FORECASTING

RISKS

KNOWLEDGE

ACADEMIC ADVOCACY

January 2015 Vol. 2- No. 10

Rs. 150

FOCUS

An Anthology of Some of the Best

Feature

Lean Management for Cold Storage

page no. 35

SME Corner

Financial Supply Chain for SME’s

page no. 38

LSP Focus

Warming up to Cold Chains page no. 48

January 2015

EDITORIAL

3

n behalf of team SCMPro and ISCM, I wish each and Oevery one of you a wonderful, high growth and professionally satisfying year ahead.

2014 was a defining year for India. After a gap of three years we dared to dream again. After a gap of three years, we are seeing the green shoots of industrial revival. A change of guard at the center and a few states heralded a new optimism to the industry. The Ease of Doing Business Index from the World Bank had placed us at 142 among 185 nations. And we need to correct it urgently. Unfortunately, the Indian opposition politician is still tied to religion, caste and conversions as issues. Development is anathema to them. Apparently, economy is not their concern. Fortunately for India, the Government is seized of the gravity of the situation, and have acted. Baby steps, but a cause for hope.

On a lighter vein, the master supply chain professional, Santa Claus has managed to deliver gifts across the world, in time with six sigma accuracy. But the delivery systems across the world collapsed once again. From Europe to UK to USA, Christmas deliveries were delayed because of capacity constraints. This is an interesting issue – we cannot build capacity based on volume spikes that last perhaps a few days in the year. Nor can we sit back and blame it on the supply chain. Can we not innovate delivery systems that can handle the spikes efficiently? Time for the Indian Jugaad to kick in.

With a prayer on our lips and hope in our eyes, we wait for the economy to pick up its growth trajectory.

Meanwhile, Happy Reading.

GIRISH V S EDITOR

The Season of Hope

January 2015

CO

NTE

NTS

JAN

UA

RY

201

5

4

06SCM NEWS >>

Analysis of latest Supply Chain and Logistics happenings.

35FEATURE >>

8-33LEAD STORY

42SCMPro CLASSROOM >>

38 SME CORNER >>

Mr. Prashant Gubba speaks about their experience in Lean Management for Cold Storage.

Dr. Rakesh Singh explores the problem at forecast error.

Financial Supply Chain

Management (FSCM) deals

with capital. payment terms,

pricing and Inventory decision

making by the firm, which

plays a crucial role for SME's.

SCMPro looks at some of the

innovations by the bank in

managing FSC.

Keeping in mind the spirit of new year SCMPro brings its readers a collection of top most read and liked articles from last year. Each articles has been chosen by our editorial advisory team and the idea is bring the best of last year in nutshell.

50ACADEMIC ADVOCACY >>

5

44KNOWLEDGE >>

Part 5 of the series the authors looks at managing Supply Chain Risks.

This research addresses current gaps in the literature by investigating the buyer–supplier integration dynamics in a global context with a focus on the antecedents and outcomes involved in the process.

204-D, Riddhi Siddhi Complex, Off. S. V. Road, Opp. Patkar College, Goregaon (West), Mumbai 400062, INDIA.

48LSP FOCUS >>

SCMPro brings you a

review of work by Lisa

Ellram and Martha Cooper

on five academician and

pracitioners perspective

on Supply Chain

management first

published in The Journal

of Supply Chain

Management.

January 2015

6

iwali in India, Christmas in Europe and US, and Bachelors Day in China – all suffer from one major constraint – the necessity to deliver an Dunprecedented number of parcels on a single day. And the e-commerce firms have not been able to live up to the hype. Apart from these

special days, we have the same day and next day deliveries on offer. This is forcing retailers and distributors to

rework their warehouse strategies. The traditional view of a warehouse as a large shed to hold goods till they are

transferred to the store is passé. Before the e-commerce age, warehousing was focused on a few large hubs across

Europe – the UK's golden triangle in the Midlands or the Benelux corridor between Amsterdam and Antwerp. The

need today is for smaller warehouses closer to the population they seek to serve. And unlike the large

warehouses, these small warehouses need to break up a large truck load of goods into smaller vehicles for faster

deliveries within the cities and towns. This will in turn lead to a few problems – land, for one, is very expensive around

these urban centers – leading to rising rents.This has one good fall out – across Europe, investors are pumping in money to build new facilities.

According to a report from Standard Life, European warehouse investments jumped to Euro 20 billion in the first nine months of 2014; and

earned an 8 percent return.

There are good times ahead for warehouse investors. But, apparently we still need to learn from Santa Claus how he delivers so many gifts

across the world in a single night!

odel – one of YUK's leading

delivery services

companies told its

customers just that!

Yodel has clients like Tesco – the leading UK retailer and

Amazon. In the run up to Christmas, Yodel said delivery

of some parcels would be delayed by over 72 hours and

that its sorting centers would not accept fresh deliveries

till the 27th of December. And it seems UK too suffers

from the same problem – a shortage of drivers – some

estimates put it at 60,000 drivers. And just like

Flipkartsale in India, the Black Friday – the start of the

Christmas shopping frenzy and Manic Monday – the

Monday following Black Friday – saw sales of GBP 810

Million and GBP 666 Million – with around 205 million

home deliveries in Nov- December time frame. The

result – most retailers suspended the next day

deliveries. Unlike Flipkart where most products were not

available, in UK, it was a case of delayed deliveries.

The bottom line – Yodel was voted as the worst parcel

delivery service in UK – with 58 percent customers

experiencing bad deliveries!

NEWS

January 2015

E-Commerce Impacts Warehousing

We Cannot Deliver Causes of Supply Chain Disruptions in 2014

Q: How severely has your supply chain been affected by any of the following sources of disruption over the past 12 months?

8January 2015

THE BEST OF 2014

THE BEST OF 2014

January 20159

he New Year signifies hope and cheer. The fourth - Financing SME Supply Chains THope that the year will prove to be better by Asad than the one gone by. And cheer to keep us motivated to strive for the promise the year holds. It is a time to look back at the year gone by and take stock of what we did right and what we did not do. Of the hits and misses.

Keeping in that spirit, this year we bring you a collection of articles that appeared in the previous 12 months of SCMPro. These articles were chosen by our editorial advisory team along with the Editor. Each article was chosen for a specific reason – either for its popularity or for bringing out an aspect of supply chain we are not familiar with. The idea was to present the best of the year in a nutshell. A quick guide to all that was the best.

The first article - Forecasting what to do and what not to do – is a star from our 2014 series. The GIGO principle (Garbage In, Garbage Out) is a well-known phenomenon in IT. But the same can be applied to supply chains as well. If the business forecast is not accurate, the resulting supply chains too will not be optimized. This article by Dr. Rakesh Singh was one of the most popular articles of 2014, for its focus on the basics of forecasting.

The second - Challenges of global fast fashion supply chains – by Dr. John Gattorna was a two part series that explored the challenges of supply chain management for global fashion brands. The article is special for the insights it brings on aligning the supply chain to the customer needs.

The third - Disaster Risks and Impacts on Supply Chains - has been chosen for its focus on an emerging area of SCM – Humanitarian Supply Chain Risk Management. Humanitarian logistics is one aspect of a supply chain – a supply chain response to a compelling cause. However, apart from the response of the supply chain to a disaster, disasters too have an impact on supply chains. Humanitarian logistics addresses the supply chain impact on disaster. The converse, though not a part of humanitarian logistics, has its own challenges.

Ata; Manish Shukla; Mahender Singh has been chosen as it highlights the biggest challenge to SME - finance. Small and Medium Enterprises (SME) are the backbone of an economy. They contribute immensely to the employment opportunities in the country and account for roughly 40 percent of the exports from the country. However, when it comes to financing, SMEs are considered higher risk and face multiple constraints. As the ad says – small business is big business.

The fifth– Agri Collateral Management – explores the contours of warehouse receipts – an innovative financing tool for agri producers. Farmers in India face multiple challenges. As the harvest reaches the markets, traders form a cartel to beat down prices. This limits the farmer's income and exposes the sector to dramatic changes in food prices. The ability to store products and release them for the right price can boot rural incomes and create a healthier economy. But for that to happen, the farmer should be able to store the produce at the right environment to avoid losses. One such area is inventory management – not from the traditional perspective, but the inventory at the warehouses – the ability to realize higher value from storage. Collateral management is fast emerging as an option for firms to realize higher value from their supply chains.

The sixth article - Complexities of Distribution Chanel in India – Challenge or Opportunity? – is an extract of a presentation by Pratin Vete - Associate Director – Performance Improvement, of Ernst & Young – presents the challenge of pharma distribution – where small players rule the roost, and the manufacturer does not have visibility beyond the super stockist.

And finally, we bring you an interesting article by Kanika Bhutani of EY on supply chain in the dot com era.

Happy Reading.

Thanks to global competition, demand is no longer certain chain. Once these are tabled, forecasting will be less uncertain for any business. Gone are the days of certainty, long in an uncertain environment.product life cycles and loyal consumers. The overall And the new IT based tools for supply chain and forecasting environment is today dynamic. In such a situation firms

will be able to improve the forecast and institute a system for increasingly realise that understanding demand, planning tracking forecasting errors. Forecasting practices are demand and linking supply with demand pays. At the same characterised by some interesting insights about changes in time, if the supply chain forecast is substantially in error, the techniques. Research indicates that in the 1980s, despite the ramifications will be felt throughout the entire process. growing availability of computer based forecasting systems,

This is why forecasting has assumed a significant companies continued to rely predominantly on subjective importance, and increasing number of managers look to techniques. Since the mid 1990s companies have started using forecasting to reduce costs. computer-based forecasting systems, yet surprisingly forecast

accuracy has not improved even among those who use these Despite significant developments in the area of supply chain models.forecasting as well as IT, most organisations do a poor job of incorporating demand uncertainty into their production A plethora of questions arise today. Are forecasts planning processes. Most often this is blamed on forecasting reviewed and agreed upon by key departments in the without realising the importance of selecting the appropriate organisation? Are right statistical methods used in forecasting forecasting technique. Managers need to identify first the the demand for a product? What horizons and time period are firm level variables which cause variability in the supply used for both long and short-term forecasting? How are

Seasons rule:

10

The GIGO principle (Garbage In, Garbage Out) is a well-known phenomenon in IT. But the same

can be applied to supply chains as well. If the business forecast is not accurate, the resulting

supply chains too will not be optimized. This article by Dr. Rakesh Singh was one of the most

popular articles of 2014, for its focus on the basics of forecasting. This is a star from our 2014 series.

