“SUPPLY CHAIN MANAGEMENT

-PRINCIPLES AND PRACTICES”

INTRODUCTION

THE BASICS OF SUPPLY CHAIN MANAGEMENT:

Supply Chain Management is the management of resources to design, procure,

fabricate, produce, assemble, store, distribute, use, maintain, recycle, and dispose of goods
and services. .

A "supply chain" consists of interconnected components required to transform ideas

into delivered products and services. Supply Chain Management is a business approach that
focuses on integration, and partnerships, in order to meet customers' needs on a timely basis,
with relevant and high quality products, produced and delivered in a cost effective manner.

Supply Chain Management, SCM as it is popularly known, is of considerable interest

in recent years for manufacturing and services sector of our economy. A good supply chain
management helps organizations in securing high quality input materials and purchased
goods at competitive prices. It also allows organizations to respond to customer orders faster.
Often, organizations have benefited from reduced costs throughout the supply chain.

WHAT IS SCM?

The recent competitive pressures have made several Indian organizations realize that
individual companies by themselves can not face up to the competition. A well designed
product and a good technology for manufacture may not ultimately deliver value to the
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

customer because of a bad set of suppliers or an inefficient distribution network. For instance,
a manufacturer of auto electrical components competes with a competitor on the basis of
what he does in his factory as well as on the basis of his relationship with suppliers and
customers, and on the strength of his distribution system. In this case, the supplier, the
customer, the logistics partner and the manufacturer together constitute the supply chain (see
figure on next page ). The key requirement of SCM is the ability to network with a several
other business entities having complimentary skill sets.
Every organization has three types of flows, the material flow, the information flow and the
fund flow. While the material flows from the back end (supplier) of the supply chain to the
front end (customer), money flows in the reverse direction. The information flows on both
directions. SCM involves developing a set of management practices that will ensure that
these three flows are smooth.

Faster material flow will greatly improve responsiveness to customer requirements and will
in turn ensure faster money flow back into the supply chain. However, the information flow
is the crucial determinant of the other two flows in a supply chain. Collaborative planning
and information sharing practices will streamline the information flow in the supply chain. A
good supply chain management will provide superior value to the ultimate customer.

Current interest in supply chain management stems from the need of world-class
organisations to purchase, produce, move, and market goods and services on a global basis.
Relentless focus on time, cost and quality have sharpened the need to co-ordinate and
cooperate with business partners around the world in order to meet and exceed customers'
needs and wants. .

The traditional concept of business is becoming obsolete. Companies, both

manufacturing and service, are creators of value, not simply makers of products. Future
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

managers are prepared to add product value, increase quality, reduce costs, and increase
profits by addressing the needs and performance of the processes as : supplier relations,
supplier selection, purchasing negotiations, operations, transportation, inventory,
warehousing, benchmarking, third-party vendors, electronic commerce, recycling, supply
chain electronic software, and customer relations.

SUPPLY CHAIN COMPLEXITIES:

A variety of supply chain-related operational systems (such as supply and demand

planning, warehouse, and transportation management), CRM systems (for sales, marketing,
and services), and enterprise resource planning systems (for finance, human resources, and
manufacturing) support these business processes.
These systems work together to support the two basic principles of supply chain
management: Production (including materials management , procurement, manufacturing,
warehousing, transportation, inventory, and supplier management) and Fulfillment
( comprising logistics, demand planning, distribution, transportation, and order management )
.

These areas are associated with a distributed, complex set of applications that require
interprocess integration and enterprise application integration levels. These applications must
also support existing and evolving standards - the EDI, Voluntary Inter-Industry Commerce
Standards, for example - to collaborate with external parties. This already complex situation
is further aggravated by the introduction of e-business systems, such as e-commerce
storefronts and e-marketplaces. This huge set of challenges has captured a significant amount
of financial and human capital resources and has left many companies without the required
information.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

HOW TO ACHIEVE SUPPLY CHAIN EXCELLENCE:

Break Organizational Barriers: Develop the ability to share information about

business activities and interact on a near real time basis across the supply chain.

Build visibility into the supply chain: Give more people a view into the metrics of
supply chain performance.

Manage by Metrics: Make your performance metrics align to cross-organizational

business processes and assign them to specific individuals for monitoring.

Reduce the decision cycle process: Respond to market or customer demand in days
or hours and not in weeks.

Encourage decision-making collaboration: Make decisions collaboratively on the

Internet, bringing relevant internal and external stakeholders into the process.

Reduce opportunity and problem resolution latency: Measure and monitor supply
chain activities step by step so that you can respond to them more quickly.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

THE OBJECTIVES OF THIS PROJECT

ARE AS FOLLOWS :

(i) TO STUDY THE VARIOUS STRATEGIES INVOLVED IN SUPPLY

CHAIN MANAGEMENT .

(ii) ANALYZING THE SCM FRAMEWORK , COSTS INVOLVED IN

SCM AND MEASUREMENT OF REAL VENDOR COST.

(iii) UNDERSTANDING THE PRINCIPLES OF SCM

(iv) IDENTIFICATION OF THE ROLE OF ERP IN SUPPLY CHAIN

MANAGEMENT.

