. As trading partner
integration grows toward collaborative execution, performance is greatly enhanced. The
third stage - Demand-Centered E-Business - represents a very real target for the near
term. The fourth - Demand Web Fulfillment - is a conceptualised view of how Web-based
systems will work together across companies and enterprises, given current technology
direction.
Most companies start on the Internet at this stage. Establishing an Internet presence is a
one-way flow of information, generally providing product and service information to
customer inquiries; its value comes from informing the customer. Users can access order,
inventory, or transportation status. Third Party Logistics (3PL) has made it a common
service offering. Companies afraid of channel cannibalization caused by selling directly
on the Internet are often frozen here. SCE vendors extended their applications out to the
Web to satisfy the demand for the capability.
24

Stage Two: Commerce Is Initiated

Buying and selling on the Web begins at the second stage. Customers can place orders
directly on the merchant's commerce server, configure them, authorize payment, and be
notified of expected delivery dates. SCE systems figure prominently, providing inventory
information, transportation routing and scheduling, and order management to the
customer-facing applications. The fulfillment process is from the Industrial Age, and
service failures are frequent. Systems are not integrated inside a company, duplicate data
entry is common, and no collaborative execution processes exist between partners.
Stage Three: Demand-Centered E-Business
Customers buy from your company for one of three reasons: convenience, price, or
scarcity. Combine two or more reasons and you provide even greater value to the
customer and profits for yourself. How well you deliver to customer expectations dictates
how successful you will be. Execution becomes critical, and collaborative execution
between supply chain partners is essential. Acting as the demand center, your company
coordinates and makes sure the entire supply chain is focused on serving the customer.
An information backbone connects the community. You have full visibility to supply
chain inventories, purchase order status, transportation status, and alert and workflow
processes. Information is also pushed to the customer as opposed to the pull-only model
in the first two stages.
Stage Four: Demand Web Fulfillment
Supply Chain Management (SCM) moves from art to science. The fourth stage is a
conceptualised vision, but at least we can discuss a totally integrated supply chain,
confident that technology will be able to support the scalability, breadth of functions, and
communications required for such an aggressive undertaking. Completely event-driven,
information and data flow both ways throughout the entire trading community. Systems
automatically optimize for disruptions in supply and demand, with rules built to manage
fulfillment and automation of business decisions between systems and enterprises.

25

Decision Phases in a Supply Chain

SCM is an approach to manage the entire flow of information, materials and services
from raw material suppliers through factories and warehouses to the end customer. SCM
is a very complex problem in itself. It involves complex decision-making at various
nodes and can be of different level.
Supply Chain Decisions can be classified in three categories:
Strategic Decisions: as the term implies, strategic decisions are made typically over a
longer time horizon. These are closely linked to the corporate strategy (they sometimes
are the corporate strategy), and guide Supply Chain policies from a design perspective.
These are long-term decisions of a Supply Chain and are based on planning. These are
typical reviewed in several years. The strategic level defines the supply chain network,
i.e., selection of suppliers, transportation routes, manufacturing facilities, production
levels, warehouses, etc.
Tactical Decisions: These are decisions based on strategic decisions; these decisions are
made typically taken to implement them. These are typical reviewed in several months.
The tactical level plans and schedules the supply chain to meet actual demand.
Operational decisions: These are short-term decisions and focuses on activities of dayto-day basis. The efforts in these types of decisions are to effectively manage the product
flow and thus are taken based on circumstances and condition prevails. The operational
level executes plans.
Apart from this decisions are also classified based on functionality like location,
production, inventory and logistics decisions. In each of these areas there can be strategic,
tactical and operational decisions involved.

26

Supply Chain Decision-Making Framework

Supply chain strategy or design

The real-world experience provides the capability to devise solutions that are practical, as
well as aggressive and future-oriented. The flexibility to work on any aspect of Supply
Chain decision and operation, in addition to the vision and integration of an end-to-end
design includes suppliers and customers.
An effective Supply Chain development lies in: recognizing that any company should be
operating a number of Supply Chains, for different linkages of distinct sources, customer,
products, channels; leveraging the capabilities of all participants in the chain, upstream
and downstream, internal and third party; creating a demanding vision for the future, and
sequencing a series of interim, attainable, steps to reach it; knowing the baseline starting
point of Supply Chain performance, and measuring the current state constantly.
Understanding the human dimension of the significant process, behavioral, and belief
changes that are required for breakthrough in Supply Chain performance; making
operational improvements early and often, while developing the Information Systems
foundation for better transaction processing, communications and decision support; and
27

keeping the long-term vision, the end-state objective, in view at all times. The scope of
collective experiences a real advantage in planning and executing a Supply Chain
implementation, for sourcing and procurement, through manufacturing integration, into
Transportation and Network Design, and Warehousing and Distribution operations.

Supply Chain planning

From acquiring raw materials to delivering finished products to end users, logistics
operation include all activities along the supply chain process, or as commonly referred to
in logistics circles, from "the suppliers' supplier to the customer's customer." this is the
supply chain. In well-functioning supply chain, at every link, each unit should treat the
next units a customer, always focusing on service to the ultimate customer, the end user
or client.

Customers focus
A well-functioning supply chain staff consciously strives to anticipate and satisfy
customers' need. Supply chain managers, in addition to their primary customers, also
have important intermediate customers, each with special needs and expectations.
Service providers are the final link in the long supply chain that stretches from
manufacturers to customers. Because they directly link logistics operations to the ultimate
customer, service are the most important "intermediate customer." service providers must
be given the products they need. Their fundamental concern is quality of care, and they
understand the supply chain system's contribution to their ability to provide quality care.
Service providers need the logistics system to deliver a dependable supply of quality
products and other supplies for their client, which means they need convenient and
regular re-supply with minimal additional work.
Warehouses and stores in the distribution chain are also intermediate customers that
demand logistics systems resources (staff, storage space, and transport); regular and
predicable re-supply of all products from the next higher level, and technical support and
problem-solving assistance, when needed.

28

Policymakers and senior program managers, as representatives of the program, also need
to be treated as customers by the next highest level in the system: donors, lenders, or
other suppliers of products. They want the same thing as every other customer along the
supply chain: reliable availability of the right products at the right time. They also need
the supply chain system to provide accurate data on stocks levels and strict accountability
for materials, and to provide cost effective logistics operations. Policymakers are
particularly important internal customers, because they control the allocation of funds and
other resources for the supply chain. International donors are the customers of their own
suppliers. But, they also have expectations from the in-country logistics system: they
want the system to ensure accountability for donated products; and accurate and timely
data on products consumed, quantities needed. Above all, donors want the logistics
system to ensure the availability of products to all current and potential customers.
When developing a customer culture within a supply chain, it is essential to identify all
the system's customers and their respective needs and expectations. The primary
customer, however, is always the client. While a supply chain may be required to satisfy a
variety of internal or intermediate customers, the most successful supply chain
unswervingly focus on satisfying end users.