January 2015

Forecasting what to do and what not to do

Dr. Rakesh SinghVisiting Professor of supply chain strategy and economics, Great Lakes, Chennai and Chairman, Institute of Supply Chain Management, Mumbai, Managing Editor, SCMPro

KNOWLEDGERISKS FOCUSFORECASTING ACADEMIC ADVOCACY

11 January 2015

information system be of much help. market response, i.e. sales force composite method. This method is an

Similarly, another company, a tractor outcome of thinking that as the business major, for which we designed a environment becomes more uncertain, forecasting model, had almost given up firms can minimise their supply chain the causal method of forecasting and cost by adapting responsive and embraced the sales force composite postponement strategy rather than being method, even though the latter's dictated by forecast. In supply chain statistical and judgmental considerations accuracy remained a major worry. literature this is called “quick response”. combined? In a study conducted by the Tractor demand is closely related to what Firms use their widely dispersed sales Great Lakes Institute of Management, happens to agriculture. We had force to compute a rolling forecast and Chennai, it was found that the most identified a causal model that was based align their supplies to these forecast. But widely used method of forecasting is the on drivers of demand for tractors and this approach does not solve all the sales force composite method. Causal provided a fair guide in planning sales. problems.and time series models have given way to The company did not know how to

rolling plans. With the changing nature convert causal forecasts into short-term For example, we found that there is a of businesses and increasing complexity forecasts for better operational planning general tendency for small changes in due to changing nature of demand, this and thus gave up scientific forecasting customer demand to be amplified within shift from quantitative to qualitative for judgmental methods. a production distribution system. models is understandable. But what we Upstream replenishment demand and

On the other hand, agribusiness firms found surprising was that even where physical shipments exceed the original such as Bayer and Syngenta have been causal and time series models would order quantity. They are caused due to quite successful in this area. Along with have been appropriate, IT based sales orders moving up the supply chain their rolling plans, they also forecast the force composites were used blindly. levels, unplanned trade and promotion crop scenario for various regions. They Forecasting is not owned as yet by any discounts, long lead-time and batch intelligently use their sales forces to track department, thus a consensus approach ordering.changes in the cropping pattern, areas has yet to evolve leading to a budget under different crops, procurement driven demand planning.prices and rainfall. This data is then used

What these companies probably forget is to create an operational sales forecast on that not all demand is unpredictable: both a quarterly and a monthly basis. there are times when demand follows a Not surprisingly Syngenta and Bayer predictable pattern. While auditing the have been able to minimise inventory in forecasting processes of a lifestyle major, comparison to other players in the

All these are essential parts of business I found that the company used the time industry.organisation and these marketing, series technique for its vacuum cleaners logistics and forecasting initiatives lead and spare part requirement. The forecast

Forecasting methods and models need to to wide scale fluctuations. Forecasting is error was so high that they gave up be applied intelligently. Indian firms often used as an order history from the forecasting in favour of an ERP system seem to have lost their direction. Their company's immediate customers. At where sales force composite forecasts choice of forecasting methods seem to be each level of the supply chain, members were converted into rolling forecasts. dictated by supply chain requirements smoothen their orders based on their This too did not meet with much with little understanding of when, understanding and comforts.success. To understand the problem we where, what and how to forecast. The used data collated from Mumbai's Such appropriate choice of a technique Colaba market and found that the business driven variability is further depends upon the inherent uncertainty consumption data showed strong distorted as marketing and promotions in the business environment and factors seasonality. No forecast would be create havoc with market data or that cause this uncertainty.accurate unless corrected for the seasonal demand trends. Most members of the

trend and combined with the According to a number of surveys, firms supply chain stock during promotions appropriate time series technique. Nor today are moving away from and discounts, leading to a jump in would the investment in an up-to-date sophisticated techniques to one based on demand. But each promotion is carried

Keep internal biases in check:

Improve business practices:

What these companies probably forget is that not all demand is unpredictable: there are times when demand follows a predictable pattern.

There is a general tendency for small changes in customer demand to be amplified within a production distribution system.

THE BEST OF 2014

12January 2015

out in isolation vis-à-vis the rest of the changing needs of the supply chain in supply planning and execution, demand organisation; and strategically to terms of changing business models and planning, logistics, and strategic compete with key competitors. Keeping processes. There is a lack of collaborative sourcing. Forecasting would be effective track of these spikes seems next to architecture in decision support only if we know the key linkages impossible, be it in the consumer software. These firms still use ordering- between structures and processes. durables sector or in an engineering based information instead of flow-base. Among the most important ones are company or for that matter Lack of advance planning with process common information, co-location, agribusinesses. A forecaster sees the functionality hinders optimal supply cross-enterprise teams, cross-functional upward trend and forecasts high leading chain allocations. Real-time teams, common measures, joint to inventory costs in the supply chain. communication between information planning and some degree of trust.

systems transport and warehouse Similar problems are posed when a full We found that firms which used management systems and advance truck load becomes the norm due to the forecasting successfully had developed planning systems is totally absent. transport discount, and here again the not only cross-functional trust, but also Information systems in these companies, jump in data can mislead forecasters. We cross-organisational trust with thus, lack a modular, pen and Internet-also found that longer lead times meant distributors and suppliers. The cross like architecture or “web-enabled ERP”.higher demand amplification, poor functional discipline that requires the forecast and excessive inventory cost. Forecasting finally is victim of the same various internal groups to put aside their

ills which plague any organisation. To turf issues and focus on building an In sum, firms often blame forecasts for facilitate the changing dynamics of advantaged distribution system. Many the error when the real culprit is their business in response to uncertainties, successful companies have succeeded in own business practice. Forecasting these firms need different processes, improving cooperation among internal methods can work when you are in a structures and linkages. Many of these functions and gaining significant position to track this business driven firms who claim to practise supply chain operational benefits. Whereas the firms variability and then factor them into management in practice do not have in which well meaning employees were your forecast.one. Softwares bought by these firms reluctant to work effectively together

Finally, it should be cannot replace the need to link with other departments inside the firm, remembered that forecasting is an structures with processes. Most of these found it easier to point fingers at other integrated exercise in which all levels of firms have a rigid and outdated departments than cooperate in making the supply chain are involved and organisational design leading to lower the forecasting error-free. They willing to share information which helps internal flexibility. They are unable to considered departmental or functional in increasing demand visibility within link various processes of organisation excellence as more important than organisations as well increase the with corresponding structures. business excellence.performance of forecast. IT thus is a

Thus it is clear that forecasting as an critical tool. But, most firms show a exercise is more than using sophisticated significant level of dissatisfaction with techniques. These techniques will work the quality of IT.effectively only when we create demand

We found that most firms lack extended visibility across the supply chain. This enterprise functionality and open system calls for aligning marketing, The structural issues architecture which can facilitate promotions, discounts and other here deal with what is to be done in integration and collaboration and bring logistics decision with a clear purpose of terms of organisations, in terms of cross-transparency across the total domain of creating demand visibility across the functional teams, what will be done in supply chain management. The current supply chain. Information technology is terms of supply bases in terms of the information systems are inward looking an important forecasting enabler, but it structure of distribution channel, and and miss linking across the boundaries is not effective unless the right kind of the structure of the manufacturing of the organisation. They do not organisational design in terms of new centre. Key process that come into play connect easily with other systems. structures, processes and linkages are put include such things as Information systems in these companies in place.insuring/outsourcing, strategic also lack flexibility in adopting to ever processes, new product development

Share knowledge:

The way forward:

Thus it is clear that forecasting as an exercise is more than using sophisticated techniques.

THE BEST OF 2014

Demand Planning and Supply Chain Forum 2015

February 21, 2015, 'The Orchid', Mumbai

ISCM

“The State of Demand Planning

and Forecasting in India” will release a report on

at the event.

Forum Agenda

Keynote Address by-

Dr. Rakesh Sinha, Godrej Consumer Products Ltd.

Special Address-

Sales and Operations Planning by Pratin Vete,

Associate Director- Performance Improvement, EY

Measuring Performance by-

Dr. Rakesh Singh, Chairman ISCM

Panel Discussion-

The Way Ahead

Recognizing the winners

Demand Planning Forum celebrates the demand planning and forecasting function in Indian

companies, by recognizing and sharing the best practices adopted by both individuals and

companies. ISCM invites top companies to share with it the demand planning process.

£Benchmark yourselves against the best in the

Industry.

£Hear what Demand Planning and forecasting

will look like 3 to 5 years from now.

£Improve your company's forecasting

accuracy and the value and effectiveness of

your forecasting and planning team.

£Get your team to learn and make your

Demand Planning more productive.

The Forum is open to product managers,

marketing managers, corporate planners,

market researchers, or professionals who

prepares or analyses forecasts as part of their

job responsibilities.

All corporates who have a formal demand

planning and forecasting function are

encouraged to participate under the corporate

platform.

Who Should Participate? Why Should You Participate?

Registration fee: Rs. 7500 + tax. For registration,

Contact info@iscmindia.net or call 022 60020157 / 59

Initiative

here is no doubt that the fast-changing and glamorous Timage the fashion industry projects to consumers and the rest of society is very appealing. Nonetheless, it is this very aspect of its nature which poses significant challenges for supply chain professionals. One such challenge is the marking-down of slow-moving items at the end of the season, an example which highlights the rationale behind a number of important decisions made by companies in relation to network design and inventory location.

Interestingly one particular item might shift faster or slower, depending on the store and its location. Generally, slow-moving stock ends up being sold at a significant discount during

14January 2015

Dr John Gattorna is an acknowledged 'thought leader' on the global supply chain

scene. This article, examines the challenges of supply chain management for

global fashion brands. The article is special for the insights it brings on aligning the

supply chain to the customer needs.

Dr. John Gattorna UTS University of Technology, Sydney

Xavier Farrés Miebach Consulting

Global Fast Fashion Supply Chains

THE BEST OF 2014

Challenges of

January 201515

clearance periods, or shifted through an positioned inventory locations; typically in external, online, or company outlet store. Asia, Europe and the US respectively. In some However, if located in the right store at the cases, companies use network modelling right time it could have been sold at full- technology to assess different alternative price. Therefore, companies are increasingly inventory location scenarios in order to opting for simpler supply chain networks, to identify the optimal solution.easily and quickly replenish and rotate stock However, it is also possible to tackle the to stores, in accordance with local market mark-down issue from another angle. Some trends. companies optimize revenue streams during The ideal situation would be to operate with sales periods using price elasticity only one global inventory location. However, optimization techniques. In this way they can this is not a practical option for most implement discount mechanisms that businesses. Currently, only one company, maximize revenues in accordance to the Inditex (Zara), has been able to achieve reaction by customers to different price efficient global deliveries from central points based on historical performance.distribution centers based in Spain, to stores within 40 hours range. This is one of the reasons why, Inditex (Zara) frequently arises Sourcing and manufacturing lead times in conversations. Generally recognized as a within the fashion industry can usually be world leader in fashion retail, the company is anything from one to three months. As a renowned for listening very closely to consequence, optimizing the process of store consumers, making rapid and instinctive replenishment requires accurate forecasts. product design decisions, and being able to There are a number of proven factors at create and place products in stores faster than different stages of the forecasting process any competitor. Some outsiders are convinced which help improve accuracy. These include, that their business model places a bigger the reaction of potential customers to new emphasis on the cost of stock and mark- collections, specific events held to discuss and downs, rather than the process of producing determine forecasts, and analysis of first and shipping products, a model with which orders from those specific channels which are many companies feel systematically first in the order decision cycle, for example, incompatible. wholesale.

In fact, the volume of product shipped by many companies does not even merit attempting to deliver globally with such speed and efficiency. Paradoxically, size is sometimes an enabler of speed because the very big volumes, 800 million garments a year in the case of Inditex, facilitates cheaper airfreight costs, and allows for production to shift

In contrast to other industries, this between suppliers, an option not generally forecasting process is more opinion than open to most players in the industry.statistically based, mainly because the

Other companies have opted to situate majority of products are new and there is no inventories regionally to guarantee rapid historical data to rely on. That said, there is deliveries and ensure order lead times to definitive evidence that this process is stores do not exceed three days. Companies becoming more multi-functional in order for that have chosen this particular strategy, companies to collect the best intelligence operate with networks which normally from all possible sources. In the opinion of consist of up to three or four globally- Manel Jiménez, the Supply Chain Director of

Stores Replenishment

THE BEST OF 2014

Companies that have chosen this particular strategy, operate with networks which normally consist of up to three or four globally-positioned inventory locations.

16January 2015

Desigual, “the process of generating accurate forecasts is critical. We are continuously refining the way we incorporate the intelligence we gather during delivering of a collection. The more multifunctional, the better the results”.

Finally, there is no doubt that social media and direct interactions with customers are starting to become a source of intelligence, not only for product design, but also for generating better sales forecasts. When companies operate in different channels (wholesale, franchise, retail and online)

We have already discussed in this global interviewees confirmed that the behavior of fashion retail series about network design and those channels alters according to market inventory location in Chapter 1 and stores conditions. As a consequence, they replenishment in Chapter 2. In this chapter acknowledged that the theory of buying we want to take a more upstream view to behavioral segmentation, as developed by discuss about sourcing and manufacturing supply chain thought leader John Gattorna lead times. In this particular area, there are would definitely facilitate a more effective two key aspects being debated within the forecasting process.industry. The first is the question of sourcing

Most companies' supply chains replenish location. their stores based on stock levels and

Sourcing far away ensures cheaper costs but company forecasts. However, the Inditex often entails visibility and traceability model differs slightly in two ways. Firstly, challenges, whereas, sourcing closer to key automatic order replenishment proposals can markets guarantees a faster response but with be amended by store managers who actually higher costs and capacity constraints. The have the final word on order quantities. second key debate is whether to buy fabrics Secondly, lack of product availability in stores in order to react faster to market changes, or might be seen as the consequence of the buy finished products to avoid the capital demands of fashion, with new products and obsolescence costs that holding fabrics in continuously brought in to satisfy consumers' stock often creates. Nonetheless, in the need for new styles and trends.opinion of Berta Escudero, the CSCO of

In any case, sales in stores tend to build up GrupoCortefiel, the best supply chains in the over the weekend period. The replenishment industry have managed to find the right processes therefore have to be flexible enough balance between all the options, in order to to cope with corresponding weekly peaks and more effectively meet the requirements of troughs, a fact which can pose difficulties, their respective business models. especially when operating Distribution

In any case, accelerating the responsiveness of Centers. Stores have to have sound product key suppliers in order to react faster to replenishment procedures to avoid out-of-market changes is a definite priority for most stock in stores, when the product is available companies and is seen as a clear competitive in the back room. For this purpose stock advantage. The behavioral supply chain record accuracy is of vital importance, and design configuration developed by John increasingly companies are at last considering Gattorna, provides useful insights into how RFID as the ultimate solution to this this particular goal might be achieved. problem.

