1. SCM Challenges

8/6/2019 1. SCM Challenges

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Dr. A. K. DeyDr. A. K. Dey 11

A. K. DeyBirla Institute of Management Technology


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A comprehensive example of supply chainintegration with focus on quality is the case of NDDB.

Began with just milk procurement and processing.Over 50 years, they have forward integrated thechain to include distribution, value added products,and retailing.They have backward integrated into animal

husbandry, animal feed, and packaging.

Cash logistics, quality assessment,developments of key inputs


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By acquiring a technology that enabledmixing of colors and base paints to get theappropriate shade in a few minutes, AsianPaints obtained a competitive edge bydelaying their differentiation.

Retail inventory costs have come down, while atthe same time, product availability has gone up.

D elayed differentiation (postponement),technology development


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HUL has generally sought competitive advantagethrough a continuous reengineering of the supplychain. Major market segments have driven their supply chain response.

Recently, for their food and FMCG products, the ModernTrade (read organized retail) segment is driving asupply chain that is adding value by cutting down leadtimes.

H orizontal differentiation and vertical integration, non departmentalised management cadre


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The concept of the supply chain has changedsignificantly for a bicycle company.

It started from a factory that sourced raw materials, madecomponents, assembled bicycles, warehousing, and delivery

to dealer. And changed to sourcing, kitting, warehousing, delivery todealer, and assembly.The factory has lost its significance and the supply chain isleaner and more straight. The bicycle company focussesmore on marketing, design, and quality control.

S ourcing, kitting, dealer development,focus on costs


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Tata Motors L td has improved its inventorylevels and inbound logistics costs by using athird party logistics service provider to source,kit, and deliver components.

T hird party logistics, kitting


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Benetton used to follow the traditional way of making hosiery: dye the yarn (fixing the colour)and then knit the fabric (fixing the style)

U nderstanding customer behaviour showed that it was

easier to predict style choices than colour choices.Consequently, they evolved a technology to changethe production sequence for their single colour fabricsto first knit and then dye.This enabled the supply chain to be aligned with themarket behaviour choice.

P ostponement, technology development


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Dell Computers was a pioneer by recognizingthe market segment which was (i) computer aware, (ii) customization sensitive, and (iii) pricesensitive, and designing a channel for this.The channel offered mass customization andtwo-day delivery at a low price by leveragingonline (remote) ordering, assembling to order,and express parcel delivery.

M ass customisation, focus on costs


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Amazon was a pioneer by recognizing the non-browser market segment which knew the book it wanted or had theleads that would enable search for the book.The channel offered online (remote) ordering, and ship to

order using express parcel delivery. As a significant valueadd, it also offered recommendations on books based ona profiling of the customer.When large brick and mortar outlets like Barnes & Noblealso started offering electronic ordering, then Amazon hadto rethink its strategy of not having such outlets.

Customer profiling: CR M , value addition


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Pizza H ut traditionally had eat-in and take-outchannels. Dominos entered the market withdelivery and take-out channels, providing moreconvenience at a lower price.

Pizza H ut was forced to respond with a deliverychannel. Correspondingly, to stay in the mindspace of their customers, Dominos also openedeat-in restaurants at many locations.

V alue addition:P roduct + service to P roduct + service


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IT H ardware manufacturers are continuouslyrestructuring their distribution network to enablea responsive supply chain for products, spareparts, and repair and return. Third partylogistics service providers have played asignificant role here.

S pare parts logistics, reverse logistics, third party logistics


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Supply-chain is a term that describes howorganizations (suppliers, manufacturers,distributors, and customers) are linked together.

Supply-chain management is a total systemapproach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and

warehouses to the end customer.