29

Supply Chain Obstacles/Challenges

Increasing
variety of
products
Difficulty in

Decreasing

Executing New

Product Life-

Strategies

cycles

Supply
Chain
Obstacles/
Challenges
Fragmentation

Increasingly

of Supply Chain

demanding

Ownership

customers

Globalization

30

Supply Chain Drivers

Inventory
This refers to means by which inventories are managed. Inventories exist at every stage
of the Supply Chain as, raw materials, semi-finished goods or finished goods. They can
also be in process between locations. Their primary purpose to buffer against any
uncertainty that might exist in the Supply Chain. Since, holding of inventories can cost
anywhere between 20 to 40 per cent of their value, their efficient management is critical
in Supply Chain operations. It is strategic in the sense that top management sets goals.
However, most researchers have approached the management of inventory form an
operational perspective. These include deployment strategies (pull verses push), control
policies the determination of the optimal levels of order quantities and reorder points,
and setting safety stock levels, at each stocking location. These levels are critical, since
they are primary determinants of customer service levels.
The keys to effective Inventory Management lie in shortening the lead-time throughout
your Supply Chain:

Understanding how your order frequencies and quantities drive inventory and
its consequent effect on warehouse sizing and slotting,

Analyzing the trade-off of centralized vs. distributed inventory, in terms of

inventory investment, transportation costs, and customers service capabilities,

Integrating and coordinating the silos in your organization, for optimum inventory
strategies across the entire Supply Chain,

Being bold, and confident, enough to make inventory decisions for operational
improvements in the face of negative accounting issues; and building a Supply
Chain and inventory strategy to evaluate your customers expectations and
anticipate their genuine needs.

31

Includes:

1.

Raw Materials

2.

Component parts

3.

Work in process (WIP)

4.

Finished goods

Transportation
The mode choice aspects of these decisions are the more strategic ones. These are
closely linked to the inventory decisions, since the best choice is often found by
trading off the costs of using the particular mode with the indirect cost of inventory
associated with that mode. While air shipments may be fast, reliable, and want
lesser safety stock, but they are expensive. Meanwhile shipping by sea or rail may
be much cheaper, but they necessitate holding relatively large volumes of
inventories to buffer against the inherent uncertainty associated with them.
Therefore, customer service levels, and geographic location play vital roles in such
decision. Since, transportation is more than 30% of the Logistics costs, operating
efficiency makes good economic sense. Shipment sizes (consolidated bulk shipment
versus lot-for-lot), routing and scheduling of equipment are key in effective
management of firms transport strategy.
The estimated Rs 65,000crore Indian trucking industry has been in existence before
SCM as a concept came into vogue. Trucking plays a vital role in SCM in the flow
of material. The success of the entire exercise of planning and investing in ERP and
Supply Chain software depends on whether goods reach on time. Timely
movement of goods is primary concern of any Supply Chain, says Vishal Gupta,
director Total Logistics. The traditional transport companies are now transforming
into a fleet manager offering value-added services like track and trace, specialized
trucks for certain goods, warehousing and other facilities, and serving user specific
industries.
The need to provide value-added services has also resulted in strategic tie-ups by
truckers, say with specialized operators to serve specific industries. For e.g. TCI
32

has tied-up with Mitsui to form trans-system that offers logistics services to the
auto industry.
Transportation includes the following:
i.

Moving inventory from point-to-point

ii.

Impact on
(1) Responsiveness
(2) Efficiency

The future of the Indian trucking industry depends on various factors like economic
growth and investments in infrastructure. At present a number of organised
transport operations are leveraging on their strength in trucking by combining
allied services like clearing and freight forwarding, warehousing and customer
relationship Management to become complete Logistics players. This is taking the
form of tie-ups, acquisition. The future will see similar consolidation happening in
this arena, especially in the organised segment that makes about 15% of the market.

Commercial Vehicles and Logistics: The Movement Zones

Type of Movement
Raw material to factory
Primary

Finished goods to
warehouses

Secondary

Key Feature
Long distance, bulk
movement
Mechanical handling
Operational economy
Convenient batches

Warehouse to

Safe transportation

wholesaler/retailer

Timely distribution
Optimum turnaround
Door delivery

Tertiary

Wholesaler / retailer to
consumer

Timely delivery
City Operations
Frequent start-stops
High manoeuvrability

33

The potential issues and opportunities in most transportation situations are:

Is the internal fleet cost-and-service effective?
Are you getting the most of your money from common carriers?
When 3PL solution is the right way to go?
Are you paying what you have agreed to?
Is the mix of modes and services you are using right for your changing
business?
How much should I be charging my customers for delivery?
Why cant my fleet make money?
How can transportation enable an integrated Supply Chain, instead of
getting in the way?

Facilities
a) Warehousing/Storage
Warehouse is the quiet key to effective service. Review whether the warehouses are
in the right locations to effectively serves the customers. With the speed that is
required to manage orders and inventory, companies must have timely, accurate
information of inventory on-hand. Warehouses must be located in the proper areas
to effectively meet customers delivery requirements.
i.

Where inventory
(1) Stored
(2) Assembled
(3) Fabricated

ii.

Types
(1) Storage
(2) Production
(3) Marketing

34

b) Material Handling
It is concerned with movement of product at the stocking point and it involves decisions
such as:

Smoothening of raw material

Selection of material handling equipment

Maintenance of material handling equipment.

"The Mission of Materials Management Services
is the acquisition
of the RIGHT goods and services,
in the RIGHT quantity,
at the RIGHT time,
of the RIGHT quality,
at the RIGHT place,
from the RIGHT supplier
and at the RIGHT cost,
at a minimum inventory and operating investment."

c) Packaging
It is concerned with design of packaging of product that ensures damage free movement
of the product and is conductive to efficient handling and storage.

35

Information
A must for successful implementation of Logistics functions. Developing proper
Data Base, IT system, such as ERP and DI methods.

Accurate forecasting

Good order Management

Just-in-time (JIT)

Contingency Replenishment (CR)

Quick Response (QR) to the customer

- are the bases for good information system to be developed.

Order Processing
The order processing system undergoes various checks to determine if:
(1) the desired product is available in inventory in the quantities ordered,
(2) the customers credit is satisfactory to accept the order, and if
(3) the product is scheduled for production if not currently in inventory.
Management can also use the information on daily sales as an input to its sales
forecasting package. Order processing next provides information to accounting for
invoicing, acknowledgement of the order to send to the customer, picking and packing
instructions to enable warehouse withdrawal of product, and shipping documentation.
The primary function of the order processing system is to provide a communication
network that links the customer and the manufacturer.