(v) IDENTIFYING THE PROBLEMS AND CHALLENGES FACED BY

SCM IN THE INDIAN PERSPECTIVE.

(vi) CASE STUDY: PROJECT LEAP – HLL’S E-ENABLED SCM

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

STRATEGIC SUPPLY CHAIN MANAGEMENT

Strategic supply chain management is directly related and draws strength from the business
strategy of an organization. As a matter of fact, the supply chain strategy is developed from
business strategy. An organization, therefore, is first called upon to formulate and lay down
the strategy it wishes to follow to promote its products and achieve growth in business. The
business policy covers the following aspects:

 Products / services for marketing

 Market segments ( Geographic ) of operations
 Customer segments
 Channels of distribution ( e.g. distributors , dealers , retailers etc )
 Customer service

The supply chain strategy to be developed should be fully aligned. Alignment means
that it should pursue the same goals and objectives as laid under the business strategy. There
can not be departures or deviations as otherwise negative results can emerge, energies
frittered away and resources spend wasted .
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

KEY COMPONENTS OF SUPPLY CHAIN

Strategic supply chain can be considered to comprises of the following key components:

 Sourcing Strategy
 Distribution Strategy
 Inventory Strategy
 Customer Service Strategy

Sourcing Distribution Inventory

Strategy Strategy Strategy

Strategic Supply Chain

Management

Customer
Strategy of
Service Strategy
Integration

Figure : Component of Supply Chain Management

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

SOURCING STRATEGY:
Not many organizations go for in-house manufacturing. They rely on sourcing and
developing vendors with elaborate systems to check and control quality. Even firms which
decide on in-house manufacturing often do not go for manufacturing full range of products to
meet total market demand but decide on partial sourcing. Make and buy decisions make a
significant impact on the cost structure of a company’s products. Sourcing strategy has three
major elements.

Make or buy

Sourcing

Manufacturing Capacity
Management Management

Figure: Elements of Sourcing Strategy

Make or Buy Decisions

Traditional approaches on make or buy decisions have considered factors such as cost of in
house manufacturing , cost of sourced supplies , labour cost changes ( due to buy decisions ,
in-house labour may sit idle ) , recovery of overheads , under utilized capacity of plants and
machinery , transport interruptions etc. It now also considers for faster deliveries, easy access
for service, repair and replacement and customer preferences.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Manufacturing Management

The functional area decides such issues as to how production should be organized and
managed. Traditionally, the production planning and control systems have been designed to
maximize efficiency of labor and utilization of machines. These considerations are no longer
adequate. In a customer focused business world, production processes have to optimize
balance between customer satisfaction and efficiency.

Capacity Management

This calls for decisions to locate plants for in-house processing and suppliers and to fix
capacities for both plants and suppliers. Traditionally, the decisions on plant location were
taken considering cost of land, power, Govt. subsidies, availability of labours concessions in
sales tax and other statutory levies, industrial relations etc. But now new factors such as
proximity to customers, cost of distribution, supply chain infrastructure availability, access to
service facility and various transport modes and access to IT have emerged.

DISTRIBUTION STRATEGY:

Distribution Strategy is the linkage between the firm’s customers and the sources of its
products / services that the firm provides to the market place. This Strategy decision is not
only important as it involves distribution cost consideration, which constitutes significant
percentage of total marketing cost, but it also calls for long term commitment to certain type
of costs associated with a channel of distribution.

Distribution

Channel Supply Chain Distribution

Selection Configuration Planning

Figure: Factors of Distribution

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Channel Selection:

A wide choice of channels is available including dealers, retailers, stockiest, wholesalers,

distributors and currently World Wide Web. Choice of an appropriate channel depends on the
products / services to be marketed, the volume involved, the geographical locations to be
covered and the long-term business policy of the firm for marketing and exercising controls.
Choice of a channel is important as it can directly influence the level of customer service.

Supply Chain Configuration:

A Supply Chain has a number of participants such as sources of supplies, storage or stocking
stations, distribution channels till the supplies reach the end customer. Decision on
alternatives such as number of participants and their locations have an important bearing on
the efficiency of Supply Chain system. Supply Chain Configuration calls for determining
numbers and location of each of the participant. The answer to these questions will consider
the factors as volume of supplies, number of customers and their geographic locations, cost of
transportation, distribution cost and level of customer satisfaction.