Manufacturing Lead Times

Stores have to have sound product replenishment procedures to avoid out-of-stock in stores, when the product is available in the back room.

THE BEST OF 2014

January 201517

A good example of this kind of thinking could manufacturing capabilities, increasing their ability be heard in the words of Nick Cullen, the to react quickly. In addition, their purchasing Group Supply Chain Director of Clarks: “Our power gives them more leverage over suppliers. business is complex. We have multiple To increase agility, some companies may need to markets, channels and points of supply around significantly transform engrained processes, the world and we're continually refreshing our systems and values embedded within their supply range as we're in the fashion business. chains. Making these modifications will definitely Whichever way you look at it we need value require robust change management and execution chains with different characteristics. We capabilities. When pushing for these changes, the attempted to force a one-size-fits-all approach implications of mark-downs and the loss of sales and trim around the edges for different needs. opportunities due to inadequate response can play It became clear that we need a small number of a major role for building a “burning platform” for different value chains to be both efficient and change. effective. Currently we are part way through implementing value chains where each one has From experience, in order to achieve a successful a different balance between cost, service, transformation of this scale, strong support from flexibility and agility for particular senior executive leadership is customer and consumer channels. required. All stakeholders will have The key factor that will make this a to alter their modus operandi and success is that it is a business wide this will require assistance from transformation to create value the very top.chains, and it unites the business around a common purpose”

In this series on global fashion Additionally, it has been retail we have discussed about acknowledged in conversations network design and inventory that the refinement of certain location, stores replenishment in emotional skills may enable key and sourcing and manufacturing supply chain personnel to lead times. At the end of the successfully manage their relationships with

series, we want to discuss about talent business partners. The right combination of management, as it is a major current concern for this factor with the former one explained global supply chains. The growth in emerging above, could largely determine whether the markets has created a higher demand for pursuit of improved responsiveness and managers, and the fierce talent wars amongst integration of the supplier base will be companies to hire the best staff makes the successful. situation even more complicated. Additionally, as

Interestingly, the Swiss watch industry offers global supply chains keep developing at a rapid relevant insights into this particular issue. The pace, supply chain management has become a precision of machines and high-end design for much deeper and broader discipline. which the industry is renowned, require very

The increase in depth is a reflection of the more complex supply chains and strong relationships complex relationships between the functions and with business partners, i.e., taking both a sophistication of the different technologies and downstream approach to maintain awareness tools in use today. The increased breadth of supply of market developments and ensure accurate chains is due to the more global nature of forecasts, and an upstream view to guarantee business, where managers are expected to work the supplier base is engaged and agile enough with a wider variety of people and cultures in to satisfactorily react as needed. Once more, it more geographically diverse contexts.is size which can greatly determine agility.

Larger companies often have in-house This situation means that the understanding of

Talent Development

The increase in depth is a reflection of the more complex relationships between the functions and sophistication of the different technologies and tools in use today.

THE BEST OF 2014

18January 2015

cultural differences, the flexibility practice is highly valued by those them to quickly respond to fashion needed to deal with distinctive individuals' assigned overseas trends, whilst minimizing the cultures, and the capability of postings and a very good way of detrimental impact of mark-downs building trust in different cultural promoting company values. In some in slow moving stock. Furthermore, settings have become genuinely cases, Long-term overseas some retailers utilize network essential requirements to engage assignments are considered modelling optimization technology employees within firms and to beneficial, although not very to find the best solutions. ensure talent is nurtured from within practical when there is a need to find

What became very clear was the organizations. In the words of the talent in the country of origin. importance of sales forecasts for CSCO of GrupoCortefiel, Berta Finally, periodic team reports are enabling efficient store Escudero “International companies regarded as being very important to replenishment. These forecasts are with a multicultural workforce are ensure members of staff in global becoming increasingly more aware of multicultural locations continue to nurture the multifunctional. Moreover, as diversity. To be successful in global values of the company. In any case, garments change continuously to business environments you have to talent is not an easy topic in the match fashion trends they are also be very respectful with cultural global fashion industry. As Alan becoming more opinion than differences” Higgins, the Operations Director statistic-based, although social media EMEA of New Era Cap Company Interviewees have found global explains, “Global Talent doesn´t and customer interactions are

cultural models beneficial for a develop by itself. You have to starting to bring workable data into better understanding of these acknowledge cultural differences, this process. differences. In particular, and put in place a specific program participants found the model Interestingly, larger companies are with a compelling employer developed by David C. Thomas and sometimes the most agile, and proposition and a structured Kerr Inkson to be useful because one having the right mind-set, values, development plan. When you can easily identify countries in the and organizational structures is identify the people with potential, seven cultural dimensions, e.g., essential for achieving such agility. you have to put the effort in as a Spain and France in “Egalitarism”, What is certain is that the deep business”. Japan and USA in “Mastery”, China transformational changes needed to and India in “Hierarchy”, the UK in Of the policies to apply in order to achieve the required level of agility “Affective Autonomy”, and the retain and develop key employees, are only successful when supported Netherlands and Switzerland in ensuring responsibility, showing by the upper-levels of organizations. “Intellectual Autonomy”. respect, revenue sharing schemes, Interviewees advocated the use of

and the practice of rewarding global cultural models to enable One prevalent topic in conversations individuals (not only with monetary better talent management. However, was that of the Chinese culture. In compensation, but also in terms of specific talent retaining plans with particular, the importance of taking recognition) were seen as most clear leadership accountability are the time to forge the personal effective. One retailer had clearly relationships necessary for doing also deemed very important.

addressed this issue by determining a business or implementing projects in number of specific guidelines and Finally, the management of the China. with thirty per cent of leadership customer buying behavior, through In terms of increasing employees' performance reviews being dedicated the alignment of strategy, values and loyalty to firms, participants have to talent development. leadership styles as detailed in the concluded from experience that Dynamic Alignment methodology providing extensive overseas training developed by Dr John Gattorna is to key employees from developing providing the most clues as to how The research conducted and economies is a practical way to the global fashion retail industry reported in this paper has shown that increase retention rates. might overcome the challenges it global retailers usually opt for very

faces.simple network designs which enable They have also concluded that this

Conclusion

THE BEST OF 2014

?Understand drivers and enabling framework

for reaching rural markets.

?Understanding the role of corporate

initiatives in rural and agricultural

development.

?Getting abreast with logistics, credit and

insurance need in rural markets

?Develop an understanding of the challenges

in Agri and Rural Supply Chain

?An aggregate collaborative out of box

strategy for all players in the rural Agri

markets.

Rural markets provide a vast opportunity for corporates in India. In the

past companies have been flirting with rural markets without much

commitment. There are three important flows in rural markets. Urban

to rural for consumables and expendables, urban to rural for

agricultural inputs and rural to urban for agricultural produce. Rural

and agricultural marketing suffer from infrastructure, and credit

constraints. Making cost of reaching rural market high. Farmers on

another hand do not find access to markets directly leading to lower

realization for their products.

The summit will explore the evolution of Agri retail, logistics

challenges, lack of access to credit and risk management. This will

provide a platform to explore a collaborative out of box rural reach and

development strategy which will be a win-win solution for all

stakeholders.

th15 May 2015, Mumbai

Out of the Box Strategies for the Future Who Should Attend

Agenda

?Challenges of Modernizing Indian Agriculture – A Macro and Micro View

?The Changing Rural Consumer

?Rural Reach and Agri Supply Chains – Strengthening the Ties

?Challenges of Reaching and Communicating with Rural Consumers

? Making Agri & Rural retail successful

?Role of Rural Credit / Insurance in rural Agri Supply Chain

?Rural and Agri Logistics – Cold Chains, Warehouses and infrastructure bottlenecks

?Experiments in Agri Logistics – the case of ITC e-Choupal and Tata Kisan Kendra

?Dynamic Alignment – Bringing Sales, Marketing and Operations together

?Out of the Box Strategies for rural and Agri Markets

Delegate Registration Fee: Rs. 10,000 + Tax.

For more detail, contact jayaram.nair@scmp.in or call 022 60020157 / 159

Rural and Agri Strategy Summit 2015

Rural and Agri Strategy

Initiative

ccording to Council of Australian Governments, Disaster resilience is A'the capacity to prevent, mitigate, prepare for, respond to, and recover from the impacts of disasters'. Building supply chain resilience enhances our ability to minimize the effects of future disaster events on communities, economy and environment. It also means we efficiently and effectively cope with the impacts of disasters when they do occur. Resilience is a dynamic quality and is usually developed and strengthened over time, it builds upon rather than replaces existing strengths and arrangements.

Global supply chains expand the risks of natural disasters and in turn natural disasters affect supply chain operations. As supply chains go global and multi modal, these developments globalize disaster risks and bring extra vulnerability to businesses, particularly to their production networks. Natural disasters are one of the causes of disruption to supply chains. They usually result in widespread damage to a large number of companies and production locations at the same time. This has a severe impact on industry and significant time is often required for recovery from natural disasters.

According to an ARTNeT Working Paper, “some widely adopted supply chain management strategies also increase the risks of problems in situations of natural disasters. Examples include the “just-in-time” practice and lean supply chain management, which require more frequent deliveries of supplies, minimizing the non-value-added time and inventory. These efficiency maximization models in business increase the level of interdependence between firms and correspondingly raise the chances of a supply chain

20January 2015

Humanitarian logistics is one

aspect of a supply chain – a

supply chain response to a

compelling cause. However,

apart from the response of the

supply chain to a disaster,

disasters too have an impact on

supply chains. Humanitarian

logistics addresses the supply

chain impact on disaster. The

converse, though not a part of

humanitarian logistics, has its own

challenges. For one it creates

resilience in supply chains. This

article has been chosen for its

focus on an emerging area of

SCM – Humanitarian Supply Chain

Risk Management.