36

Cost Trade-Offs Required in Marketing and Logistics

M
A
R
K
E
TI
N
G

Product
Promotion

Price
Place/
Customer service
levels

Transportation
costs

Inventory
Carrying costs

Lot Quantity
costs

Warehousing
costs
Order processing
and information
costs

37

L
O
GI
ST
IC
S

Achieving strategic fit in Supply Chain Management

Achieving strategic fit: Matching S.C. to customer segment requirements
Understanding the

Quantity of product provided in each lot

customer:

Response time that customers are willing to

tolerate
Variety of products needed
Service level required
Price of the product
Desired rate of innovation
(Volumes, variety, response time, service level, price
innovation rates)

Understanding the
supply chain:

Responsiveness
Respond to wide range of quantities demanded
Meet short lead times
Handle a large variety of products
Build highly innovative products
Meet a very high service level
Efficiency
Economies of scale
Low capacity (excess costs)
Low cost transport

38

Achieving Strategic Fit

Finding the Zone of Strategic Fit
Responsive
Supply
Chain

Responsiveness
Zone of

Spectrum

Strategic Fit

Efficient
Supply Chain
Certain
Demand

Uncertain

Implied
Uncertainty
Spectrum

Demand

Fit Between Competitive and Functional Strategies

Competitive Strategy

Product
Development
Strategy

Supply Chain Strategy

Manufacturing
Inventory
Lead Time
Purchasing

Marketing and
Sales Strategy

Transportation
Information Technology Strategy
Finance Strategy
Customer Service
39

The Bull Whip Effect

What happens when a Supply Chain is plagued with a bullwhip effect that distorts its
demand information as it is transmitted up the chain? In the past, without being able to
see the sales of it products in the distribution channel stage. HP had so rely on sales
orders from the resellers to make product forecast, plan capacity, control inventory, and
schedule production. Big variations in demand were a major problem for HPs
Management. The common symptoms of such variations could be excessive inventory,
poor product forecasts, insufficient or
excessive capacities, poor customer
service due to unavailable products or
long backlogs, uncertain production
planning (i.e., excessive revisions), and
high costs of corrections, such as for
expedited shipments and overtime.
HPs product division was a victim of
order swings that were exaggerated by
the resellers relative to their sales; it, in turn, created additional exaggerations of orders
swings to suppliers.
In the past few years, the Efficient Consumer Response (ECR) initiative has tried to
redefine how the grocery Supply Chain should work. One motivation for the initiative
was the excessive amount of inventory in the Supply Chain, from when products leave
the manufacturers production lines to when they arrive on the retailers selves, has more
than 100 days of inventory supply. Distorted information has led entity in the Supply
Chain the plant warehouse, a manufacturers shuttle warehouse, a manufacturers
market warehouse, a distributors central warehouse, a distributors regional warehouse,
and the retail stores storage space to stockpile because of the high degree of demand
uncertainties and variabilities. Its no wonder that the ECR report estimated a potential of
$30 billion from streamlining the efficiencies of the grocery Supply Chain.
Others industries are in a similar position. Computer factory and manufacturers
distribution centers, the distributors warehouses along the distribution channel have
inventory stockpiles. And in the pharmaceutical industry, there are duplicate inventories
40

in a Supply Chain of manufacturers such as Eli Lilly or Bristol-Myers Squibb,

distributors such as McKesson. Again information distortion can cause the total inventory
in this Supply Chain to exceed 100 days of supply. With inventories of raw materials,
such as integrated circuits ad printed circuits broads in the computer industry and
antibodies, the total chain may contain more than one years supply.
In a Supply Chain for typical consumer
product, even when consumer sales do not
seem to vary much, there is pronounced
variability in the retailers orders to the
wholesalers. Orders to the manufacturers
and to the manufacturers supplier spike
even more. To resolve the problem of
distorted information companies need to
first understand what creates the bullwhip
effect so they can counteract it. Innovative companies in different industries have found
that they can control the bullwhip effect and improve their Supply Chain performance be
coordinating information and planning along the Supply Chain.

Causes of the Bullwhip Effect

The following four have been identified as the major causes of Bullwhip Effect:
1. Demand forecast updating.
2. Order batching.
3. Price fluctuation.
4. Rationing and shortage gaming.
Each of the four forces in concert with the chains infrastructure and the order managers
rationalize decision-making create the bullwhip effect. Understanding the causes helps
managers design and develops strategies to counter it.

41

Demand Forecast Updating

Every company in a Supply Chain usually forecasts its production scheduling, capacity
planning, inventory control, and material requirements planning. Forecasting is often
based on the history from the companys immediate customers. When a downstream
operation places an order, the upstream managers processes that the piece of information
as a signal about future product demand. Based on the signal, the upstream manager
readjusts his or her demand forecasts and, in turn, the orders placed with the suppliers of
upstream operation. We contend that demand signal processing is a major contributor to
the bullwhip effect.
For example if you are a manager who has to determine how much to order from a
supplier, you use a simple method to do demand forecasting, such as the new daily
demand data become available. The order you send to the supplier reflects the amount
you need to replenish the stocks to meet the requirements of future demands as well as
the necessary safety stocks. The future demands and the associated safety stocks are
updating using the smoothing technique. With long lead times, it is not uncommon to
have weeks of safety stocks. The result is that the fluctuations in the order quantities over
time can be much greater than those in the demand data.
Order Batching
In a Supply Chain, each company places orders with an upstream organization using
some inventory monitoring or control. Demands come in; depleting inventory but the
company may not immediately place an order with its supplier. It often batches or
accumulates demands before issuing an order. There are two forms of order batching:
periodic ordering and push ordering. Instead of ordering frequently, companies may order
weekly, biweekly, or even monthly. There are many common reasons for an inventory
system based on order cycles. Often the supplier cannot handle frequent order processing
because the time and cost of processing an order can be substantial. Many manufacturers
place purchase orders with suppliers when they run their material requirements planning
(MRP) systems. One common obstacle for a company that wants to order frequently is
the economies of transportation. There are substantial differences between full truck-load
(FTL) and less-than-truckload rates so companies have a strong incentive to fill a truckload when they order materials from a supplier.
42

In push ordering, a company experiences regular surges in demand. The company

has orders pushed in it from customers periodically because salespeople are
regularly measured, sometimes quarterly or annually, which causes end-of-quarter
or end-of-year order surges. Salespersons who need to fill sales quota may borrow
ahead and sign orders prematurely. When a company faces such periodic ordering
by its customers, the bullwhip effect results. If all customers order cycles were
spread out evenly throughout the week the bullwhip effect would be minimal. The
periodic surges in demand by some customers would be insignificant because not
all would be ordering at the same time. Unfortunately, such an ideal situation rarely
exists. Orders are more likely to be randomly spread out or, worse, to overlap.
When order cycles overlap, more customers that order periodically do so at the
same time. As a result, the surge in demand is even more pronounced, and the
variability from the bullwhip effect is at its highest.
If majority of companies that do MRP or Distribution Requirement Planning (DRP)
to generate purchase orders do so at the beginning of the month (or end if the
month), order cycles overlap. Periodic execution of MRPs contributes to the
Bullwhip Effect, or MRP jitters or DRP jitters.
Price Fluctuation
Estimate indicate that 80 percent of transactions between manufacturers and
distributors in the grocery industry made in a forward buy arrangement in which
items were bought in advance of requirements, usually because of a manufacturers
attractive price offer. Forward buying results from price fluctuations in the market
place. Manufacturers and distributors periodically have special promotions like
price discounts, coupons, rebates, and so on. All these promotions result in price
fluctuations. When high-low price occurs, forward buying may well be a rational
decision. If the cost of holding inventory is less than the price differential, buying
in advance makes sense. In fact, the high-low pricing phenomenon has induced a
stream of research on how companies should order optimally to take advantage of
low price opportunities.