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Network of firmsCore competency

Managing Demand side & Supply side

uncertaintiesCollection of processesDemand Management, Order fulfilment, Procurement,CRM, Supplier Relationship, management andForecasting

Managing smooth flow of material (value),Information and financeManaging value chain: Creating value more thanthe competitors



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Four major driversFacilitiesTransportationInventoryInformation

Two obstaclesFragmented ownership of supply chain stagesProduct variety



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Information links all aspectsof supply chainE-business

replacement of physical

business processes withelectronic onesElectronic data interchange(EDI)

a computer-to-computer exchange of businessdocuments

Bar code and point-of-saledata creates an instantaneouscomputer record of a sale

Radio frequency identification(RFID)

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

Internetallows companies tocommunicate with suppliers,customers, shippers and other businesses around the world,instantaneously


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1010--1919


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The value chain is a systematic approach to examiningthe development of competitive advantageIt was created by M. E. Porter in his book, Competitive

Advantage (1980)The chain consists of a series of activities that createand build value. They culminate in the total valuedelivered by an organisation.The 'margin' depicted in the diagram is the same as

added value.The organisation is split into 'primary activities' and'support activities.'

1010--2020


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1010--2121

Value chainevery step from raw materials to the eventual end user ultimate goal is delivery of maximum value to the enduser Value is from the point of view of customer for whichhe is willing to pay

Supply chainactivities that get raw materials and subassembliesinto manufacturing operationFocus is on minimize cost by increasing efficiency or economies of scale

Terms are used interchangeably


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Value chainevery step from raw materials to the eventual end user ultimate goal is delivery of maximum value to the enduser Value is from the point of view of customer for whichhe is willing to pay

Supply chainactivities that get raw materials and subassembliesinto manufacturing operationFocus is on minimize cost by increasing efficiency or economies of scale

Terms are used interchangeably


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One goal in SCM:respond to uncertainty in

customer demand withoutcreating costly excessinventory

Negative effects of uncertainty

lateness

incomplete ordersInventoryinsurance against supplychain uncertainty

Factors that contribute touncertainty

inaccurate demandforecastinglong variable lead timeslate deliveriesincomplete shipmentsproduct changes batchorderingprice fluctuations anddiscountsinflated orders


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Integrated Supply ChainIntegrated Supply ChainIn order to have smooth flow of materials all thecomponents of a supply chain must beseamlessly integratedIntegrated supply chain can be established byfacilitating s haring of information betweenmember s in advanceOverall cost of a supply chain can be reducedonly if

It is an integrated supply chainTotal view (end-to-end) is taken


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Integrated Supply ChainIntegrated Supply Chain

Figure 11.5Figure 11.5

SuppliersSuppliers PurchasingPurchasing ProductionProduction DistributionDistribution CustomersCustomers

Phase 1:Phase 1:IndependentIndependentsupplysupply- -chainchainentitiesentities


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SuppliersSuppliers CustomersCustomers

Internal supply chainInternal supply chainMaterials management departmentMaterials management department

ProductionProductionPurchasingPurchasing DistributionDistributionPhase 2:Phase 2:InternalInternalintegrationintegration


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SuppliersSuppliers CustomersCustomers

Internal supply chainInternal supply chainMaterials management departmentMaterials management department

ProductionProductionPurchasingPurchasing DistributionDistributionPhase 2:Phase 2:InternalInternalintegrationintegration


Integrated supply chainIntegrated supply chain

CustomersCustomersSuppliersSuppliersInternalInternalsupplysupplychainchain

Phase 3:Phase 3:SupplySupply- -chainchainintegrationintegration


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1010--2828

Information sharing among supply chainmembers

Reduced bullwhip effectEarly problem detectionFaster responseBuilds trust and confidence

Collaborative planning, forecasting,replenishment, and design

Reduced bullwhip effectLower Costs (material, logistics, operating,etc.)H igher capacity utilizationImproved customer service levels


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1010--2929

Coordinated workflow, production andoperations, procurement

Production efficienciesFast responseImproved serviceQuicker to market

Adopt new business models andtechnologies

Penetration of new marketsCreation of new productsImproved efficiencyMass customization


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1010--3030

Process for two or more companies ina supply chain to synchronize their demand forecasts into a single plan tomeet customer demandParties electronically exchange

past sales trendspoint-of-sale dataon-hand inventoryscheduled promotionsforecasts


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1010--3131

Procurementpurchase of goods and services from suppliers

On-demand (direct response) deliveryrequires supplier to deliver goods when demanded

by customer Continuous replenishment

supplying orders in a short period of timeaccording to a predetermined schedule

Cross-enterprise teams coordinate

processes between company and supplier


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Two levels of decisionsDesign decisionsOperations decisions

Design decisionsWhich activities should be carried by nodal firm and which shouldbe outsourced?H ow to select entities/partners to perform outsourced activitiesand what should be the nature of relationship?Decisions pertaining the capacity and locations of various

facilities.