Distribution Planning:

The supplies can be carried through a wide variety of transportation choices. A faster
transportation not only helps to achieve a higher level of customer satisfaction in making the
supplies available on time but also helps to increase the sales by seizing business
opportunities, where there is sudden rise in demand. To meet these objectives, many
corporations tend to own their own fleet of transport vehicles. The transportation cost is an
important factor in Supply Chain system. This factor seeks to establish the transport mode
capacity, location, routine, and the schedule of distribution so that supplies reach the
destination in time.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

INVENTORY:

This constitutes the core of SCM. The major costs of a Supply Chain, the level of customer
satisfaction, the business growth ( or fall ) are largely influenced by the inventory strategy.
There are several issues, which are at conflict with each other and are required to be resolved.
Higher inventory at several distribution points may for example, help in making the goods
easily available to customers and results in growth of sales but will simultaneously increase
costs and bring down revenues. Inventory strategy comprise of three elements :

Demand Forecasting

Inventory Strategy

Stock Facilities Planning Inventory Planning

Figure : Inventory Strategy

Demand Forecasting:

It requires determination of the product's demand for period under consideration. Many
products have a seasonal demand, which is governed by factors as festivals, weather ( Season
) etc. Many others follow a regular cycle. There are products, which find market when there
is scarcity of alternatives. Demand planning is needed as it enables the company to organize
its sourcing strategy and stocking policies. The economics of a total system can go haywire if
demand planning finally finds no resemblance to the actual market conditions. On the other
hand, an accurate demand forecast will result in total smooth operations. A number of
forecasting tools are available to carry out demand planning in a systematic manner.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Inventory Planning:

Once the demand has been forecast, the organization is called upon to determine levels of
production to develop an inventory policy. The latter includes fixing of inventory levels as
minimum / maximum stock, reorder level, lead time for procurement, order level quantities
etc. It also includes setting up procedures and fixing time schedules for monitoring the
inventories and exercising controls. Inventory planning is required to be carried at all the
channels (Stocking points) of the Supply Chain system. In a Supply Chain system cost of
inventory constitutes a major overhead. Customer satisfaction on the other hand expects
delivery of goods from ready stocks. A balance is therefore to be struck. Inventory
management is a well-developed discipline even in conventional management philosophy. A
number of tools and softwares are available to carry out this function. Proper inventory
management reduces cost while raising the levels of customer satisfaction.

Planning of Stocking Facilities:

Adequate stocking facilities are needed for keeping stocks at each of the channel stock
station. The storing facility should be sufficient to carry out the inventory in safe conditions
and should be equipped with handling facilities for easy and quick receipts and issues.
Besides, the storage facility should be situated close to the rode / rail heads so as to
minimized the cost of transportation. Being close to distribution channels is also desirable as
it will reduce the time to carry stocks to the sales counters.

CUSTOMER SERVICE STRATEGY:

A Corporation has to draw up a strategy defining methods and means to respond to the needs
and expectations of its customers (End users) in a manner that maximizes profitability. With
customer moving to center stage, companies begun to treat him as a valuable, independent
entity. Increased and intense competition all around has made customer service as the key
differentiator in a marketing system.

Many companies have discovered the importance of servicing the customers. These
companies no longer refer to sales as selling of their products but selling of relationships,
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

solutions, support and care. In many cases, especially in cases of consumer durable where
there is high similarity in products offered, selling a product hardly fetches profits, it is the
service which brings returns e.g. The automobile manufacturers all over the world ( GM,
Ford, Hyundai, Maruti, Telco ) are now concentrating in after sales service and product
customizing options business.

Customer service has become the cutting edge and is a valuable business activity garnering
both more resources and top management’s attention . Customer service is being offered in
many forms. Post warranty support , fast repairs , speedy response to service calls from
customers , easy availability of spares , qualified component and customer friendly
technicians are some of the apparent services . The present trends go beyond this. It is no
longer enough to restrict the service offered to the products sold by the company. Its loyal set
of customers expects the services on the other brands as well . In some cases, cross-functional
service is demanded. A vigilant company has to equip itself to meet these challenges.
Customer service strategy is developed from three factors as shown in figure below.

Service
Needs

Custome
r
Service
Strateg
y

Service Revenue
Cost Mngt.

Figure: Input for Customer Service Strategy

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Identification of service needs

This is very crucial step for providing appropriate service to customers. Many companies fail
in their endeavor to provide service as proper needs have not been identified. Besides, for a
product, needs of service can very from one segment of customers to another. Also,
expectations of service can differ from one geographic base to another. The need to
understand customer’s need has therefore, become a very important exercise. It requires a
continuous and constant touch with customers. The exercise calls for :
 Segmentation of customers
 Identification of segments unique to the company
 Identification of service needs relevant to each customer segmentation / product
/geographic location

Cost of Service

It is seldom that a firm claims to provide no service to the customer. The issue involved are
as to how to improve the service so as to maximize a firm’s profitability. The exercise under
this step calls for determination of:
 Service cost incurred by the firm to deliver the current level of service
 Cost of providing newly identified level of service to customer
Based on the data so collected, a company draws up a plan to provide a level of service.

Revenue Management

The principal objective of profitability maximization and growth cannot be sacrificed. Even
increased customer service also must led to these objectives. This step, therefore, calls for
determination of appropriate response to the identified needs and expectations of the
customers. Obviously many customers segments may have to be dropped out or levels of
service diluted. Some firms even have considered treating service as an independent profit
center. In order to survive and thrive as a profit center , the firm requires identified potential
income and a break up of cost, which will have to be charged . Revenue management takes
into account such issues as well as connected problems such as third party service , splitting
of fees , costs of logistics and spares .
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

SUPPLY CHAIN INTEGRATION

STRATEGY

In traditional supply systems, suppliers and manufacturers operate rather independently.