43

Rationing and Shortage Gaming

When product demand exceeds supply, a manufacturer often rations its product to
customers. In one scheme the manufacturer allocates the amount in proportion to
the amount ordered. For example, if the total supply is only 50 percent of the total
demand, all customers receive 50 percent of what they order. Knowing the
manufacturer will ration when the product is in short supply, customer exaggerate
their real needs when they order. Later, when demand cools, orders will suddenly
disappear and cancellations pour in. this seeming overreaction by customer
anticipating shortages results when organizations and individual makes sound,
rational economic decisions and game the potential rationing. This effect of
gaming is that customers orders give the supplier little information on products
real demand, a particularly vexing problem for manufacturers in a products early
stages.

How to Counteract the Bullwhip Effect

Understanding the causes of bullwhip effect can help managers find to migrate it.
Indeed, many companies have begun to implement innovative programs that
partially address the effect. Next, examine how companies tackle each of the four
causes. Categorize the various initiatives coordination mechanism, namely
information sharing, demand information at a downstream site is transmitted
upstream in a timely fashion. Channel alignment is the coordination of pricing,
transportation, inventory planning, and ownership between the upstream and
downstream sites in a Supply Chain. Operational efficiency refers to activities that
improve performance, such as reduced costs and lead-time. We use this topology to
discuss ways to control the bullwhip effect. (See table 1).
Avoid Multiple Demand Forecast Updates
Break Order Batches
Stabilize Prices
Eliminate Gaming in Shortage Situations

44

Table 1:

A Framework for Supply Chain Coordination Initiatives

Causes of

Channel

Operational

Alignment

Efficiency

Information Sharing
Bullwhip

Demand
Forecast
Update

Order

Understanding
system dynamics
Use point-ofscale (POSI data)
Electronic data
Interchange
(EDI)
Internet
Computerassisted ordering
(CAO)

EDI
Internet
ordering

Batching

fluctuation

Sharing sales,

Lead-time
reduction

Echelon-based
inventory control

Discount for
truck-load
assortment

Delivery
appointments.

Consolidati
on

Logistics
outsourcing.

Continuous
replenishment
program (CRP)

Everyday
low cost (EDLC)

Price

Shortage

Vendor
managed
inventory

Discount for
information
sharing

Customer
direct

Reduction in
fixed costs of
ordering by EDI or
E-commerce.

CAO

Everyday low
price (EDLP)

Activity-based
costing (ABC)

Allocation

We contend that the bullwhip effect results from rational decision making in the
Supply Chain. Companies can effectively counteract the effect by thoroughly
understanding its underlying causes. Industry leaders like Proctor & Gamble are
implementing innovative strategies that pose new challenges organizational
relationships, and implementing new incentive and measurement systems. The

45

choice of companies is clear: either let the bullwhip effect paralyse you or find a
way to conquer it.

How to Reduce the Bullwhip Effect

One way to reduce the bullwhip effect is through better information, either in the form of
improved communication along the supply chain or (presumably) better forecasts.
Because managers realize that end-user demand is more predictable than the demand
experienced by factories, they attempt to ignore signals being sent through the supply
chain and instead focus on the end-user demand. This approach ignores day-to-day
fluctuations in favour of running level.
Another solution is to reduce or eliminate the delays along the supply chain. In both real
supply chains and simulations of supply chains, cutting order-to-delivery time by half can
cut supply chain fluctuations by 80%. In addition to savings from reduced inventory carry
costs, operating costs also decline because less capacity is needed to handle extreme
demand fluctuations.
The simplest way to control the bullwhip effect caused by forward buying and
diversions is to reduce both the frequency and the level of wholesale price
discounting.
In addition to cycle time reductions throughout the supply chain, Haul Lee, V.
Padmanabhan, and Seungjin Whang recommend the following actions to reduce the
supply chain management bullwhip effect:

1. Focus on end-user demand through point-of-sale (POS) data collection, electronic

data interchange (EDI), and vendor-managed inventories (VMI) to reduce
distortions in downstream communication.

2. Work with vendors to create smaller order increments and reduce order batching.
Order batching exacerbates demand fluctuations.

46

3. Maintain stable prices for products. Price fluctuations encourage customers to

over-purchase when prices are low and cut back on orders when prices are high,
leading to large demand fluctuations.

4. Allocate demand among customers based on past orders, not present orders to
reduce hoarding behaviour when shortages occur.

47

Supply Chain and IT

Information Technology is a prerequisite for successful Supply Chain Management
(SCM) today and will become even more so in the near future. The e-Logistics field
is developing very dynamically. Business-to business transactions are made via the
Internet and ERP systems manage the transactional information within the
enterprise. While IT systems are vital components in supply chains, their successful
management relies on intelligent and coordinated decision making throughout the
logistics

network.

Intelligent

Decision

Support

using

advanced

decision

technologies is becoming increasingly important in e-Logistics and SCM as well.

Data Warehouses and Data Mining can be used to store and analyze product,
inventory, and sales information. Simulation and optimization, which can be found
in advanced planning and scheduling systems, can be employed for, e.g., inventory,
production, procurement and distribution planning. Intelligent agents can, e.g.,
communicate with different partners in a supply chain, assist in collecting
information, share product information, negotiate prices, and distribute alerts
throughout the logistics networks and SCM as well is a very active field in
research, consulting, and software development. Many such technologies or
systems have been implemented recently or are currently in the stage of
implementation.
IT is an inseparable part of SCM.
Information technology (IT) is an essential element of the Supply Chain strategy of
an organization. SCM is, to a large extent, about managing information flows.
Unfortunately, lack of sophistication in the information system is still one of the
biggest roadblocks to Supply Chain integration today. IT investments are still
guided by technology, functional and internal considerations and not by business
strategy and needs. There is a lack of extended enterprise functionality, lack of
flexibility, lack of more advance functionality beyond transaction management, and
lack of open, modular, internet-like system architectures. The human error element
too is painful.

48

In the absence of trust and partnership, organizations are not able to share
information. It sometimes doesnt happen even within Supply Chain activities. This
leads to amplification of demand of the Supply Chain, leading to the bullwhip
effect. Firms are caught in a tricky situation: even when the total demand
variability is low, the variability in orders is very high. This increases the Supply
Chain cost, rendering these firms uncompetitive. The solution of this problem is a
centralised information system. A few organisations have taken the initiative to
integrate their distribution network by implementing enterprise resource planning
and electronic data interchange across branches networks.
However, their work is incomplete without their suppliers and channel partners.
These organisations do not have centralised information, which could lead to large
variability in orders due to smoothening at various levels of the Supply Chain.

Enterprise Resource Planning (ERP)

Enterprise Resource Planning is a term coined in the early 1990s. It began as a group of
applications or software focused on combining multiple systems into one integrated
system where data could be shared across the enterprise, presumably reducing redundant
data entry and processes. It was originally proposed for manufacturing and production
planning.
In the mid 1990s, ERP solutions expanded to include ordering systems, financial and
accounting systems, asset management and human resource management systems.
Finally, in the late 1990s, the solutions were again broadened to include systems that
made it possible for entrepreneurs and governmental entities to consider these solutions
for their business processes.
The need to undergo an Enterprise Resource Planning project is seen as an opportunity to
not only integrate data systems, but to also redefine processes in the interest of gaining
efficiencies, as well as promote professional growth for employees by introducing new
skills and knowledge in the areas of data management and procedures.