Disaster Risks and Impacts on

Supply Chains

KNOWLEDGERISKS FOCUSFORECASTING ACADEMIC ADVOCACY

21 January 2015

on the supply chains. supplier can reduce production costs, it can also make producers vulnerable to Another defining crisis was the floods disasters. Although having multiple in Thailand in 2011. A large number of suppliers in different locations may firms had chosen Thailand as a low cost raise transaction costs, it reduces the manufacturing center. And most of risk of disruption by securing supply them were confined to the low lying disruption. Also, the compression of substitutes. To achieve a proper balance areas in and around Ayutthaya and non-value-added time in inventory between efficiency and risk, firms Pathum Thani. The floods caused transfer and storage may remove the should take risk into account and significant impact on other countries essential risk buffer between the conduct a prudent cost-benefit analysis through their global supply chains. In production nodes and deepen the and implement measures to enhance India, car manufacturer Honda was negative impact when natural hazards disaster resilience. Such measures may affected by the floods as some of its occur in the global supply chain. For include: 1) raising production crucial parts were supplied from example, when a disaster hits a supplier flexibility to cater to the volatile nature Thailand. Thailand's supply chain or a distribution link and disrupts the of the market, 2) selecting suppliers on disruption and production losses supply chain, the focal firm that adopts the basis of risk criteria rather than on affected Japan, where the “just-in-time” practices will suddenly pure cost minimization (Christopher, manufacturing production index fell by encounter production suspension due 2011), 3) shortening the supply chain 2.4 per cent. In US, the price of hard to supply shortages and the negative and increasing supply chain visibility, disk drives tripled during the floods. effect will transmit quickly to the 4) diversifying risks by using different

downstream supply chain.” distribution channels and suppliers, 5) enhancing relationships with other There are a few lessons from the great supply chain partners. The second key Japanese earthquake. In March 2011, strategy is to Invest in long-term an earthquake struck Japan triggering a continuity.devastating tsunami, which led to the

meltdown of nuclear reactors in For Governments, the policy Fukushima. The disaster caused a framework advocates a dual role. record 210 billion United States Governments have a responsibility to Dollars (USD) in economic damage, Supply disruptions due to natural develop and disseminate information representing 3.8 per cent of Japan's disasters are no more an abstract about risk and risk reduction measures Gross Domestic Product (GDP). The discussion. to raise awareness within global supply combination of the earthquake and chains and assist individual entities to Given the scale of possible damage due tsunami damage and the meltdown of prepare for potential natural hazards. to natural disasters, Asia-Pacific the Fukushima nuclear reactors affected Post-disaster recovery is another Research and Training Network on broad areas and caused severe damage important issue for governments as the Trade have published a policy guideline in various sectors, especially in the speed of the recovery process is the key for managing the impact of disaster risk manufacturing and chemical industries. to mitigating negative consequences on on supply chains. The framework As a result of this disaster, individual global supply chains.addresses three stake holders – the firms suffered huge direct losses, and private business enterprise, the To reduce vulnerability to supply chain the disaster could have a longterm governments and the private-public disruptions, companies must think of impact on the ability of firms to partnership ventures. the entire value chain . The pros and produce and deliver their products or

cons of efficiency and risk in supply services. On top of this, the disaster According to the policy framework, chain should be carefully evaluated and affected the employment opportunities Enterprises involved in global supply aimed at building disaster resilience. in Japan, creating large scale chains must adopt risk reduction Governments play a fundamental role unemployment due to closure of firms strategies to increase resilience. Two key in building supply chain resilience. in the affected area. This subsequently strategies are: Disaster risk reduction is essential to led to labor migration from this area to Find a balance between efficiency and lowering potential impacts and should other locations, creating fresh pressures risk - While sourcing from only one

Global supply chains expand the risks of natural disasters and in turn natural disasters affect supply chain operations.

According to the policy framework, Enterprises involved in global supply chains must adopt risk reduction strategies to increase resilience.

THE BEST OF 2014

22January 2015

be incorporated into long-term action plans that encourage disaster-resilient supply chains. At the same time, measures should be taken to increase the speed and effectiveness of disaster recovery in order to prevent the spread of the impact of the disaster through the global supply chains.

Specific measures could include providing financial support, protecting and promoting employment and facilitating business rehabilitation and maintenance. Corresponding measures should also be adopted to maintain the confidence of investors in global supply chains and therefore ensure the long-term competitiveness of the country. Effective management of the risks also requires collaboration between the public and private sectors. Public-private partnership in managing risks arising from natural disasters should be explored in areas such as insurance, strengthening physical assets, issuing extreme-weather warnings and sharing information on disaster risks and risk reduction strategies. Successful implementation of public-private partnerships in managing risks arising from natural disasters is crucial for the security and well-being of global supply chains and national economies in the future.

Extracted from: The impacts of natural disasters on global supply chains By Linghe Ye and Masato Abe, ARTNeT Working Paper Series No. 115.

Figure 3- Disaster impact spill-over from the Great East Japan Earthquake

Auto production after Japanese earthquake

March 11 April to June 11

Per

cent

age

Cha

nge

(% Y

oY)

Japan PhillipinesThailand

-60

-40

-20

0

20

March 11 April to May11

Per

cent

age

Cha

nge

(% Y

oY)

Japan PhillipinesThailand

-60

-40

-20

0

20

Malaysia

Source:CEIC Data Company Ltd. (accessed 30 March 2012

Comparison of National and Global Supply Chains

PN: A Production Node

: A Distribution link (including service facilitating these processes)

PN1PN2

PN4PN3

PN6PN5

Focal Firm

Global Supply ChainNational Supply Chain

Nation BNation B

Nation CNation C

PN1 PN2

PN4PN3

Worldwide Customers

DomesticCustomers

Focal Firm

PN6PN5

Nation A

Nation A

Customers

Table- Losses for Eartquake damages in 2011, Renesas Electronic Corp

535.80

90.70

77.10

73.30

37.30

814.20

(198.90)

615.30

Repairs to Property, Plant and Equipment

(expenses for restoring to the original condition)

Loss on disposal of stock

Loss on disposal of fixed assets

Fixed expenses during suspension of operations

(loss for inability to operate)

Loss on cancellation of lease contracts and others

Total loss on the disaster

Insurance payments received

Net loss on the disaster

Note: Calculations based on 1 USD= 80.5 YenSource: Renesas Annual Report 2011

ItemsAmount

(USD Millions)

THE BEST OF 2014

January 201523

Small and Medium Enterprises (SME) are the backbone of an economy. They contribute

immensely to the employment opportunities in the country and account for roughly 40 percent of

the exports from the country. However, when it comes to financing, SMEs are considered higher

risk and face multiple constraints. Asad Ata; Manish Shukla; Mahender Singh from Malaysia

Institute for Supply Chain Innovation examine the issue of Finance in SME supply chains. This

paper has been chosen as it highlights the biggest challenge to SME- finance.

sia's economic miracle is often associated Awith large, multi-national companies. While these organizations are important drivers of the region's growth, SMEs have played a key role. However, unlike larger companies SMEs struggle with finance as a limiting factor rather than a lever for value generation.

As the backbone of many economies across Asia, SMEs have been the key drivers of the remarkable growth that the region has

Asad Ata Mahender Singh

THE BEST OF 2014

SME Supply ChainsFinancing

24January 2015

achieved over recent years. More governments in most countries have made importantly, these enterprises will dedicated efforts to create policy continue to play an important role in frameworks, regulations, financial Asia's economic renaissance. It is institutions and rating agencies to promote estimated that SMEs comprise more the growth of SMEs. India has fostered an than 98% of the number of enterprises influx of investment in Asia. The in the Asia-Pacific region. The sheer development of India's domestic market has number of SME organizations is not a significant influence on neighboring the only reason why they are important countries such as Bangladesh, Sri Lanka, to Asia's prosperity. SMEs promote and Myanmar, and on the markets of the business ownership and entrepreneurial ASEAN countries. The Indian government skills. They can be agile, adapting has taken several vital steps towards quickly to shifts in supply and demand, identifying and promoting various SME attributes that are particularly sectors in India. The Ministry of Small and important in volatile global markets. In Medium Enterprises (MSME) has addition, SMEs are engines for job developed policy guidelines and legal creation. frameworks. The Small Industrial

Development Bank of India (SIDBI) In an increasingly uncertain and provides credits to SMEs through a tie-up complex business environment, with various public-sector banks.understanding and managing the flow of finance through respective supply chains, is a critical capability for all companies Access to timely and cost-effective finance is regardless of their size. This is a big challenge for any SME across the particularly true for SMEs as they world. The SME need for finance can be compete on scope instead of scale, which broadly divided into two categories based on requires an adaptable supply chain. This their capital and operating expense. Capital is a challenging task for SMEs who are expense is incurred for activities such as limited by resources and the setting up the venture, scaling the understanding needed to acquire the operations, facility modernization, skills essential for designing, building, diversification, and other emergent needs. and managing an advanced supply chain; In addition, a SME incurs operating factors critical for their survival. For expense in every cycle of its growth, for the example, SMEs have a difficult time payment of raw material, salaries, rent, and accessing and understanding their capital utilities etc. Similarly the source of funding requirements and managing finances for these expenses can be classified in terms effectively internally and across the of fixed costs and working capital. The fixed boundaries of their enterprise. Without a costs involved in setting up the business are good understanding of currency mostly the initial investment made by the fluctuations, trans-border transactions entrepreneur. The entrepreneur investing in and associated costs, SME's struggle to land, machinery, and buildings, may get compete. While larger companies loans from the banks. Government funding capture efficiencies by forming strategic also represents a huge contribution at alliances with core suppliers, SMEs are various stages of the venture starting from not equipped financially to enter into the setting up of the business to technical such partnerships. modernization. Other sources of funding

can be family, friend, and venture capitalists. Table 1 presents a snap shot of the sources

Realizing the importance of SMEs, the and requirements for capital.

The Demand and Supply of Finance

Government Initiatives

Banks want to see at least two sources of repayment to justify the ability of the lender to repay the loan.

Many of the SME businesses are based on needs and not as a conscious choice or an opportunity to build upon.

THE BEST OF 2014

25

for the right purpose. Most banks want the owner to put in at least 20 to 40 percent of the total request. At the same time, banks depend on the owner's equity for rating a loan request.

The associated transaction cost in processing a loan application, administering the loan, and updating the status makes it invariable for a large number of banks to finance SMEs. Any financing product or scheme One of the largest costs is enterprise such as an ICT firm, provided by the banks is also incurred in the initial stages of this information asymmetry affected by the system's political, the SME's life cycle in the form becomes more crucial. A major social, and legal environment of operating expenses. Bank issue is the lack of a policy system. Inefficiencies in the loans are of the most prominent framework for risk analysis of the banking sector also contribute to source of funding for this borrowers. This results in the this problem. In the absence of a expense. Once the business is lending organizations charging functional system to enforce and operational, there can be several very high interest rates for a good monitor the rules of lending and other sources for financing the loan and a low interest rate for a borrowing, inappropriate use of working capital. One of the bad one.the loans cannot be prevented. major sources is through advance

Banks want to see at least two For example, in the Indian payments from buyers and credit sources of repayment to justify subcontinent a notable behavior from the suppliers. Another the ability of the lender to repay among borrowers primarily source is financial service the loan: the cash flow from the engaged in agriculture and providers, offering finance business as well as the presence related business is to use these against finished-goods inventory.of a secondary source such as funds for personal financial

Despite all the efforts, SMEs collateral. SMEs' inability to needs. Bad farm loans continue to face several hurdles provide past financial statements contributed 44 percent of new to sustaining their operations. to help analyze their cash flow non-performing loans (NPLs) in One of the most predominant is and the minimum required fiscal year 2011 in India.access to finance both on supply collateral makes it difficult for

Thus the development of SMEs and demand side. On supply banks to extend these loans. requires the presence of a side, financial institutions face Existing businesses showing a supporting environment in any constraints due to a number of proven financial track record country. The figure below factors starting from information with consistent profit are more illustrates a conceptual asymmetry. There is a lack of likely to be approved than start framework categorizing the key accurate and detailed up, innovative businesses or a factors into two layers. While the information about the borrower. business operating marginally factors in the outer layer deal Few countries maintain a central but with an opportunity to grow with the legal, social and political database regarding the borrowers with additional investment. environment of the country, the within the organized financial Moreover, the financial factors in the inner as discussed sector. But maintaining a institutions also want to see the earlier in the background are database of the overall SMEs is owner's taking some equity in a associated with infrastructure, not feasible for the banks due to business. This is to ensure that technology, market and finance the large number of borrowers. the owner is committed to the services available to the SMEs.For any start up innovative business and that the loan is used

January 2015

THE BEST OF 2014

26

INSIGHTS

Lack of motivation, interest and education

Working Capital Constraints

Fixed Capital Constraints

Next Steps

Inability to qualify for loans

from lending organizations. With most of their assets leased or rented, SMEs also lack the collateral required for The case studies and interviews conducted provide financing or loans.insights into financial needs of SMEs in the respective

sectors. On comparing the following similarities and differences were observed:

Many of the SME businesses are based on needs and not as a conscious choice or an opportunity to build upon e.g. businesses or trade including agro-business ventures SMEs are under high pressure due to the constraints of inherited from the family lacks the motivation and day-to-day working capital.entrepreneurship which is a key ingredient for innovation.

The longer the cash cycle, the higher the pressure e.g. Coupled with a lack of education, the growth and Horticulture where it could be from 60 to 90 days verses maturity of the business is not realized to its full potentialsmall scale manufacturing.