Suppliers have very little information on what manufacturer needs until the receipt of order.
Similarly manufacturers are unaware of the availability of material until they get a response
for their order .the status of stocks with distributors, dealers, retailers is hardly available and
if available, seldom reliable. Many manufacturers considers this information as unwarranted
because sales transaction is considered to be completed once stock reach these channel s and
as undesirable as it amounts to interference with distribution channels. Many stockiest also
consider disclosure of this type of information of stocks as uncalled for as this is confidential.
But in an efficient SCM, manufacturers, suppliers, distributors and customers are linked in a
form of a chain to develop and deliver product as a single organization of pooled skills and
resources .
The process of linkage among the participants is the most significant factor Higher is the
integration process, greater is the success of the supply chain system .

The integration can have three forms:

Information Integration

Integration Strategy Decision Integration

Financial Integration

Figure : Integration Strategy

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Information Integration:

Information plays the most crucial role in integration .The participants share confidential and
crucial information. In a well implemented system, the participants are aware of the stocks ,
demands and availability of supplies at all time . The supplier knows what the manufacturer
needs and the manufacturer know the stock and needs of the distribution channels.
Information technology is playing a n important role in linking .

Electronic Data Interchange (EDI) has been successfully tried. But the real breakthrough has
come from advanced computer software as ERP and PEA ( Planning Engine Applications ) .
ERP organizes and interconnects most day-to-day tasks , such as entering order , tracking
product shipments , scheduling products and updating sales forecasts and balance sheets .
Planning and implementation of information system can also help to analyze product flows ,
order patterns , inventories , obsolescence , level of production and supply costs .

Decision Integration:

If the various participants of the supply chain system operate as one congruent whole,
demands of integration call for a joint decision making exercise. The participants are
expected to meet at frequent intervals to take joint decisions on issues such as inventories,
distribution, trade-off to strike a balance between contradictions and even pricing policies.
The entire supply chain system would be behaving as if it were one single company. This
task is however, not easy to achieve as human element is involved and consensus decisions
only signify the path of least resistance and minimum risk involvement. This decision
integration also implies that a participant will have a right to exercise controls on operational
activities of the other participants and raise voice of discontent in case the operations are
contrary to decisions already made.

Financial Integration:

Financial integration implies that each of the participants has a financial stake in operations
of other participants. Suppliers, for example can be equity holders in the venture of the
manufacturers and manufacturers extend their financial participation to the distribution
channels. With this arrangement, the participants become part of one set up and tend to work
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

towards achievement of objectives, which become common goals. Each participant becomes
dependant on the other and the right functioning of the system is the common concern.
Failure of one participant brings an immediate response from other participants to correct the
situation. Fear of failure binds the participants and keeps them together. This is no doubt one
of the strongest integration, but has been rarely practiced except in large set ups where
financial participation is otherwise necessary for business survival.
SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

SUPPLY CHAIN INTEGRATION

FRAMEWORK

Customer
Service

STRATEGIC
STRATEGIC

Channel Network
Design Strategy

STRUCTURAL

Warehouse Transportation Materials

Design and Management Management
Operations

FUNCTIONAL

Information Policies and Facilities and Organization

Systems Procedures Equipments and Change
Management

IMPLIMENTATION

Figure: SCM Framework Pyramid

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

SCM FRAMEWORK

A framework to understand the various issues involved in SCM is provided by the pyramid
structure for the SCM paradigm. The pyramid allows issues to be analyzed on four levels:

Strategic:

On the strategic level, it is important to know how SCM can contribute to the enterprise’s
basic “value proposition” to the customers? Important questions that are addressed at this
level include:

 What are the basic and distinctive service needs of the customers?
 What can SCM do to meet these needs?
 Can the SCM capabilities be used to provide unique services to the customers? Etc.

Structural:

After the strategic issues are dealt with, the next level question(s) that should be asked are:

 Should the organization market directly or should it use distributors or other

intermediaries to reach the customers?
 What should the SCM network look like?
 What products should be sourced from the manufacturing locations?
 What products should be sourced from which manufacturing locations?
 How many warehouses should the company have and their locations ?
 SCM has to evaluate existing capabilities and add additional capabilities to fulfill unique
requirements.

Functional:

This is the level where operational details are decided upon. Functional excellence requires
that the optimal operating practices for transportation management, warehouse operations and
materials management (which includes forecasting, inventory management, production
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

scheduling and purchasing) are designed. These strategies should keep in view the trade-offs
that may need to be made for the overall efficiency of the system. Achieving functional
excellence also entails development of a process-oriented perspective on replenishment and
order fulfillment so that all activities involved in these functions can be well integrated.

Implementation:

Without successful implementation, the development of SCM strategies and plans is

meaningless. Of particular importance are the organizational and information systems issues.
Organizational issues centers on the overall structure, individual roles and responsibilities,
and measurement systems needed to build an integrated operation. Information systems are
“enablers” for supply chain management operations and therefore must be carefully designed
to support the SCM strategy. Supply chain mangers must consider their information needs
relative to decision support tools, application softwares, data capture, and the system’s
overall structure.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

TYPES OF COSTS IN SUPPLY CHAIN

MANAGEMENT

Costs can be classified into three categories:

*Direct Costs: Costs, which are directly identifiable with a particular supply source.
*Indirect Costs: Costs which are indirectly incurred, with reference to a Specific source.
*Hidden Cost/ Benefit: The costs/benefits attached with each supply source which are not
visibly apparent but having an overall impact on the organizational bottom line.