49

ERP systems have been widely spread. ERP is followed by Wear-House

Management

systems,

Customer

Relationship

Management

(CRM)

and

Transportation Management
ERP systems integrate the key execution functions across the business

EDI (ELECTRONIC DATA INTERCHANGE)

EDI allows the electronic transmission of orders, invoice and remittance
information between businesses. EDI has around since the late seventies and it is
used as a replacement for paper-based system has increased dramatically. The
concept involves defining a standard format for transmission of data between two
businesses, which allows the whole transaction process to be automated. Thus, the
actual applications at each end neednt be identical.
Why EDI?
Simple. EDI saves money. It accomplishes this by making more efficient use of
valuable personnel who are released from time-consuming paper work. It also
moves business efficiency by increasing throughput and reducing the scope for
errors, and allows more sophisticated automated business processes to be
introduced.
How does EDI work?
EDI take information from a business process and delivers it to a trading partner
- a business that has agreed to participate in the electronic exchange of data. The
data is usually transmitted over a Value Added Network (VAN). The VAN is
essentially a giant virtual switchboard where data is shunted from one participating
company to another.
Alternative data can be transferred directly. Direct transmission occurs when a
company connects directly to the computer of its trading partner using a dial-up
connection or dedicated line. Once the trading partner receives the information, the
EDI system will translate the standardised EDI data into the local format for use in
the local IT systems.

50

Advantages
EDI is an automated method for exchanging data and therefore it eliminates most of
the errors and time delays associated when people are involved.
Disadvantages
The disadvantage of this is that it requires two companies to use compatible
hardware and communications software.

The Postponement Strategy

THE CONCEPT OF POSTPONEMENT
The concept of postponement has a long history of practical applications, as well as
academic literature. Practical application of the concept can be traced back to the 1920's.
The first detailed empirical descriptions appeared in the 1960's. In the literature, the
concept was originally proposed by Alderson and later expanded by Bucklin. The logic
behind postponement is that risk and uncertainty costs are tied to the differentiation
(form, place and time) of goods that occurs during manufacturing and logistics
operations. To the extent that parts of the manufacturing and logistics operations can be
postponed until final customer commitments have been obtained, the risk and uncertainty
of those operations can be reduced or fully eliminated.
The concept of postponement lies in organizing the production and distribution of
products in such a way that the customization of these products is made as close to the
point when the demand is known as possible. Postponement belongs to a set of levers
used in inventory management to attack the variability of demand and supply. This set of
levers can be divided into proactive and reactive. Proactive levers directly attack the
causes of variability; reactive levers help to cope with its consequences. Together with
substitution, specialization, and centralization, postponement is a reactive lever.
The converse concept of postponement is speculation, which holds that changes in form,
and the movement of goods to forward inventories, should be made at the earliest
possible time to reduce the costs of the supply chain. Speculation makes it possible to

51

gain economies of scale in manufacturing and logistics operations, and limit the number
of stock outs.

Optimal Postponement Preconditions

Implementation of postponement works best under certain demand, product and
production preconditions.

Demand Preconditions:

Fluctuation (e.g. seasonal hikes in demand for ski equipment)

Unpredictability (e.g. demand for high tech products with a short product life)

Urgency - operating on short required order lead times relative to the

production cycle (e.g. Benetton would not be able to run its full regular
production cycle after finding out which sweater colours sell best in the
season)

Differentiation - associated with distinct customer segments that require the

company to provide a product line in which the products have different
performance characteristics (e.g. different performance, technological or legal
requirements on the same product in different countries)

Negative correlation for the products in the product line (e.g. success of one
line of printers can have an adverse impact on the demand for the remaining
lines of printers)

Product/product line preconditions:

High product value - products with high unit value have high inventory
holding cost and high cost of oversupply. The postponement concept is best
applied if there is one particular component (or step in operations) that has a
significantly high value added. It makes intuitive sense to delay it. (for
example, in assembling a notebook computer, it would make sense to delay
the installment and production of different LCD displays until the last minute
rather than the casing of the keyboard since an LCD display is much more
expensive than a keyboard casing).
52

High customization - product lines with highly customized end products

usually find it difficult to forecast demand on a product basis. Additionally, it
is usually difficult to find alternative uses for them and therefore their cost of
oversupply is high. Because of this, it is important to realize which
production step has the most significant impact on customization of the
product (point of product differentiation). It makes sense to defer these
operations for the products in the product line (for example, in Benettons
case, it was difficult to forecast demand for each sweater colour; once the
sweater has been dyed in a certain colour, it is virtually impossible to change
it; if the colour did not sell well, the sweater could not be re-coloured).

High component commonality / modularity - component commonality refers

to a high degree of shared components across the product line. Shared
components result in inventory pooling effects and also shared production
process steps. The component commonality can be taken one step further in
the modularity concept, which uses sharing of bundles of the components
instead of single components.

Production preconditions:

Balanced process capabilities - capabilities, such as cost, time, quality and

flexibility need to be kept in balance. Delaying the component production
until shortly before the demand is known may imply producing in small
batches. However, if the set up and changeover cost of the production
equipment is high, there is a high level of scale economies in running

large batches that would be lost.

Availability and quality of the outside suppliers - in order to serve more
flexible production needs, the outside suppliers need to possess similar
capabilities in terms of flexibility of deliveries, speed of order fulfillment

and quality of service.

Availability of information and IT systems in place - a steady flow of
information is needed so that the company can effectively manage the
balance between the supply and the demand.
53

Postponement benefits:
Increased sales by being able to postpone the production to the point when the
demand is better known, the company can greatly improve its forecasting abilities
and will run a lower risk of losing sales, because the product is not available. Not
only can the company improve its performance in its existing business; the newly
gained flexibility capabilities can translate into dramatic improvements in meeting
the customer requirements, which can attract business that was previously not
attainable.
Lower inventory holding cost
Lower cost of obsolescence
Lower scrap cost
There are two sources of these benefits:
Improved forecasting
Delaying expensive operations and point of product differentiation this enables
the company to maintain the bulk of its inventories in the cheaper and/or precustomized form. As a result, company will achieve the benefits of a larger
inventory buffer (pooling effect) without having to carry the full cost of it.

The Postponement Strategy Examples

Paints Insta Color
Emulsion Paints Asian Paints
One of the first, and now classic, examples of this strategy was to postpone the colour of
paint to the retailer/customer level. Rather than holding a wide variety of premixed
colours, retailers began to stock paint in a neutral colour, and customize the final colour
upon specific customer orders. This of course, dramatically reduced the retailers' number
of necessary stock keeping units (SKU's).
Paints The Effect
54

 Reduce Inventory Levels

Very High Customer Service
Reduction in Forecasting Errors
Product quality undiluted
No loss of scale economics