As a result, SME's are vulnerable to market changes. These Establishing a line-of-credit with the suppliers could help are extremely varied and often unpredictable; the alleviate some of this pressure. introduction of a low cost fashionable scarf from China

and the dumping of live chicken into the Malaysian Where advance payments or loans are possible from markets from Thailand on account of floods, are two buyers, the demand is more certain and predictable, and examples. While in both these cases the SMEs were aware SMEs are able to operate with greater confidence.that it will only take about six to eight weeks for the markets to absorb these disruptions, enterprises that are susceptible to even relatively small disruptions would For businesses with high investments in fixed assets mostly collapse.upfront and a lower rate of return, scalability is

constrained even when an opportunity to grow – such as purchasing a farm or a dairy – with further investment

MISI seeks to develop a framework that links the SME arises.needs for capital with the role the SME has in the Supply Chain. Based upon this goal, a Multi Criteria Decision Analysis Tool could be developed to help SMEs and Lack of documentation, bills and receipts to demonstrate financial organizations to gain insights into these business the cash flow of the businesses, especially for startup opportunities.enterprises, means that SMEs fall short on acquiring loans

?

?

?

?

January 2015

Legal Social

Political

Technology

SMEs

Infrastructure

Market Finance

Figure 1: Environmental Factors for SME Sustainence

THE BEST OF 2014

27 January 2015

Farmers in India face multiple challenges. As the harvest reaches the markets,

traders form a cartel to beat down prices. This limits the farmer's income and

exposes the sector to dramatic changes in food prices. The ability to store products

and release them for the right price can boot rural incomes and create a healthier

economy. But for that to happen, the farmer should be able to store the produce at

the right environment to avoid losses. One such area is inventory management –

not from the traditional perspective, but the inventory at the warehouses – the ability

to realize higher value from storage. Collateral management is fast emerging as an

option for firms to realize higher value from their supply chains. This article has been

chosen for dealing with an innovative financing tool for farmers – Warehouse

Receipts.

Agri Collateral Agri Collateral

THE BEST OF 2014

Management

28January 2015

To get around this problem of poor perceived he Indian agri commodity market consists creditworthiness, banks evolved an innovative of a large number of participants Tfinancial instrument – the Warehouse receipt. including farmers, multiple layers of A warehouse receipt is a documentary proof of aggregators and traders. The farmers have poor ownership of commodities (e.g. bags of wheat) holding capacity due to poor balance sheet that are stored in a warehouse, vault, or quality and credit history. Banks are keen to depository for safekeeping. The Warehouse identify lending opportunities within this receipts guarantee existence and availability of segment to meet their priority segment the commodity quantity, type, and quality in obligations. But the threat of a high level of an identified storage facility. It may also show non-performing assets and heavy supervisory transfer of ownership for immediate delivery or costs proves a dampener. To add to the for delivery at a future date. Rather than problems, if the agri produce is not stored at delivering the actual commodity, negotiable the right temperature and moisture, the warehouse receipts are used to settle expiring produce loses its value.futures contracts. The process of entering into a warehouse deal, storage, retrieval and despatch of stored commodities form the core of collateral management.

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

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

Collateral management services allow banks to ignore the borrower's financial strength and rely on the warehouse receipt issued by the agency for measuring creditworthiness. Contrast this with traditional lending for working capital, based on the balance sheet of

The Warehouse receipts guarantee existence and availability of the commodity quantity, type, and quality in an identified storage facility.

THE BEST OF 2014

Mr. Ragheysham Chandak, the Chairman of Buldana Urban had a moment of epiphany – as a farmer, when he transported his produce to the markets, he observed that the prices offered to him were lower than what was seen in the markets. The reason – the middle men who controlled the prices formed a cartel to push prices down during harvest. The same was sold at far higher prices a few weeks later. He decided to build the first warehouse in Buldana to store his output, and sell when the prices were higher. But his produce was too small for a warehouse to attain optimal performance. He tried to sell the idea to other farmers in Buldana. The farmers had a small problem – they needed the money immediately to square off their debts. The traders used this urgency to crash prices. Chandak purchased the produce from the farmers, warehoused it and sold it for a higher price a few weeks later. (To his credit, he traced each farmer and returned the difference in price to them!) Today Buldana Urban Credit Society run 300 warehouse and offers a unique “Grain Bank” to the farmers of Buldana. A place where farmers can deposit their produce, avail of loans on the value of the stored grains at lower interest.

That is the power of collateral management.

29

the borrower. Warehouse receipt financing is updated in real time on the status of the more secure due to the collateral manager's collateral. Collateral management in India will intermediation. The collateral manager continue to see tremendous growth and guarantees the quality, quantity and availability acceptability. The product, which started of the collateral, provides price information around 2004 and promoted by two new private and aids in disposal of the commodities, if sector banks, is now being used by about 40 necessary. The collateral manager also ensures financial institutions to disburse loans. that the commodities are adequately insured for natural calamities, theft and quality deterioration.

One of the challenges faced by collateral management service providers is the complexity of securing multiple warehouses spread across remote areas of the country. The Warehousing Development and Regulatory Authority (WDRA) were set up to regulate and ensure implementation of the provisions of the Warehousing (Development and Regulation) Act, 2007 for the development and regulation of warehouses, Regulations of Negotiability of Warehouse Receipts and promote orderly growth of the warehousing business. However, only 365 warehouses are registered with the warehouse authority, and an additional 555 applications are pending approval. 115 Agri Commodities and 26 Horticulture Commodities are registered for issuance of Negotiable Warehouse Receipts.

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

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

January 2015

THE BEST OF 2014

To provide secure and safe collateral management operations, extensive risk profiling, audit planning, and manpower management are required.

Collateral management operations process

A good collateral operating model aligns people, processes and technology, supported by clear objectives; products and services and well-defined controls. Daily actions include:

1. Managing Collateral Movements: to record details of the relationship in the collateral management system, monitor customer exposure and collateral received, call for margin, transfer collateral to counter party, check collateral to be received for the eligibility, reuse collateral according to policy guidelines, deal with disagreements and disputes and collateral valuations, reconcile transactions.

2. Custody, Clearing and Settlement

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

4. Margin Calls: to notify, track, and resolve margin calls.

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

30January 2015

here are a few key trends that define the industry. But what we are not Tthe Indian pharmaceutical industry – factoring in is that over 90 percent of and the one that attracts the most these new products will not exist three attention is the proliferation of brands. years ahead, or they are not growing. As Studies by EY s show that 94 percent of a result of this, the growth of existing the products launched since 2009 have products slows down, and we launch yet failed to generate a sales of INR 2 crores. another new product. Such brands contribute 70 percent of new Another trend that is visible is the product revenue, while approximately 10 shrinking of the new product pipeline. percent of brands contribute to 75 percent EY experience has shown that over the of the revenue. From the supply chain past five years there has been a perspective, this 90 percent, which has

significant decline in new product volumes but not value is the real launches – and this is across both challenge. The supply chain head has to domestic and multinational companies. spend considerable time and effort Now we have a situation, where there is planning for these products. It is believed a doubt about the quality and quantity that new products are a growth driver for

The real challenge to any pharma manufacturer in India is ensuring their products are

available on the store shelves across the country. Organized, modern distribution is

largely absent in the country. Instead we have layers of small players, who control the last

mile access. In the US, the company comes up with a product and then chooses the

distribution channel. In India, we need to do it together. To top it all, the allocation of

margins to these layers is not clear. This poses challenges for the pharma sector. Hitesh

Sharma, Partner - National Life Sciences Leader, and Pratin Vete, Associate Director –

Performance Improvement, of Ernst & Young speak about these challenges.

Challenge or Opportunity?

Complexities of Distribution Channel in India –

THE BEST OF 2014

But what we are not factoring in is that over 90 percent of these new products will not exist three years ahead.

31 January 2015

Any typical pharma company will have around 2000 distributors, out of which 500 would contribute around 75 percent of the sales.

of the growth driver – the new products.

Associated with this, there is an ever increasing sales force with sub optimal quality. The past seven years data shows that there has been a doubling of the number of representatives visiting percent of volumes. And their numbers are not a doctor –from 100 to 200. A top notch doctor large – there are around 15000 hub chemists. We could have 500 representatives visiting her. As a are all aware of their existence. But we have not consequence, the time per representative has picked up the significance of their contribution to come down to 2 to 5 minutes. The industry's the supply chains.inability to attract right talent as representatives

The second significant part about the supply has led to a decline in quality, and as a result, the chain is the channel complexity. If we look at the ability to build brands has taken a beating. urban markets, the retailer has two major

The industry is shifting from acute to chronic requirements – service within a quick time and and from branded to generic. Concurrently, better margins. And when we move to the Class technology has led to the decline of the doctor's II and below markets, the requirements change dependence on a medical representative for from service and margins to credit – generally information about a product. The focus is upward of 45 days. And because they need such shifting from portfolio focus to brand focus and long credit periods, no distributor can sell to from single stakeholder to multi stakeholder them – they can be serviced only by wholesalers. management. The industry today has the OTC, The important factor here is creditworthiness. generics-generics, hospitals, specialty and super And no stockist can guarantee creditworthiness of specialty segments. And each of them has its own 750000 chemists. In a real sense, the stockist is supply chain dynamics. Another shift we are an investor and the wholesales entities are the seeing is the change in focus from doctor to service providers. And we do not have any doctor plus patient. This means a change in the visibility here. We need to be aware of these supply chain channels – there are large OTC complexities as we design our supply chains. India brands who have started e-tailing their products. cannot afford the lean distribution models of the There is a subtle channel transformation west, primarily due to the needs of our supply happening. And then there is the issue of channel chains. sustainability.

And while we do have a complex distribution We are aware that 80 percent of our population is channel, there is a significant skew – any typical living in class II to class VI and rural India. And pharma company will have around 2000 we are also aware that the formal supply chain – distributors, out of which 500 would contribute under the company's control ends in class I cities around 75 percent of the sales. EY had – the stockists. Beyond them we have the commissioned a study in Uttar Pradesh and wholesale chemists and an entity known as the Andhra Pradesh to study this skew. We found hub chemist. These fall outside the control of the that around 1000 wholesalers contributed to pharma company. The Hub chemist is at the cusp around 35 percent of the volumes. And if we can of the Class II and Class III town, having both a get control over these, we could have significant retailer and wholesaler license, with around 80 control over the supply chain. Similarly, we need doctors and a same number of chemists who buy to identify the significant contributors among the from him. And this is the entity who caters to 80 hub chemists. And we end up with a substantial percent of the population, because that where the part of the supply chain under our direct control. distribution has not reached. We have seen that in If we can understand from where the major the generic –generic category, up to 80 percent of contributions come from and map them, we will the volumes are happening through the hub be able to gain significant control over the supply chemist. And for large brands, they contribute 30 chains.

THE BEST OF 2014

32

THE BEST OF 2014

January 2015

The e-commerce boom in India

has sparked a revolution in retail

while simultaneously placing the

customer in the driver's seat. The

growth that has been witnessed in

the space, and the forecasted

potential, is momentous and has

retailers aggressively vying for

increased market share. While it's

evident that the future will see the

'survival of the fittest', this segment

has realised the need to evaluate

their internal functions and make

amends so as to differentiate their

proposition.

upply chain and logistics are core Scompetencies for entities in this segment, With the advent of 'pure-play' online retailers, and ironically these are the functions which who captured the market with their customer lack thorough visibility; this inadvertently first approach through offers such as same day leaves the retailer vulnerable to losses. delivery and cash on delivery etc. had a lack of Management of the retail supply chain is a key focus on initial Return On Investment. This element of a retailer's central mission of approach has set the bar in the industry and getting the right amount of product, at the has driven traditional high street retailers to right time to the right customer in a cost- launch online channels to complement their effective way. Another essential facet of supply existing business model. Some 'brick-and-chain management, which organizations tend mortar' retail businesses have invested heavily to overlook, is the incorporation of an efficient in setting up online retail channels to gain risk management system. While the value of competitive advantage, only for this new an efficient risk mitigation structure is channel to remain autonomous from the core underestimated today, as we progress into the business. In the early days of online retailing digital age the benefits will become more this might have been due to a conscious widely visible and tangible. Here are a few decision not to divert management attention areas to consider as important elements in from core business operations. However, as paving the future of an efficient and cohesive online retailing is growing significantly to be supply chain: comparable in magnitude to traditional

The high-expense of the online game

Supply Chain in the Dotcom EraConnecting the Dots:

Kanika BhutaniAssociate Director, Fraud Investigation &Dispute Services

A key driver of complexity in a retail environment is the number of unique Stock Keeping Units (SKUs) and the number of formats and fascias.