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Operations decisionsDemand forecastingProcurement planning & controlProduction planning & controlDistribution planning & controlInventory managementTransportation managementCustomer order processing

Relationship management



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Demanding customersIntensive competitionH igher level of product proliferation

Shorter P L CsH igher disposable incomeDeclining brand loyaltyCross category competitionCrossover behaviour of consumers: splurgersand Bargain hunters



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Five major trends have made SCM a criticalsuccess factor in most industries:Proliferation in product lines: More variety & More

SKU

sShorter P L CsH igh level of outsourcingShift in power structure in the chain

Globalization of manufacturing



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More varieties and more SK U sL arge number of substitute productsForecasting becomes challenge

Supply chain starts with better forecasting!



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Products getting outdated fastCompetition driving down the useful life of a productWindow of opportunity to recoup investments isshorteningEfficient firms like Dell with just seven days of inventory as compared to industry average of 35 daysneed to worry about product obsolescenceCompetitors of Dell with higher level; of inventory willend up writing off huge amount of inventory asobsolete



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Firms increasingly focus on core activities andoutsource the restThis trend is irreversible

H igher level of outsourcing make Supply ChainvulnerableForcing firms to develop different types of capabilities within the organization



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Supply chains have become very longGoods & services have to travel through different

L andsU

sing different modes of transportComplying with various rules and regulations

Managing supply chains have becomes verycomplex



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Common issuesTaxation structure drives location decisionsPoor state of logistics infrastructure

For other issues: Context of FMCG sector Managing product availabilityWorking with smaller packsEntry of national players in traditional fresh products sector Complex tax structureCounterfeit goods

Opportunistic games played by distribution channelEmergence of 3P L and 4P L

Emergence of modern retailReservations for Small Scale Sector



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Customer service issues should drive this decisionPharma firms located at Baddi, H P: reason tax benefits

Air conditioning and diesel power generating firms atSilvassaSpecial Economic Z ones attract many firmsTo avoid multiple tax, firms keep stocks in each stateVarious taxes: delivery by road gets unusually delayedVAT & GST may bring relief



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Both transportation & warehousing dominated byunorganized sector Over 90% trucks in the country belong to owners

who have less than 5 trucks eachU norganized trucking industry results in unreliablelead time and high transit damages



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Driven by the emergence of a vast domesticmarket and relatively low-cost workers

Ford, H yundai and Suzuki all export cars from India insignificant numbersL G, Motorola and Nokia all either make handsets in Indiaor have plans to start

ABB, Schneider, H oneywell and Siemens have set upplants to manufacture electrical and electronic products

for domestic and export markets



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Innovative solutions are required to overcomeComplex distribution structureL arge number of customers at the bottom of pyramidPoor infrastructureComplex tax structure

Innovative SCM implemented by AMULMother DiaryITCShakti Project of HULDabbawalah (Tiffin Carriers) of M U MBAI



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Managing product availability in complexdistribution set up

Order fill rate; L ine fill rate & Cycle Service Level

Small pack sizesL arge Rural population & Economically weaker sectionProblem: Increased per unit transportation & packing costCompanies have to find innovative ways to balancemarket penetration & logistics costs



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Dealing with counterfeit goodsMore popular brand; more counterfeitsRules are not strictly implementedDetection is costlyL egal expenses

Opportunistic games played by distributionchannel

Try to grab significant portion of promotion budgetDivert goods from one market to another violating thenorms set by company- poaching



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Emergence of 3P L and 4P LGood for the industryCustomer will benefitExpertise will increase

Emergence of modern retailExtract higher discount because more demandIn India share of retail sale is very lowStill they demand high marginManufacturer wishes to bypass distributors likelihood of channel

conflictImpact of higher discounts on overall distribution systemThreat of private labels



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



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Thanks

Dr. A. K. Dey

Professor Supply Chain & Operations ManagementBirla Institute of Management technologyIndia

D A K DD A K D 5252

Documents

1. SCM Challenges