DIRECT COSTS

Direct costs comprise the basic supply rate, taxes and duties, packing and forwarding charges,
freight charges, etc. These costs have to be netted off by the benefits on account of interest
savings on the credit facility offered by individual vendors and other direct benefits arising
from a supply source. The important point is that while comparing direct costs, all costs and
benefits from individual vendors should be worked out on a cost sheet, so that we can
identify and evaluate the different costs and benefits. Ignoring any parameter of cost or
benefit can lead to a totally different and sometimes incorrect decision. The impact of the
costs/benefits, when considered over the entire year, may be substantial.

INDIRECT COSTS

In addition to direct costs, there are indirect costs attached to the supply management system.
These costs may vary from vendor to vendor. These costs arise as a result of various
decisions taken while fixing a supply source and also as a result of behaviour specific to a
particular vendor source.

Inventory Carrying Cost

Inventory carrying cost varies with the lot size of procurement from different vendors. While
discounts are larger with larger size lot procurement, the inventory carrying cost would also
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

be higher. There is a need to strike an optimum balance between the various costs and
benefits. The inventory carrying costs needs to be factored in while arriving at the final cost.

Cost of Unusable Material

Depending upon the vendor, unusable material in the process may vary, on account of
product quality. For a goods manufacturer, depending on the different sheet sizes of steel
coils from vendors, the scrap percentage may vary from vendor to vendor. These costs, that
have to be worked out for each vendor, should be considered in vendor evaluation.

Effect on Realization due to Quality

The quality of raw material finally decides the quality of the finished product. The quality of
the finished product will finally determine the realization a particular product can fetch in the
market. While the impact on raw material cost would be considered in the direct cost
comparison, the costs or benefits arising out of the relative quality of raw materials needs to
be considered in the indirect cost analysis, while evaluating a vendor.

Effect of Utilities Consumption

Each raw material may have different process requirements to convert it into the finished
product. The consumption of utilities may vary, depending upon the source of the raw
material. Some raw materials may have better processability and may require lower power
consumption, water consumption and chemical consumption, compared to others.

Yield of Finished Product

The yield of each raw material, and the costs related to it should be analyzed in detail. These
details should be analyzed in the context of the market conditions and the best decision
arrived at.

HIDDEN COSTS/BENEFITS

It is important to understand and define quality requirements precisely. The supplier may be
providing a product of better quality than what is required, but this may result in unwarranted
extra costs, which should be reduced.

Effect on Productivity
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Various raw materials will have different processability and this, in turn, will result in
different productivity. Raw materials enabling higher productivity would result in a higher
contribution on a per day basis, assuming all other factors remain the same. Therefore, it is
essential that the impact of different raw material sources on productivity be analyzed and
built into the vendor evaluation sheet.

Effect on Breakdown and Maintenance Cost of Plant and Equipment

Each raw material source can have a specific impact on the life of plant and equipment. The
impact may be of low or high magnitude. The impact on equipment life and maintenance
needs should be analyzed and quantified, with specific reference to the raw material source. If
the impact is substantial, this variable should be considered in the vendor evaluation sheet.

Effect on Plant Availability due to the Increased/Reduced Breakdown and Maintenance

An increase or reduction in breakdowns and in the quantum of maintenance requirement will
affect not only the maintenance and replacement cost of the equipment, but also the time
required for repairing or replacing the equipment. If the equipment is only one in the
production process, any outage of that equipment, due to maintenance or replacement needs,
will result in stoppage of production during that period. The impact of this should be worked
out and included in the vendor evaluation sheet.

Technical Inputs from the Vendor and After-Sales Service

Suppliers of raw material can play an important role in the value creation chain by providing
their specialized inputs to the user industry. When selecting a supplier of a particular raw
material, it is essential to understand and assess their technical capabilities. Creative
collaboration with suppliers, through exchange of technical inputs, information sharing and
joint development of products and processes, can confer distinct advantages. Alliances with
suppliers can offer benefits beyond the purely financial—in areas such as product design,
quality, manufacturing, service and technology.

COST QUANTIFICATION
The costs, as discussed above, can be classified into two categories:
 Costs quantifiable in monetary terms
 Costs not quantifiable in monetary terms
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

The costs that are quantifiable in monetary terms can be measured and compared clearly. The
costs that are non-quantifiable in monetary terms need to be understood and weighted
accordingly to the vendor selection process.
WHAT IS REAL VENDOR COST?

The real vendor cost is the total of all the above costs—direct, indirect and, sometimes,
hidden .The real vendor cost should be calculated for a key factor. Depending upon the
various key factors, costs may vary. Generally, the real vendor cost should be worked out as a
reverse function of cost. In other words, the expected profit should be worked out based on
different alternatives. The alternative that maximizes profit is the best alternative, rather than
the one that results in the lowest cost.