33 January 2015

THE BEST OF 2014

operations, this can result in wasteful maintain product availability. To support to invest in compliance support at these and disruptive duplication of functions this complexity reduction in retail levels through awareness generation, in areas such as marketing and supply operations, warehousing and capacity building and continuous chain. merchandising IT systems should be monitoring. Both internal and external

integrated and not reliant on human resources can be utilised for this intervention to transfer information purpose. This can be achieved by from one system to another. aligning supply chain compliance and

integrity initiatives with the overall business strategy.

Taking off from efficient technology When a brand and its supply chain implementations in the supply chain implement the Code of Conduct and framework, organizations could also practice sustainable compliance it creates

Traditional retailers will need to look at backward integration to ensure value leading to employee satisfaction, recognise that they may need to make streamlining of logistics, with the environmental improvement, increase in significant investments in Information vendors or third party logistic providers. production and sale, brand image and Technology (IT) when looking to The logistics industry is extremely appeal to investors and consumers. become a multichannel retailer. This competitive, leading to thin margins or Value creation builds human capital, may well represent a step change from often losses. It is dominated by social capital and environmental capital how they have operated before, with unorganized operators with five or fewer further reinforcing the financial capital. requirements for 24X7 reliability, trucks that results in inefficiencies and

Amongst many challenges, brands today availability and security of customer diseconomies of scale. While freight have to deal with the new challenge of data. The best retailers are integrating rates have gone up in the recent years, supply chain compliance and integrity their offline and online supply chains fuel costs have trebled further eroding and remain profitable at the same time. and investing in versatile supply chain the margins. Backward integration helps From a short term perspective, systems and scalable, flexible online eliminate the fragmentation and apart expenditure on supply chain compliance platforms. from the lower cost benefits for the and integrity may appear to be an retailer, it also helps increase visibility additional expense but it the long run it and automates the process through the is lucrative and is in the best interest of customised use of technology. These Although the struggle with the supply the brand. In fact it should not be dynamics help avert misuse of the chain mechanism has been a traditional viewed as expenditure but an investment process and enhance predictability hindrance and a black hole of sorts, for sustainable development. Why stay through the use of analytics and shared technology has slowly helped bridge a behind? Make a difference. Invest in market intelligence. number of gaps. Technological supply chain compliance and integrity advancements and breakthrough and reap long term benefits.implementations are now paving the

way for a more informed and controlled Among all the elements mentioned mechanism of supply chain above there needs to be due diligence management. conducted in monitoring the

organisations efforts. When the supply A key driver of complexity in a retail chain becomes complex the risk of environment is the number of unique inflated invoicing, manipulated margins, Stock Keeping Units (SKUs) and the kickbacks and collusion between the number of formats and fascias. Whilst supplier facing employee and contractor, offering a large number of SKUs may is high. It is therefore crucial for brands seem to be offering customers what they to understand and map the supply want, it adds cost to the operation. High chain. Therefore, there should be SKU counts result in larger distribution routine monitoring to assess their centres, higher stock levels, more compliance so as to identify red flags suppliers to manage, and more effort to and fraud vulnerable areas. It is prudent

Backward integration

Smart tech integration

Mitigating risk and corruption

Note: Views expressed in this article are personal to the author.

When a brand and its supply chain implement the Code of Conduct and practice sustainable compliance it creates value leading to employee satisfaction, environmental improvement, increase in production and sale, brand image and appeal to investors and consumers.

204-D, Riddhi Siddhi Complex, Off. S. V. Road, Opp. Patkar College, Goregaon (West), Mumbai 400062.Tel: + 91 22 60020157/159 Mobile: + 91 9821732929

Cold StorageCold Chains are inviting attention from investors, industry

and the Government. As India sets out on establishing cold

chains and cold supply chains, the industry can leapfrog

the problems that developed nations faced in the process

of developing cold chain management. Mr. Prashant

Gubba speaks about their experience in Lean

Management for Cold Storage.

January 201535

FEATURE

Lean Management for

These goals were in line with the core lean philosophy which is “Doing more and more with less and less”.

Prashant GubbaResearch and Technical HeadGubba Cold Storage

few years back, a business associate introduced me to the Aphilosophy of lean manufacturing and how implementing lean had dramatically changed their business fortunes. I then contacted the referred Lean Expert, a company called Kanzen Institute, and initiated the process of lean implementation with them. Right at the start, the goals for lean implementation were fixed considering the key business indicators:

1. Maximum utilization of cubic space: this has a direct impact on the business profitability since the main cost is refrigeration

2. Minimum truck Turn Around Time: inward and outward- this enhances customer satisfaction

3. Maximize productivity of workers: labour cost being a significant component for both us and the clients

The above goals were in line with the core lean philosophy which is “Doing more and more with less and less”

The lean implementation was done through a series of focused improvement workshops during which cross functional teams were formed to take up specific improvement projects across the various plants.

We have three broad types of plants – conventional seed storage, racked seed storage and frozen foods. One plant of each type was selected and teams were formed to focus on the flow of material from truck to storage as well as on space utilization within the storage facility.

36January 2015

Lean Workshop under progress under leadership of Lean Expert Ganesh Mahadevan

Space Utilisation increased after increasing the height of the crates

On the third day, the same following the observations were:process was observed to verify and 1- Synchronization of activities at validate the impact of changes docking area with the activities at made and results measured. A 15 the storage bays so that the bags day action plan was made to flow smoothly through the lift, complete the balance action items conveyor and manually.and these were monitored on a daily basis at the plant level and a 2- In several cases, some material weekly basis at the management had to be moved especially in level. racked storage facility to access the

required material thereby delaying the start of loading. So a method of internal shifting prior to arrival The team members observed the of truck was implemented.truck loading and unloading

activities from the paradigm of 3- Linked to the above, a system Zero Waiting time of truck. By of Pre-Alerts was started wherein definition loading means that our Plant Supervisor would material is being physically placed interact with the regular clients on in the truck and unloading means the previous evening and get the material is being lifted out of the details of the trucks expected on truck. Hence if at any point in the next day. This helped in time this is not happening, it planning of labour, equipment means the truck is waiting. The and internal shifting.entire process from Gate In to

4- Delay in picking and removing Gate Out was studied as the time SKUs in the frozen foods storage taken for this is the overall time facility- multiple handling and the truck is held up at the cold counting of these products was storage facility. Some of the major observed. The team rearranged the improvements done by the team

Truck Turnaround Time

FEATURE

Lean Focused Improvement Workshop

On the first day, the lean expert gave the teams a basic orientation on how to observe the process under Lean paradigms in order to identify Muda (waste or non value added), Muri (strain) and Mura (inconsistencies / variations). The teams then spent the day observing the process and came out with a list of observations and opportunities for improvement therein. These were shared in the evening with the rest of the teams and the Management and actionable points were decided.

These actions were then implemented on the second day – they included change in practices or methods of doing work, some modifications in equipment/ tools to help workflow and reduce strain and some strategic decisions on how the process should be run.

FEATURE

37

entire ice cream room using 5S principles – any item worked on fixing the stacking norms for each product should be located and picked in less than 30 seconds. based on client recommendations, the same was A trolley was designed and put into use to minimize displayed and workers trained to follow them.rough handling of crates. Within a couple of months of implementing these 5- Multiple counting, cross checking and improvements, we had shut down one cold room in documentation was delaying the post loading process the frozen food unit saving huge costs of of gate pass generation. This was streamlined and a refrigeration, increased our racked storage to 1.5 system having software and printer was shifted to the MT/slot and space utilization in conventional seed ante room next to the docking so that by the time the storage by 10%.truck driver closes his vehicle and secures the goods the gate pass is ready.

Through all these improvements the average TAT for a 10 ton truck was drastically reduced from 45 minutes to 35 minutes. The labour productivity also went up significantly as the people were involved mostly in the actual loading/unloading activity and idle waiting time was cut out.

Our experience with this lean implementation was initially mixed. The focused improvement workshops

These teams worked with the paradigm “Chilling is brought our diverse employee base together meant for the client's material be it seeds, ice cream, promoting teamwork and sense of achievement which dairy products or others”. So any space in the facility left everyone on a high at the end of the 3 days. But occupied by other things or lying empty is non value the hard part was to complete the action points and adding from our perspective. This means we are sustain the practices in the subsequent period. Here spending money on refrigerating unwanted items or we, the top management have a significant role to play simply cooling empty space. Some of the major in terms of motivating and supporting the employees, improvements done by the team following the monitoring their progress regularly and if need be observations were: even putting some pressure on them to finish things.

1- Uneven height of seed bag thappis observed Over the last few months we have sustained about resulting in unutilized space at the top. Maximum 60% of what we implemented which we are now in height marking and painting done on all bays to guide the process of enhancing. This we are doing through the hamali labour in filling up the bays. framing and implementation of Standard Operating

Procedures (SOPs) which will incorporate all the good 2- A racked slot can take up to 1.5 MT load, we practices implemented during the lean improvement observed that our average load ratio was about 1.3 phase.MT which mean about 13% underutilization. The

main reason for this was difficulty in stacking the We are also implementing a reward and recognition regular bags on the pallet especially for bulky seeds scheme for our employees wherein the best like cotton. improvement ideas implemented will be appreciated

in various forum like our newsletter, on the notice After discussing with our clients, we made the boards and in internal forums.transition to bulk of the materials coming in jumbo

bags of 1.5 MT capacity and these were loaded in the In conclusion I would like to say that before Lean we racked slots. Pallets and bags above 1.5 MT were also thought we are already the best and there is nothing received and stored on the ground level. left to improve. But Lean opened up a different

paradigm and this in turn gave rise to a whole new set 3- In the frozen foods facility we store a wide variety of improvement opportunities.of products with varying packaging and sizes – carton

boxes, crates, plastic packets etc. Here the team

Sustenance of Lean

Storage Space Utilization

Any space in the facility occupied by other things or lying empty is non value adding from our perspective.

January 2015

Traditional supply chains deal with the flow

of products and information across the value

chain. Financial Supply Chain, on the other

hand deals with the flow of finances. At the

heart of an organization is its ability to meet

its financial obligations in time. FSCM deals

with events that will impact the working

capital, payment terms, pricing and

inventory decisions by the firm. For an SME

this is crucial as they do not have any control

over pricing, payment terms or interest rates.

SCMPro takes a look at two of the

innovations by banks in managing Financial

Supply Chain among SME's.

38January 2015

Financial

for SME’sSupply Chain

A financial supply chain is the flow of payments between various entities in a supply chain. Apart from

the flows related to the cost of goods or services, a financial supply chain also includes the financing products available to the entities in the supply chain. For quite a while, the suppliers and vendors of a large corporate were treated as separate entities, to be evaluated on a standalone basis. This put the SME suppliers and vendors at a disadvantage.

Small and Medium Enterprises operate under quite a number of constraints -poor infrastructure, lack of business process knowhow, below par human resources, small foot print and lack of avenues for financing. Because of the smaller revenue base and balance sheet size, SME's are typically assigned a BBB or lower rating – which places them at the bottom of the credit worthiness ladder. The Basel II recommendations on credit evaluation place a 150 percent risk weight for loans given to firms with a rating of BB or below. Which means that lending to most SME's will be a costly affair for banks. This is also reflected in the SME lending rates of banks. And therein lies the trouble with our financial system.

On the one hand we praise the contribution of SME to nation building, and at the same time deny them credit at attractive rates to make them profitable. The financial system and the banks in particular responded by

“On the one hand we praise

the contribution of SME to

nation building, and at the

same time deny them

credit at attractive rates to

make them profitable.

January 201539

that can help the SME financial for supply chain. Products like Factoring discountiand Forfeiting helped the SME in ng these the collection process, at a slightly invoices higher cost. The banking system and developed two specific products presents aimed at the SME sector –the the same Channel or Supplier financing and to the bank. The distributors do not the Distribution or Vendor need to pay the big corporate on Financing. In both these products, receipt of the invoice. The dealers / an SME either selling products to or distributors make the payment at buying products from a large maturity by issuing post-dated company can borrow the rating of cheques at discounting. the larger firm for securing credit. 2. On submission of the invoice to This is an innovative financing be discounted, the bank checks for opportunity for the SME to get the line limits and on adequate limits credit at better rates. approve the request. If the limits are

inadequate the request is rejected.