Hewlett Packard
Overview: Hewlett Packard is known as a leader in the application of postponement
techniques. One of the areas where they have done this most effectively is in customizing
their printers close to the local markets where they are actually being sold. The idea they
use is to postpone commitment of a printer to a certain geographic market by producing
universal printers and then applying power supplies and labels (the parts that differentiate
printers for local markets) at the last stage once demand is more certain. This allows
them to gain pooling effects and therefore, to better match supply and demand.
Traditionally, most computer peripheral manufacturers have built one plant for a major
market, such as the Americas, Asia, or Europe and then shipped product from this plant to
regional Distribution Centers (DCs) around that market. In many instances, only one
worldwide plant existed with shipments made from this plant to Distribution Centers
around the world. These Distribution Centers provided quick response to customer orders
for products and were needed in a major market to reach customers within a certain time
window. This supply chain seemed to make sense since there were some economies of
scale to having a centralized plant supplying an entire major market.
Problem: However, there are certain problems with the traditional system that
necessitated looking at the policy again. The first problem is the amount of finished
goods inventory that must be carried in the local Distribution Centers. Since shipments
come from a distant plant, not only did these Distribution Centers need to stock a large
amount of inventory to compensate for the lead-time, they also had to stock additional
inventory to handle all of the product proliferation that took place. For example, in
Europe, many different versions of a single printer model must be made due to the
different power sources and sets of languages. Compounding this problem is the
increasing emphasizes placed on speed. The lead time from when a customer orders a
product to when they received it is being squeezed and HP had to find ways to reduce
55

cycle time while trying to keep inventory costs low. This squeeze on lead times means
that postponing back at the plant level is not an option. Local Distribution Centers are
needed to meet this short lead-time demand. So how can the apparently contradictory
goals of increasing service and reducing inventory be met?
Management Decision and Outcome: The solution, following the postponement
philosophy, was to actually build some assembly functions into their Distribution
Centers. This way, the plant could send generic printers to the Distribution Centers and
they could be customized there for the local markets. This allowed HP to take advantage
of inventory pooling at the DC level which dramatically cut inventory. Certainly, it
seemed that this would increase costs since there are economies of scale to these
manufacturing processes. However, the decrease in inventory more than made up for the
increased cost in creating some assembly functions at the DC level. Essentially, what HP
did was postpone the customization of the printer until the printer was actually in the
geographic area where the demand was coming from and until orders were more certain.
Implementing this type of supply chain is not easy because it takes coordination and
investment, but the payoffs can be quite large.

Motorola
Overview: Motorolas Land Mobile Products Sector/Radio Products Americas Group
(RPAG) has recently adopted a postponement manufacturing and distribution strategy for
its two-way radio (pager) business. The shift towards postponement allows RPAG to
carry more variety without increasing inventory. But on the other hand, the shift in
strategy also requires additional investment in its warehouse system.
Problem: RPAG builds radios for many national, regional, and local retailers. These
retailers often demand many different varieties in packaging, housing, and frequency
because the ultimate end users demand variety. In the past, products would be
manufactured to stock from different plants and then sent to the Atlanta DC.
Management Decision and Outcome: The recent shift in strategy is making to order.
The most expensive part of the radio, the circuit board, is still manufactured at various
plants and sent to the Atlanta DC. At the DC level, pre-manufactured circuit boards are
now put in different housing, label, and packaging only after an order is received. With
56

the new strategy, the DC can carry more variations of finished good products without
tying up additional money in inventory. Furthermore, customer service also improves
because the DC no longer needs to rely on the factory to ship special ordered products.
The DC is able to customize packaging for short runs of special products.
However, the new strategy also requires the DC to take on additional responsibilities.
RPAG has evolved from a push to a pull operation. Consequently, the DC must now be
able to track and move inventory more efficiently to meet customer demands. Thus,
RPAG had to install a warehouse management system (WMS) to control the flow of
inventories. Furthermore, RPAG also adopted vendor-managed inventory (VMI) for
retail customers to better manage its inventory.

The Integrated Supply Chain Strategy

In order to optimize performance, supply chain functions must operate in an integrated
manner. But the dynamics of the enterprise and the market make this difficult; materials
do not arrive on time, production facilities fail, workers are ill, customers change or
cancel orders, etc. causing deviations from plan. The Integrated Supply Chain
Management (ISCM) addresses coordination problems at the tactical and operational
levels. It is composed of a set of cooperating, intelligent agents; each performing one or
more supply chain functions, and coordinating their decisions with other agents -this is
called a Logistical Execution System (LES). Our approach views problem-solving as a
constraint satisfaction/optimization process where agents influence each other's problem
solving behaviour through the communication of constraints. Coordination occurs when
agents develop plans that satisfy their own internal constraints but also the constraints of
other agents. Negotiation occurs when constraints, that cannot be satisfied, are modified
by the subset of agents directly concerned. The recent advent of the Internet and WWW
as infrastructures for global connectivity has confirmed the distributed multi-agent
orientation of the project and has allowed us to develop new Internet agent technologies
that can aptly support the global integration and management of the supply chain.

Achieving an Integration Supply Chain

57

Integrated Supply Chain

INBOUND
SUPPLY
CHAIN

Outsourcing
Inbound
Transportation
Production
Planning
(For Outsourcing &
In-house)

STORAGE

Warehousing
Inventory Control

OUTBOUND
SUPPLY
CHAIN

Order
Processing /
Inventory
Outbound
Transportation

58

Performance Measurement

Delivery
Order fill rate
Lost Sales

Service
On time

Cost
Inventory
Freight
Overheads

Time
Order cycle time
Replenishment leadtime

Supply Chain Performance Metrics:

Why we are doing simulation? Because, we want to analyze our supply chain. We need a
set of performance metrics, which can be used to determine comparative efficiencies of
different configuration of supply chain. These metrics can be either qualitative or
quantitative. Qualitative factors include Customer satisfaction, flexibility of supply chain,
information and material flow integration etc. But since these can't be measured as
numerical quantity, so it is very difficult to do comparison based on it. Quantitative
factors are as follows:
Cycle Time - can be supply chain process lead time or order-to-delivery of lead-time.
Customer service level - measured by computing order fill rate, stock out rate, back order
rate and delivery probability of each individual element.
Inventory Levels and holding cost, Resource Utilization, Transportation cost
Beside this we can also include cost of raw materials, penalties for incorrectly order
filled etc to our performance metrices.

59

Job Scope Available

Role and Scope

Is crucial in any industry

Is critical for any product or Service

Can be the deciding factor in various industries

Available as an industry option by itself

Industry Independent Options

Purchase

Inventory Management

Production Planning

Warehousing

Transportation

Channel Management

As an Industry

Road Transport companies

Shipping Companies

Freight Forwarding Companies

Third Party Logistics companies

Supply Chain Software companies

Warehousing Service Providers

60

Going For Gold In The Supply Chain

SUPPLY CHAIN MANAGEMENT AT MARICO
Marico Industries, Ltd. is a leading India-based consumer goods company with
sales of Rs 6.96 billion (approximately $142 million) for the fiscal year ending
March 2002. With 6 factories and about 1,000 employees, it has maintained steady
revenue and profitability growth throughout the past 10 years. Marico offers a
range of products to the local and export markets (primarily South Asia and the
Middle East), including refined edible oils, food products such as jams and sauces,
niche fabric care products, and hair oils.
Marico was incorporated in 1988 and began commercial operations in 1990 when it
acquired the consumer products division of Bombay Oil Industries. Since its
inception, a key strength of the company has been its ability to build brands.
Marico has pursued a rigorous approach to creating and sustaining its brands,
focusing on understanding and anticipating consumer needs, innovating in distinct
ways, developing advertising campaigns to reinforce value delivered to consumers,
and tracking metrics that support product positioning strategies. The companys
approach has enabled it to pioneer polyethylene packaging for coconut oils, coldwater clothes starching product, and other unique developments. Marico faces
competition from large, well-capitalized international rivals such as
Nevertheless, Maricos approach has enabled the company to create unique value
for consumers and thereby to build significant market share in many product
categories. Of Maricos nine brands, three are market leaders.
A key attribute of Maricos brands is the widespread availability of the companys
goods throughout India. Maricos distribution network is the key to ensuring that its
products reach about 100 million people throughout the Indian subcontinent each
month. Marico produces 125 SKUs at its own factories and through 15
subcontracting manufacturers. It stores products at 32 warehouses and sells to
3,500 distributors. These distributors in turn provide products to 1.6 million
domestic retail outlets.
61