Depending on the key factor, the basis of cost comparison will vary. Alternatively, the real
cost drivers are best reflected by way of the contribution comparison. The key factor will
decide the basis on which the real cost/benefit comparison should be made.

Key Factor Real Cost/Benefit Driver

Sales Contribution per production unit

Production Contribution per unit time

Raw Material Contribution per raw material unit

Power or Fuel Supply Contribution per unit of power

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

When a sale is the key factor, it means that all other factors are available in abundance, but a
sale is a limitation, and the contribution per production unit will be the guiding factor for
deciding the real cost. However, when production becomes the key factor, which means that
you can sell as much as you produce and that there is no other key factor, then the
contribution per unit time, i.e. the daily contribution, would be the guiding factor.
Particulars Unit Vendor A Vendor B

Contribution per unit Rs/Unit 762.86 757.53

Daily Production Unit/day 3000 3090

When Sales is a key Factor

Maximum sale per day Unit/day 2700 2700
Contribution per unit Rs/Unit 762.86 757.53
Hence Vendor A is more economical

When production is a key factor

Maximum sale per day Unit/day 3000 3090
Contribution per day Rs.lacs/day 22.89 23.41
Hence Vendor B is more economical
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

HOW REAL VENDOR COST SHOULD BE MEASURED?

Cost is generally measured as the direct cost of procurement and the lowest direct
procurement cost is generally considered the best cost. however, it may not always be the
correct method of vendor evaluation and it may lead to incorrect decisions. Alternatively, the
cost of production per unit, using different raw materials, can be the criterion for vendor
evaluation. This method is considered than the first one. Even so, though it takes into
consideration all the factors of cost of production, it still ignores factors that affect production
and those which extend beyond production.

Another alternative method for ascertaining the vendor cost can be the contribution per unit
of the key factor. This means that the alternative that produces the highest contribution based
on the key factor, becomes the preferred sourcing option. This method is better than the
previous ones. In addition to all these variables, the cost drivers that cannot be quantified in
monetary terms also need to be considered in relative terms, based on past experience. After
all, human judgement and experience are factors that are irreplaceable in managerial decision
making. For the purpose of vendor evaluation, the approach incorporating key factor-based
contribution, combined with the impact of the impact of the non-quantifiable cost-drivers, in
monetary terms, works out to be the best criteria.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

CORPORATE PROFITABILITY – SUPPLY

CHAIN MANAGEMENT CONNECTION

THE VALUE OF SUPPLY CHAIN OPTIMIZATION

Supply Chain Optimization may be defined as the effective planning and synchronization of
production and distribution across the supply cabin towards delivering maximum value to the
enterprise in terms of profitability and customer service. Effective control of the supply chain
involves supply chain planning, production synchronization and execution control across the
enterprise which may, in fact, range from a single plant, to multiple facilities under
centralized control, to large manufacturing companies with a complex network of
independent vendors and subcontractors, distributors and transportation partners.

Whatever the size or structure of the organization, the multiple benefits to be gained from
effective supply cabin management include :

 Increased return-on-assets through better synchronization, better buffer management, and

better alignment of execution with demand.

 Full Supply Chain Visibility allows executives, for the first time, the ability to see
problems before they arise.

 Decision Support will give the executive the opportunity to test many scenarios when
faced with decision. Various business goals can be balanced in an optimized setting for
maximum performance.

 Increased agility, which is enhanced ability to respond to a sudden demand.

 Reduced lead times due to enhanced synchronization.

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

 Increased customer service levels with lower buffers, for improved performance and on-
line deliveries.

 Reduced operating costs resulting from maximized resource utilization.

Taken together, these five elements can lead to impressive results for the enterprise, not
merely in cost savings alone but in the creation of real value, signified by a better competitive
position, greater market share, increased earnings and profits, and even higher stock prices.
Because of this, the quest for the supply chain synchronization and optimization is not just
another operational tactic, but rather a strategic commitment involving people throughout the
entire enterprise, from the CEO to the shop floor.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLES OF SUPPLY CHAIN

MANAGEMENT
INTRODUCTION:

To balance customers' demands with the need for profitable growth, many companies have
moved aggressively to improve supply chain management. Their efforts reflect seven
principles of supply chain management that, working together, can enhance revenue, cost
control, and asset utilization as well as customer satisfaction. Implemented successfully, these
principles prove convincingly that you can please customers and enjoy profitable growth
from doing so. Managers increasingly find themselves assigned the role of the rope in a very
real tug of war--pulled one way by customers' mounting demands and the opposite way by
the company's need for growth and profitability. Many have discovered that they can keep the
rope from snapping and, in fact, achieve profitable growth by treating supply chain
management as a strategic variable.

These savvy managers recognize two important things. First, they think about the supply
chain as a whole--all the links involved in managing the flow of products, services, and
information from their suppliers' suppliers to their customers' customers (that is, channel
customers, such as distributors and retailers). Second, they pursue tangible outcomes--
focused on revenue growth, asset utilization, and cost reduction. Rejecting the traditional
view of a company and its component parts as distinct functional entities, these managers
realize that the real measure of success is how well activities coordinate across the supply
chain to create value for customers, while increasing the profitability of every link in the
chain.