3. The invoice is discounted and the Channel Financing is to provide amount gets credited into the Big integrated commercial and financial corporate's account. The limits are solutions to the supply and blocked to the extent the short-term distribution channels of a large loan is granted against the invoice corporate. Channel Finance gives discounted.support to the commercial

relationship between the banks' large 4. On Maturity the Bank sends the clients and their suppliers and post-dated cheques given by the receivables, which have been customers. The commercial aim of dealers or distributors for clearance. accepted by their large corporate Channel Finance is to add value to A grace period is given for the buyers. Proceeds are paid to the supply and distribution channels by cheques to get cleared. If the cheques customer upfront and buyer providing unique solutions that meet bounce, then the invoice is not subsequently pays the Bank on our customers' demands. To leverage liquidated and after Maturity date maturity date. It provides customers Channel Finance, banks rely on two plus the grace days, the Bank re- with the earliest possible use of major product lines: Distribution categorizes or moves the asset from funds.Financing and Supplier Financing. Normal asset account to Past Due The Supplier financing is provided to

Obligation asset account. Distribution Financing is a value – vendors or suppliers of a large added service given to 5. When the SME customer makes corporate in two forms:dealers/distributors of big corporate, the payment, Bank liquidates the

?Pre-Delivery Financing: It is a which are the customers of the bank. invoice and the limits are released. working capital finance given to The Bank periodically applies the The Distribution financing operates supplier against a purchase order. It accrued interest to the customer and as follows: is usually used for manufacture of debits the customer's account. goods and this is only for 1. The Big corporate have many

dealers, and the dealers/ distributors who require a credit period when Supplier Financing is a value added they purchase goods from these big service that provides immediate corporate. Under this scheme, the liquidity to the SME supplier by invoice is drawn by the Big allowing them to sell their trade corporate. The Big corporate applies

Distribution Financing

Supplier Financing

the local market.

?Post-Delivery Financing: It is defined as a loan granted to a supplier against an invoice or bill of exchange, subsequent to the actual

Supplier

Financing is a

value added

service that

provides

immediate

liquidity to the

SME supplier by

allowing them

to sell their

trade

receivables.

“

40January 2015

delivery of goods. Supplier can avail this credit in local currency only.

The Supplier financing operates as partner with more than one large firm, then each follows: facility sought by the SME will be funded at the rate

that is applicable for the particular large firm. This is 1. The supplier who wishes to acquire working more of an issue for the banks, rather than the SME.capital finance used for manufacture of goods for

the large corporate, requests for a pre-delivery loan The financial system is evolving more sophisticated to the bank. products for the SME financial supply chain. An

exciting product that can be introduced is Total 2. The supplier presents the Accounts Management – the bank takes over the Purchase order to the Bank, the management of both the accounts receivable and the bank checks for the line limits accounts payable for the SME, leaving the SME to and on adequate limits focus on what they do best – manufacture and sell. approves the request. If the The entire working capital financing of the SME limits are inadequate the will be taken care of the bank. However this may request is rejected.run into a road block in India because of the

3. A pre-delivery loan is given notorious parallel sales that happen in India. A pilot against one delivery schedule of launched by a bank in India was a failure! But for the purchase order. The Pre- SME's who wish to grow and professionalize their delivery loan is disbursed and operations, this will be a welcome product. the amount gets credited into the customer's account. The limits are blocked to the extent the loan is given.

4. The loan is rolled over if the maturity date is to be extended.

5. On receipt of the payment, the loan is liquidated. A pre-delivery loan can be liquidated

either by negotiating the invoice with other bank or negotiating/ discounting the invoice and availing a post-delivery loan against it. This can happen at any point of time during the life cycle of the loan. The bank allows part liquidation of a loan. On liquidation the limits, which were blocked, will be released. At every stage of the life cycle of the loan and at month ends the bank accrues the interest. The bank periodically applies the accrued interest to the customer and debits the customer's account.

The Channel and Vendor financing schemes are an attractive opportunity for SME's to get credit based on the rating strength of the larger firm with which they are associated. For the financing needed to execute the larger firms business can be secured. The only catch here is that if the SME supplies or is a

Conclusion

SBI's SME Vendor and Dealer Financing Schemes

Electronic Vendor Financing Scheme

The scheme provides for financing receivables of vendors (suppliers) of reputed Corporates or Industry majors (IMs) with whom tie-up has been entered. The scheme is a completely web based solution with minimal branch intervention and provides instant credit to vendors account electronically. This enables both the Industry Majors with whom tie-up has been entered and their vendors to achieve the objective of Just In Time production. The vendors enjoy timely availability of funds.

Electronic Dealer Financing Scheme

The scheme provides for financing purchases of Dealers from Corporates /Industry Majors (IMs) with whom tie-up has been entered. It is a completely web based solution with customized MIS provided to the stakeholders. The Industry Major enjoys timely availability of funds. The dealer can make effective utilization on working capital funds. Both Industry Major and dealer can make use of improved cash flow forecasting

“ The financial

system is

evolving more

sophisticated

products for the

SME financial

supply chain. An

exciting product

that can be

introduced is

Total Accounts

Management.

SCMPro CLASSROOM

42January 2015

Understanding Bias and Magnitude

This time of the year, most firms start the process of preparing their annual budgets –

based on a forecast. And simultaneously, they try to figure out what went wrong in

their previous forecast. A deviation from the forecast – positive or negative can

have serious ramifications for a firm. In this class room series, Dr. Rakesh Singh

explores the problem of forecast error.

Dr. Rakesh Singh

easuring and understanding the most important, is to understand Mperformance of forecast is as the magnitude of error in the forecast. important as forecasting models used. But these two quantitative forecast Demand planners often do not know results may not give you any insight if which measure of error to use. There you do not decompose them and find are number of measures. Some of the out what really drives these errors in most frequently sited and used ones your forecast and thus what are Percentage error, mean absolute determines your forecast performance.deviation, mean absolute error, Mean The goal of any forecasting model is square error and mean absolute to minimise error and be as accurate as percent error. Which measure has to possible. Minimising error has two be used and when is the biggest

elements - bias and magnitude. The question facing demand planners manager should use at least one today. measure of bias and one measure of Understanding performance of a magnitude on an ongoing basis to forecast has two dimensions. First is assess the forecast accuracy. Bias is Understanding bias and second, and defined as the systematic difference

Forecast Error–

SCMPro CLASSROOM

January 201543

between the forecast and actual silos, order moving up the supply demand over a period of time. chain levels is whipped Statistically it can be measured by simultaneously by the retailer, calculating Mean error or distributor, factory and finally the Cumulative forecast error or mean supplier leading to a changing percent error. A persistent bias number at different levels of supply indicates that the forecast has been chain. All these compounded by the too low or too high and can be compulsion of businesses to resort to corrected by subtracting or adding unplanned promotion which the amount of bias from the increases forward buying not known predicted value. to the demand planner. It may also

happen that due to the obsession of The magnitude represent the the supply team to look for full variance between actual and the truck load before they supply final predicted demand. This is goods the demand become surplus as statistically measured by Mean it arrives late and competitor has absolute deviation, mean squared already fulfilled it.error, standard deviation and Mean absolute percentage error. The Which of these various measures of persistence of huge magnitude bias and accuracy is the best fit for indicates that the forecast has been measuring error? We in our highly in accurate and cannot be corporate consultancy assignment corrected just like the Bias have relied on Mean error (ME) to inaccuracy. When magnitude is measure bias and Mean Absolute high, it is important to look into the percent error (MAPE) to measure reasons as the forecasting system the magnitude. These two measures used may be a problem. It then will enable the manager to quantify needs to be revised and reviewed. both bias and magnitude and enable

them to use this knowledge to better One more point that needs to be the forecast and better business taken into account while decision from those forecasts. The understanding the performance of manager can suggest in sales and your forecast is whether error is due operations meeting that the forecast to forecasting model or is due to few bias is very high and hence forecast functional business practises. One error cannot be corrected unless needs to understand the famous functional practises which give birth bullwhip effect. A build of high to these biases are aligned. When he standard deviation around the mean finds that magnitude is very high, he may leave you unaware of a typical can suggest a complete review of the phenomenon that has been forecasting system.happening with corporates. And what is this? You may have stock So before blaming your forecasting outs in some places and surplus in model for the error, be sure that you another increasing overall supply know to measure it and fix it on the chain cost, reducing supply chain one hand and on other to align all profitability and putting a functional tactics to the need of the tremendous strain on overall forecasting to avoid bull whip effect. business. This will go a long way to help you

put your forecasting function at the This happens primarily because the center of all planning activities.entire supply chain is operating in

Understanding performance of a forecast has two dimensions. First is understanding bias and second, and the most important, is to understand the magnitude of error in the forecast.

So before blaming your forecasting model for the error, be sure that you know to measure it and fix it.

For more information on the articles or to contact the writers please email info@lscms.org

In part 4 of the series, we discussed the role

of people in the supply chain, and need to

have the right competencies for their roles

in the organization. We highlighted the

importance of high level management

attention, to ensure the right balance of

resources, with the necessary leadership

focus, as well as sustaining a high

organization engagement level. It is this

combination of good competencies and

closely synchronized cross-functional

processes that drives a high performing

supply chain execution model, where

people create the capabilities that deliver

the performance and achieve the results

that meet the strategic goals. We now look

at managing supply chain risks. Stephanie

Krishnan, Joe Lombardo and Raymon

Krishnan continue with the series.

Understanding & Managing

44January 2015

n the last 4 Parts of the series, we looked at the Iinternal elements necessary to achieve an effective supply chain performing model. However, whilst this is a fundamental component, we need to address the factors, that could disrupt the smooth flow of the business supply chain, and that can create immeasurable business risks with equally high negative consequences.

Every business faces potential risks each day of its operating life. The types of risk can vary for different businesses. The severity of risks will depend on the business nature, as well as on the supply chain dependencies.

In Part 5 of this series we will examine the typical risks to the supply chain. Risks are categorized into the potential business disruptions derived from sources of internal factors and external factors.

Internal Risks are those risks which arise from events occurring within business organization, and which could arise during the normal operation of the business. Whilst

What are the types of business risks?

Risk in the Supply Chain

KNOWLEDGERISKS FOCUSFORECASTING ACADEMIC ADVOCACY

January 201545

these risks cannot always be forecasted, Put very simply, a factor that disrupts the smooth the probability of their flow of the goods and services of the business is a occurrence can be potential risk. Fig. 1 illustrates the critical steps in predicted with some the supply chain and business cycle. Disruptions degree of accuracy. and breakdowns are not only associated with These types of risks physical and tangible sources. Some of the most could be contained and serious disruptive risks can be from intangible controlled directly by sources. Data exchanges, data communications the business executive. systems and other external sources are potential risks The typical internal that could impact the supply chain. risks sources and

However, it is the physical flows of the impact to the supply chain, can come from, supply chain that are usually the most Strategic Risks, Financial Risk, Organizational& visible disruptions to the business.Operational Risk, Employee Risk, Innovation Risk

and Business Governance.

External Risks are those risks which arise from Assessing the Business risks must begin events occurring outside of the business from a zero base starting point. That organization, which may have a direct or indirect implies that both internal and external impact on the business operations. Such events are sources of risk must be viewed with beyond the control of the business executive, who equal importance. The tendency is often for could forecast some probability of occurrence but companies to address the external risks first. But with a very low degree of accuracy. The external risks are those from external sources where the visibility is less clear and the probability of control is lower for the company executive. The typical external risks sources and impact to the supply chain, can come from, Political & Economic Risks, Compliance Risks, Environmental & Natural Risks,

Company executives often underestimate the risks from the internal Company sources.

Most CEOs find it unimaginable that risks could originate from within their own business operations. But the reality shows that the most vulnerable and Technological Risks and Health & Safety Risks.damaging risks do originate from internal sources

Many executives are aware of the risks that they face and frequently go unattended for a very long time. in the business but often it is a “gut feeling” and

Fig. 2 illustrates the Enterprise Supply Chain sometimes cannot be quantified for sustainable model, highlighting the key contributors to the actions. Managing Risk cannot be left to chance.supply chain. A “deep dive” process analysis and

Risks to the Supply Chain

Risk Identification Process

Many executives are aware of the risks that they face in the business but often it is a “gut feeling”.