Maricos peer companies in other countries recognize its strength in distribution;

consequently, Marico has secured a distribution alliance with Indo Nissin Foods
and a distribution agreement with Procter & Gamble.
Strategic Goals:
Enhance long-term value of company brands by achieving excellence in distribution
performance
Maintain market share growth in a competitive environment with much larger, offshore
rivals
Scale supply chain operations to sustain customer service as the business grows
Reduce total delivered cost
Approach:
Marico shortened its planning cycle from 30 days to about 15 days; revised its demand
planning process to forecast sales out (shipment from distributors to retailers); and
implemented an improved process to replenish its distributors. The company focused on
achieving relatively even shipment levels throughout each month and developed internal
collaborative processes to support planning.
Maricos goals included improving forecast accuracy and delivery performance in
order to sustain the widespread availability of its products in the market and the
associated positive perceptions of its brands. By concentrating on internal
operations, Marico has been able to lower inventory and supply chain-operating
costs, particularly those expenses that could be reduced through better planning in
areas such as intra-company stock transfers. The company has achieved improved
cash flow to fund future growth, sustained the viability of its independent
distributor network, and maintained those elements of its brands images that are
tightly coupled with high availability of its products to its customers.

62

CASE: Dinesh Shah, 30, a distributor of Marico Industries (flagship brand: Parachute
oil) in central Mumbai, remembers the old bad days with a shudder. Around month-end,
he would literally be stuck with loads of inventory, with goods being stored even in his
office-corridors. The go downs would be overflowing with stocks, and trucks often had to
wait for a day or two to unload additional consignments. The reason for this nightmare?
The companys sales-team was required to meet its monthly targets in terms of primary
sales i.e. sales dispatched to distributors. To achieve primary targets, the team pushed
out goods to distributors month after month even though the latter may have failed to
liquidate last months stocks.
This became a kind of vicious cycle because distributors spend the first part of the month
trying to liquidate old stocks, and by the tie the managed to do that, another dreaded
month-end would rear its ugly head, threatening to inundate them with fresh stocks.
Today, Mr. Shah is breathing easier thanks to Maricos Midas touch. With Midas an
acronym for Marico Industries distribution application software, which allows the
generation of uniform sales data from distributors the company is now able to track
secondary sales data more effectively. Earlier, the company only new how much sales had
been pushed to distributors. It had little idea about how much stock the distributor was
holding, and what he may need to stock up for future sales. But even if the goods were
overflowing, the company would lose sales due to stock-outs stock of items that are
moving in the market would not get replenished fast enough.
Not surprisingly, distributors like Shah ended up incurring high inventory costs, now
using Midas and MI-Net, a web based software, the company has effectively made its
ERP system available to distributors. And Shah says he has to keep only 15 days stocks,
and in future he may be able to get by with just four days worth. That will bring his
capital needs to almost zero, since Marico works only a four-day credit cycle.
Result: Marico expects its Rs 4crore investment in MI-Net to pay back in two years time.
Results (achieved during 3Q01 to 1Q02):
Decreased stock-outs associated with distributor sales to retailers by 33%
Reduced lost sales due to stock-outs by 28%, thereby improving total revenue by 1.5%
Lowered excess distributor inventory by 33%
63

 Reduced late deliveries to distributors by 37.5%

Reduced costs associated with supply chain exceptions by 25% (for example, intracompany stock transfers, truck detention costs)
Positioned the company for a vendor-managed inventory implementation and further
performance improvements
The benefits of Maricos MI-Net
FOR COMPANY
Improves efficiency in Supply Chain inventory control and reduced stock-outs.
Distributor control & shift of focus from primary and secondary sales.
Sales productivity & ability to monitor leading indicators reach, lines sold.
Virtual office for sales force, direct access to product and company information.
More even sales performance, with no sudden spikes at month-end.
Ability to time effective distribution along with advertising and promos.
FOR DISTRIBUTORS
Gives him a mini-ERP, and improved ROI.
Reduces paperwork on billing and report writing.
Instant information on promo schemes, discount on products.
Access to information on stocks available at depots.
Bundled software for maintaining financial accounts.
FOR SALES MANAGERS
Effective control room for monitoring sales & credit.
More precise information on lapsed outlets.
More detailed information on sales force performance.
Ability to cash in short-term opportunities like competitors stockouts.
Additional information on with (lines sold) and depth (number sold in same SKU)
of sales.

64

CASE STUDY
A note of envy creeps into Peter Gerhardt's voice when he talks about supply chain
technology. A privately held shoe retailer with 49 stores across Canada, Town
Shoes lacks the size and clout to impose supply chain mandates on its suppliers, all
of which are bigger companies. "We don't have the buying power to dictate to our
suppliers," says Gerhardt, senior vice president in charge of information systems,
real estate, finance and administration for the 1,000-employee Toronto retailer.
"We're not that great at supply chain when I look at companies like Wal-Mart,
which

have

nailed

it

down

from

end

to

end."

Instead of focusing on improving the interfaces with suppliers, Gerhardt is

concentrating on streamlining internal operationsspecifically, what happens to
the shoes once they arrive at Town Shoes' 40,000-square-foot distribution center in
Toronto. Several years ago, the retailer began using Rams merchandising software
from Richter Systems to keep track of inventory at individual stores and the
distribution center. This was a step up from the previous way of doing business. As
recently as five years ago, Town Shoes would "balance" the inventory at its stores
by sending around a truck every day to bring stores sizes and styles they had sold
out of.
But Town Shoes chose not to use all of the features of Rams. "We did a lot of bad
things to that product. We didn't want to know what we had on hand by size so we
actually took out that functionality," Gerhardt says. At the time, it was easier for
Town Shoes to deal only with shoe style, rather than size information in the
software, and rely on store managers to refer to bar codes on boxes to track sizes. A
few years ago, however, Gerhardt woke up to the need to keep tighter control of
inventory information and that meant keeping track of size data at the warehouse.
Meanwhile, Richter had transformed into Essentus, and Rams had morphed into
Merchandising Express. When Gerhardt installed Merchandising Express in August
2000, he made use of all the software's capabilities. For the first time, he had
65

access to actual stock information at each store as well as the distribution center.
This information allowed him to develop a product model: the standard number and
size distribution of a particular shoe projected to be sold by each store. Gerhardt
figured if he sent each store only 80 percent of the full model, it would cut down on
the need to balance (that is, shift stock) between stores. It costs about $2 per pair to
replenish shoes from the central distribution center rather than the $4 charge to
send individual shoe boxes in the mail from one store to anothera savings of 50
percent.
Town Shoes has spent $1 million, including software and services on the new
Essentus system, and expects its investment to pay off within two to three years.
The modest initiative is already beginning to prove its worth. Sales for fiscal 2000,
ended in January, were up 12.8 percent, while in-store inventory was down 20
percent as a result of the Merchandising Express implementation. "We sold more
goods out of a smaller inventory. We did more with less, which was the whole goal
of the supply chain project," Gerhardt says. He expects an even bigger payoff when
he begins to replenish stores twice a week rather than just once a week as this will
enable him to further decrease inventory. Gerhardt believes his company's future
well-being may well rest on this project. "Anyone who thought retail was about
selling things missed the boat," he says. "We're in the information business. If we
don't have the right kind of information, we're not going to be around."
Future Trends Percentage of buyers, sellers and distributors in the industrial supply
industry that are developing and incorporating e-commerce strategies
2000