Our analysis of initiatives to improve supply chain management by more than 100
manufacturers, distributors, and retailers shows many making great progress, while others fail
dismally. The successful initiatives that have contributed to profitable growth share several
themes. They are typically broad efforts, combining both strategic and tactical change. They
also reflect a holistic approach, viewing the supply chain from end to end and orchestrating
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

efforts so that the whole improvement achieved—in revenue, costs, and asset utilization—is
greater than the sum of its parts.

Unsuccessful efforts likewise have a consistent profile. They tend to be functionally defined
and narrowly focused, and they lack sustaining infrastructure. Uncoordinated change activity
erupts in every department and function and puts the company in grave danger of "dying the
death of a thousand initiatives." The source of failure is seldom management's difficulty
identifying what needs fixing. The issue is determining how to develop and execute a supply
chain transformation plan that can move multiple, complex operating entities (both internal
and external) in the same direction.

To help managers decide how to proceed, we revisited the supply chain initiatives undertaken
by the most successful manufacturers and distilled from their experience seven fundamental
principles of supply chain management. Adherence to the seven principles transforms the tug
of war between customer service and profitable growth into a balancing act.

By determining what customers want and how to coordinate efforts across the supply chain to
meet those requirements faster, cheaper, and better, companies enhance both customer
satisfaction and their own financial performance. But the balance is not easy to strike or to
sustain. As this article will demonstrate, each company--whether a supplier, manufacturer,
distributor, or retailer--must find the way to combine all seven principles into a supply chain
strategy that best fits its particular situation. No two companies will reach the same
conclusion.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLE 1 : Segment Customers Based On The Service Needs Of

Distinct Groups And Adapt The Supply Chain To Serve These Segments
Profitably.

Segmentation has traditionally grouped customers by industry, product, or trade channel and
then taken a one-size-fits-all approach to serving them, averaging costs and profitability
within and across segments. But segmenting customers by their particular needs equips a
company to develop a portfolio of services tailored to various segments. Surveys, interviews,
and industry research have been the traditional tools for defining key segmentation criteria.

Today, progressive manufacturers are turning to such advanced analytical techniques as

cluster and conjoint analysis to measure customer tradeoffs and predict the marginal
profitability of each segment. One manufacturer of home improvement and building products
bases segmentation on sales and merchandising needs and order fulfillment requirements.

Others are finding that criteria such as technical support and account planning activities drive
segmentation. Research also can establish the services valued by all customers versus those
valued only by certain segments. Then the company should apply a disciplined, cross-
functional process to develop a menu of supply chain programs and create segment-specific
service packages that combine basic services for everyone with the services from the menu
that will have the greatest appeal to particular segments. This does not mean tailoring for the
sake of tailoring. The goal is to find the degree of segmentation and variation needed to
maximize profitability.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

All the segments in Exhibit 1, for example, value consistent delivery. But those in the lower
left quadrant have little interest in the advanced supply chain management programs, such as
customized packaging and advance shipment notification, that appeal greatly to those in the
upper right quadrant. Of course, customer needs and preferences do not tell the whole story.
The service packages must turn a profit, and many companies lack adequate financial
understanding of their customers' and their own costs to gauge likely profitability. "We don't
know which customers are most profitable to serve, which will generate the highest long-term
profitability, or which we are most likely to retain," confessed a leading industrial
manufacturer. This knowledge is essential to correctly matching accounts with service
packages--which translates into revenues enhanced through some combination of increases in
volume and/or price.

Only by understanding their costs at the activity level and using that understanding to
strengthen fiscal control can companies profitably deliver value to customers. One
"successful" food manufacturer aggressively marketed vendor-managed inventory to all
customer segments and boosted sales. But subsequent activity-based cost analysis found that
one segment actually lost nine cents a case on an operating margin basis.

Most companies have a significant untapped opportunity to better align their investment in a
particular customer relationship with the return that customer generates. To do so, companies
must analyze the profitability of segments, plus the costs and benefits of alternate service
packages, to ensure a reasonable return on their investment and the most profitable allocation
of resources. To strike and sustain the appropriate balance between service and profitability,
most companies will need to set priorities--sequencing the rollout of tailored programs to
capitalize on existing capabilities and maximize customer impact.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLE 2: Customize The Logistics Network To The Service

Requirements And Profitability Of Customer Segments.

Companies have traditionally taken a monolithic approach to logistics network design in

organizing their inventory, warehouse, and transportation activities to meet a single standard.
For some, the logistics network has been designed to meet the average service requirements
of all customers; for others, to satisfy the toughest requirements of a single customer
segment.

Neither approach can achieve superior asset utilization or accommodate the segment-specific
logistics necessary for excellent supply chain management. In many industries, especially
such commodity industries as fine paper, tailoring distribution assets to meet individual
logistics requirements is a greater source of differentiation for a manufacturer than the actual
products, which are largely undifferentiated.