An effective approach to risk assessment, will be to address the internal risks first.

KNOWLEDGE

46January 2015

review into all the key business enablers and their Risk Management Executive would be recommended as it would respective processes will identify the potential raise the awareness and focus on risk management across the inherent risks. supply chain. A formalized risk management leadership and

structure would assess and mitigate the types of risk and the An effective approach to risk assessment will be to degree of exposure from both internal and external risk factors to address the internal risks first. Understanding the supply chain and to the business in general.clearly the internal risks, will assist in identifying the interdependencies with external sources and The key documents from such a structure would be a Risk consequently external risks. Clarity of the types of Assessment Matrix and a Risk Defensive Plan. But before these risk and their sources is essential to assert a robust can be meaningfully formulated, it will be necessary to identify control and total management of the supply chain. which are the critical processes, resources and services to the

business supply chain that generate serious risks.

The starting point for developing a defensive plan however simple or complex, is to know what are the factors that need defending from a risk and the potential negative impact on business continuity.

The guidance of a Risk Assessment Matrix, as illustrated in Fig. 4, would be used to categories the processes with Likely Failure Probability vs the Degree of Severity of such a failure. This would determine which are the key processes that need to be defended with an appropriate defensive/ contingency plan.

The risk matrix mapping must be done for all sources of risks. This will identify the real and potential business risks as well as to focus attention on the urgency for mitigating actions.

We have outlined the typical internal and external risks in the earlier sections. However, there are other external risks, which Company executives need to understand and anticipate at all costs.

The new age external business risks are those associated with outsourcing. The rapid trend of outsourcing business activities means that whilst moving internal processes to an external 3rd party for economic reasons maybe a positive factor, managing the associated business risk needs to be an important decision consideration.

Whilst 3rd parties have to manage their own risks, the business interdependencies from outsourcing are often so crucial to the supply chain, that they must be considered as internal risk sources and included in the Company Risk Assessment.

An organization will have many processes both simple and complex ones, so a prioritization of the key business processes must be done by the process owners with their functional

Considering the wide spectrum of risk and their management. The completion of the processes the risk sources facing any business, it is crucial the CEO assessments will trigger a detailed review followed by the recognizes the need to create a formalized structure preparation of the necessary action plans.to address Risk Management. The appointment of a

Risk Assessment Process

Figure 4

KNOWLEDGE

47

The methodology for formulating a risk assessment is shown and the disaster recovery plan will be prepared and directed in Fig. 5. It must be applied across all levels of the by departmental high level executives. The defensive plan organization that are relevant to the business supply chain. would encompass actions to contain, reduce or eliminate

those risks where the business executive has the ability and The tools to prepare a risk assessment are widely available for power to do so. Whilst the disaster recovery plan (sometimes immediate use. For an effective deployment, called a contingency plan) would involve actions guidance and training would be recommended for deployed in case of an improbable but possible the key process owners and functional managers disruption occurring, that would put the business at to obtain the best benefits. risk. All business risk plans must be review periodically and tested, where possible, to ensure their effectiveness as intended.

Whatever the nature of your supply chain, The risk assessment master matrix (a compilation understanding the exposures and vulnerabilities to of all risk assessments), is a key document for the business risks and the interruptions they could cause, CEO & Company Executives. This report would is a fundamental requirement to managing and highlight some very sensitive factors about the sustaining effective supply chains. All the risk company's risks and vulnerabilities. As such all the management processes and plans discussed above inputs, departmental risk assessments and the compilation of

must be realistic, effective and are part of the business the company master risk assessment report should be governance responsibilities. The full engagement of all managed by a high level executive reporting to the CEO. stakeholders in risk management is a fundamental pre-The company risk assessment report must not be freely requisite.disseminated and should only be shared within a small circle

of the CEO's top executives.

The risk defensive plan (also called the risk mitigation plan)

Building a Defensive Plan& Disaster Recovery Plans

For more information on the articles or to contact the writers please email info@lscms.org.

Figure 5

January 2015

The risk assessment master matrix is a key document for the CEO & Company Executives.

he year 2000 was seminal in the annals of service providers were given three days' notice TCrystal Logistics. A chance meeting at a for reefer deployment, whereas today, the Dominoes outlet resulted in Crystal entering demand is for immediate dispatch.the reefer business – with one truck, which

The biggest challenge was the lack of domain grew to 5 trucks in a span of four months. knowledge in India. There were three or four And within another three months, Dominoes cold chain logistics service providers, and no cancelled the contract, leaving Crystal with one to set benchmarks. The search for four reefer trucks idle. The hunt for the next knowledge led Crystal to participate in customer led them to Amul, who immediately various conferences overseas. By around 2006 engaged the four trucks. That was the Crystal logistics was engaged with the US inflexion point for Crystal Logistics in cold Government, who provided them with chains. The growth of processed foods and training on the product, best practices and pharmaceutical sector has created a huge skill requirements. The first step was to build demand for reefer trucks and cold warehouses. a good team of professionals. At the outset, In the early days of the cold chain industry, Crystal took a conscious decision – to invest resources remaining idle even for a day was in state of the art assets – to bring in the best not acceptable. The demands of the customers technology of the time, without cost have changed, the dynamics of the business considerations. Any compromise with the has changed, and the ability of the service assets would have reflected in the service providers too has changed. In the early days, quality, and the sustainability of the business.

Anecdotal evidence suggests that nearly 40 percent of agricultural produce is wasted in India

due to inadequate storage and handling facilities. Pharmaceutical products need to be stored

always below 25 degrees centigrade for retaining their potency. Sea food exports need efficient

cold storage to keep the products edible. Two of the most important items for human life – food

and medicines depend on cold chains for their sustainability. SCMPro spoke to Mr. Akash

Agarwal, CEO Crystal Logistics Cool Chain Ltd. on the future of cold chains in India.

48January 2015

Cold Chains

KNOWLEDGERISKS FOCUSFORECASTING ACADEMIC ADVOCACY

Warming up to

Any compromise with the assets would have reflected in the service quality, and the sustainability of the business.

49

LSP FOCUS

One of the major challenge in building nations have an absolute measure of the crop. From the production center, an infrastructure is estimating the standards which everyone complies the crop needs to travel to the future needs. What today appears a with. We in India lack this focus on processing center – which again is not huge capacity may not be adequate in standards. available. At the processing center, the ten years' time. That, and attention to produce will be graded, sorted and quality. washed. It is then stored in a cold room

at the processing center. To move it Crystal entered the cold chain business from the processing center to a cold from the reefer truck business. The idea storage to the wholesaler and retailer, we was to create exceptionally large need reefers.infrastructure for logistics. The business

driver for this sentiment was the The need of the hour is to create the customer demand – all customers of entire chain – from the pre-cooling the Crystal group were demanding cold centers to the processing centers to cold chain solutions. The demand was for a storage and finally modern retailing single service provider to take care of outlets to ensure the produce is not the entire chain – from port clearance wasted. We need pre-cooling collection to the customer location, with the centers at a five km radius of the stipulated storage environment. The production center. Once these cold chain consists of a front and back collection centers are set up, we will end which was transportation and the need reefer trucks to transport food. middle which was cold storage. Crystal Anecdotal evidence suggests that nearly All this will happen if we create a had the front and back ends covered. 40 percent of agricultural produce of The next logical step would be the cold India is spoiled and cannot be storage depot. And unlike the normal consumed. This represents a huge threat warehouse which can be set up quickly, to our food security and adds to food a cold chain will take a year to conceive inflation. The trouble starts from the and execute. In 2014 Crystal built a farm.At the harvest, due to lack of modern cold storage facility that has skilled resources, produce damage starts. been audited by three separate overseas We do not have the necessary tools to customers. cut the produce with minimal damage.

Immediately after harvest, the produce One of the challenges in cold t e is needs to be stored in a pre-cooler to tropicalization. Cold chain technology maintain quality. Due to the evolved in cooler European and US fragmented nature of the farms and the climate. Which means the temperature remote locations, pre-coolers are not regulator who will prescribe standards variation is not that high – while in available. Then we have the for each stage. Unless we specify India, the temperature difference can transportation and storage. From the standards, the industry will not have the vary from 45 degrees Celsius outside to production centers, the products move moral suasion to invest in such assets. minus 35 degrees inside, an 80 degree to the processing centers - called food We need policies and standards. India change; the range is much smaller in factories. At these processing centers, produces 500 million tons of food Europe. A major expense here is the the produce is ripened and then sent to products – cereals, pulses, fruits, energy requirement. The cold chain the cold storage. There are three stages vegetables and the like. Hardly a few technology is the same. It is the energy here – the pre-cooling, the ripening and percentage of this is currently stored and required to cool the premises that the storage. transported as it should be. This one varies. This also means we need better

sector alone has the capacity to absorb insulation than the developed nations. Most often the farmer cannot afford a billions of dollars to create the pre-cooler, or does not want to invest in One major learning at Crystal was the infrastructure. Clearly, this is a high one because it will remain idle for most need to maintain standards. Developed growth area.of the year due to the seasonal nature of

Food Security and the Potential for Cold Chains

January 2015

The need of the hour is to create the entire chain– from the pre-cooling centers to the processing centers to cold storage and finally modern retailing outlets to ensure the produce is not wasted.

Akash Agarwal CEO, Crystal Logistics Cool Chain Ltd.

50

Supply Chain Management is a relatively new discipline – it is around 30 years old. Over the years

the term has grown to describe different things. This work by Lisa Ellram and Martha Cooper looks

at five academic and practioners perspective on supply chain management, and the way

forward. SCMPro brings you a review of the article. The article can be sourced from The Journal of

Supply Chain Management, Vol. 50 No. 1.

Supply Chain Management:

January 2015

The initial proponents of supply chain management were and practice, and some suggestions on how to proceed as consultant who looked at it as a way to optimally use researchers in designing future studies.resources and assets. The academic work on SCM stared The initial search by the authors threw up over 17, 00,000 later. Even as academics began to use the term supply chain articles and books. A second search provided 567000 articles. management, they realized it did not fully or accurately They then pared it down to the 100 most cited articles describe the complex web or network of relationships and published in journals. It was further pruned processes moving in many directions and to 57 articles based on their coverage. A large connecting companies to make products and number of authors have taken a process services more effectively available to orientation. As used here, process means, customers. The authors explore "the “supply chain as a means for linking evolution of the concept and considers the structured activities designed to produce an current state of supply chain management. In output for a particular customer or market doing so, the literature associated with the (Davenport, 1993); it can also be a means to supply chain management concept is improve/coordinate processes.”examined. This literature is viewed according to the way that SCM has been conceptualized and applied."

Academicians look at supply chain management in multiple This paper examined five perspectives of supply chain streams. This has led to its evolution of SCM as a very broad management. The authors are optimistic about the future of area. It is this very broad canvas and lack of a common supply chain research and practice. This can be seen by the definition has hampered the progression of academic work increasing number of courses on offer. The industry is also and application by firms. This article seeks to trace the trying to standardize the terminology and practice. The evolution of SCM thought among researchers. authors conclude that there is a common set of principles

that define supply chain management - such as information In this seminal work, the authors have selected, highly cited transparency, supplier segmentation, customer service, lean articles that focus on the concept of supply chain principles, quality, improved communication, segmentation, management are classified according to whether supply chain inventory management and the like.management is viewed as a process, a discipline, a

philosophy, a governance structure or a functional area, including a discussion of the merits of each approach, bringing us to where we are today. The paper concludes with an assessment of the current state of supply chain research

Concluding Thoughts of the Authors

Lisa M. Ellram and Martha Cooper (2014), "Supply Chain Management: It's About the Journey, Not the Destination,"Journal of Supply Chain Management, Vol. 50 No. 1.

Academicians look at supply chain management in

multiple streams. This has led to its

evolution of SCM as a very broad area.

It's All About the Journey, Not the Destination

KNOWLEDGERISKS FOCUSFORECASTING ACADEMIC ADVOCACY