34%

2001

67%

2005

83%

Source: Harris Interactive and Industrial America, based on an e-mail survey of 981
individuals responsible for buying, selling or distributing industrial supplies in the
manufacturing industry.
ROI
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Inventory being held across the retail supply chain at any one time amounts to $1
trillion, according to a report by Benchmarking Partners, based on U.S. Dept. of
Commerce data. The Cambridge, Mass.-based consulting firm estimates 15 percent
to 20 percent of those inventories ($150 billion to $200 billion worldwide; $40
billion to $50 billion in the United States) could be eliminated through improved
planning, forecasting and replenishment.
Hot Quests Dr. Yossi Sheffi, MIT Professor of Engineering Systems; Director
Center for at MIT & Logistics.com. answers supply chain management
questions.
Question: What is the current state of integration between web based
exchanges (either public or private) and legacy supply chain solutions?
Reply: We need to distinguish here between public exchanges and private
ones. Public exchanges, by and large, are not doing well currently. They
originally did not require or offer good integration capabilities, assuming only
browser-level interactions, but the survivors are moving in the direction of
offering integration with certain ERP systems. Private exchanges, by their very
nature, started with good integration with host systems, typically on the buyer
side. Many do not require supplier integration and can operate with browserlevel interaction on the supplier side. All this is changing as systems are
scaling. Note, however, that in most cases, supplier integration does not lead to
fully automatic actions since whenever suppliers are required to quote prices,
they want a person in the loop. Similarly, many buyer system do not relinquish
the actual the supplier choice to an automated system. Finally, note that
integration is getting easier since there are many products on the market that
include pre-integrated modules that can work well with most popular ERP
systems.
Question: Supply Chain Management seems to have two measurable
objectives: 1. Increase revenues (via time to market or improved product
availability)

or 2. Reduce costs (via reduced inventory and better

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procurement). What are companies doing to meet those objectives in the area
of Culture (behaviours within the organization) and technology too?
Reply: Supply chain management, is distinct from logistics management in
that it involves the management of multi-company channels rather than the
individual enterprises, as well as cross-functional processes within the
enterprise. Changes in culture are usually the result of changes in the
measurement and reward system. To achieve better channel coordination
across functions the performance metrics need to be channel-wide and
encompass more than individual functions. Thus metrics like time to market
or cash-to-cash time have been used (typically in addition to functional
metrics) to capture and reward process mindset and performance. The
technologies that are now available to optimise and enhance logistics and
supply chain planning and execution are too numerous to list here. The
important ones involve better communications across the functions and the
channels, better accounting software to capture activity costs, better decision
support and better procurement systems.

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CONCLUSION
SUPPLY CHAIN TECHNOLOGY: Whats Next?
Are Major Technology Breakthroughs Looming?
In late 1990s, the field of supply chain technology exploded with new innovations such
as e-Procurement, reverse auctions, and more. The bursting of the dot-com bubble slowed
the pace of innovation but in 2006, one could see the return of innovative technology in
the supply chain field as well as the Internet in general.
Todays Purchase tips explore three emerging supply chain technology innovations:
software delivery, community intelligence, and buyer-supplier collaboration.
Software Delivery:
One cannot shop the supply chain technology market without noticing the buzzword On
Demand. On Demand is the delivery of software functionality over the internet from a
single application instance thats shared across all clients. On Demand solutions require
only a Web browser for access, eliminating hardware an software installation and
maintenance , reducing costs, and speeding implementation.
Community Intelligence:
Todays supply chain technology providers are oriented to create a virtual community
thats constantly transacting and collaborating and exchanging information.
Community Intelligence includes inter-company information about supplier capabilities
and performance, benchmarking data, and best practices that are accessible to the
Community of users of a supply chain system.
Some speculate that supply chain systems will someday feature Community-wide access
to peer-input suppler ratings ,not unlike a corporate purchasing version of e-Bays seller
feedback functionality.
Buyer-Supplier Collaboration:
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A casualty of the dot-com bust was the buzz-word C-Commerce for collaborative
Commerce- a vision of the future that buyers and suppliers will collaborate seamlessly
online.
With collaborative tools like wikis now populating other portions of todays cyberspace,
the buyer-supplier collaboration envisioned earlier is likely ready for prime time. Three
particular examples of technology-facilitated collaboration can be cited:
1. Both buyers and sellers will be able to expose and share their excess inventory
across the Community .
2. Community members will engage in collaborative supply chain planning and
logistics route sharing.
3. Buyers will grant suppliers access to buy from their contracts where pricing or
availability is more favorable, thereby reducing total supply chain costs.

Challenges in Supply Chain Management Today

Strategic imperative of supply chain

Deliberate redesign of supply chain networks

Offshore outsourcing (lead-times/customer service impact)

Supply chain design to customer requirements

Cash-to-cash cycle

Supply chain visibility technology

Strategies for inventory positioning near customers

Warehouse Management challenges

Collaboration with supply chain partners

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BIBLIOGRAPHY:

Business 2.0's -Supply Chain Management Web-guide

http://www.business2.com/webguide/0,1660,19462,FF.html

Not only does this site have information including SCM benchmarking and
case studies, it also contains some of SCM's major players, consultants,
research, forecasts and more.
About.com - Logistics/Supply Chain
http://logistics.about.com/?once=true&
The Logistics/Supply Chain page from About.com features news, discussion
groups, consultants, associations, definitions and glossaries, among many other
SCM topics.
Supply Chain.org
http://www.supply-chain.org/ .
This site is non-profit Supply- Chain Council's website, which gives a detailed
outline of the benefits of SCM at Marico.
SupplyChainManagement.com
http://www.supplychainmanagement.in/scm/
This site offers various articles and news on supply chain management.

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ANNEXURE
Supply Chain risk is rising on the back of greater complexity of products and services,
higher energy prices and increasing financial volatility, among other factors but relatively
few companies are acting on these challenges, according to the findings of Mc Kinsey &
Co. survey of 273 executives around the world.

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Source: Bt 50 Index, Business Today (21st August 2008)

From the above graphs we can see that Increasing complexity of products tops the
reasons influencing the Supply Chain Strategies globally and it indicates that Europe has
seen the highest increase in the segment also the Supply Chain risk faced by companies is
increasing gradually. It is indicated that this increase has not been too much in the last
five years.
Thus, Companies should act on these complexities as soon a possible before the risk
faced by these Companies increases to a large extent.

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