One paper company found radically different customer service demands in two key
segments--large publishers with long lead times and small regional printers needing delivery
within 24 hours. To serve both segments well and achieve profitable growth, the
manufacturer designed a multi-level logistics network with three full-stocking distribution
centers and 46 quick-response cross-docks, stocking only fast-moving items, located near the
regional printers.

Return on assets and revenues improved substantially thanks to the new inventory
deployment strategy, supported by outsourcing of management of the quick response centers
and the transportation activities. This example highlights several key characteristics of
segment-specific services. The logistics network probably will be more complex, involving
alliances with third-party logistics providers, and will certainly have to be more flexible than
the traditional network.

As a result, fundamental changes in the mission, number, location, and ownership structure of
warehouses are typically necessary. Finally, the network will require more robust logistics
planning enabled by "real-time" decision-support tools that can handle flow-through
distribution and more time-sensitive approaches to managing transportation.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Even less conventional thinking about logistics is emerging in some industries, where shared
customers and similar geographic approaches result in redundant networks. Combining
logistics for both complementary and competing firms under third-party ownership can
provide a lower-cost industry wide solution. As shown in Exhibit 2, the food and packaged
goods industry might well cut logistics costs 42 percent per case and reduce total days in the
system 73 percent by integrating logistics assets across the industry, with extensive
participation by third-party logistics providers .
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLE 3: Listen To Market Signals And Align Demand Planning

Accordingly Across The Supply Chain, Ensuring Consistent Forecasts And
Optimal Resource Allocation.

Forecasting has historically proceeded silo by silo, with multiple departments independently
creating forecasts for the same products--all using their own assumptions, measures, and level
of detail. Many consult the marketplace only informally, and few involve their major
suppliers in the process. The functional orientation of many companies has just made things
worse, allowing sales forecasts to envision growing demand while manufacturing second-
guesses how much product the market actually wants. Such independent, self-centered
forecasting is incompatible with excellent supply chain management, as one manufacturer of
photographic imaging found. This manufacturer nicknamed the warehouse "the accordion"
because it had to cope with a production operation that stuck to a stable schedule, while the
revenue-focused sales force routinely triggered cyclical demand by offering deep discounts at
the end of each quarter. The manufacturer realized the need to implement a cross-functional
planning process, supported by demand planning software.

Initial results were dismaying. Sales volume dropped sharply, as excess inventory had to be
consumed by the marketplace. But today, the company enjoys lower inventory and
warehousing costs and much greater ability to maintain price levels and limit discounting.
Like all the best sales and operations planning (S&OP), this process recognizes the needs and
objectives of each functional group but bases final operational decisions on overall profit
potential.

Excellent supply chain management, in fact, calls for S&OP that transcends company
2boundaries to involve every link of the supply chain (from the supplier's supplier to the
customer's customer) in developing forecasts collaboratively and then maintaining the
required capacity across the operations. Channel-wide S&OP can detect early warning signals
of demand lurking in customer promotions, ordering patterns, and restocking algorithms and
takes into account vendor and carrier capabilities, capacity, and constraints.

Exhibit 3 illustrates the difference that cross supply chain planning has made for one
manufacturer of laboratory products. As shown on the left of this exhibit, uneven distributor
demand unsynchronized with actual end-user demand made real inventory needs impossible
to predict and forced high inventory levels that still failed to prevent out-of-stocks.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Distributors began sharing information on actual (and fairly stable) end-user demand with the
manufacturer, and the manufacturer began managing inventory for the distributors. This
coordination of manufacturing scheduling and inventory deployment decisions paid off
handsomely, improving fill rates, asset turns, and cost metrics for all concerned. Such
demand-based planning takes time to get right. The first step is typically a pilot of a leading-
edge program, such as vendor-managed inventory or jointly managed forecasting and
replenishment, conducted in conjunction with a few high-volume, sophisticated partners in
the supply chain.

As the partners refine their collaborative forecasting, planned orders become firm orders. The
customer no longer sends a purchase order, and the manufacturer commits inventory from its
available-to-promise stock. After this pilot formalizes a planning process, infrastructure, and
measures, the program expands to include other channel partners, until enough are
participating to facilitate quantum improvement in utilization of manufacturing and logistics
assets and cost performance.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLE 4: Differentiate Product Closer To The Customer And Speed

Conversion Across The Supply Chain.

Manufacturers have traditionally based production goals on projections of the demand for
finished goods and have stockpiled inventory to offset forecasting errors. These
manufacturers tend to view lead times in the system as fixed, with only a finite window of
time in which to convert materials into products that meet customer requirements.

While even such traditionalists can make progress in cutting costs through set-up reduction,
cellular manufacturing, and just-in-time techniques, great potential remains in less traditional
strategies such as mass customization. For example, manufacturers striving to meet
individual customer needs efficiently through strategies such as mass customization are
discovering the value of postponement. They are delaying product differentiation to the last
possible moment and thus overcoming the problem described by one manager of a health and
beauty care products warehouse: "With the proliferation of packaging requirements from
major retailers, our number of SKUs (stock keeping units) has exploded. We have situations
daily where we backorder one retailer, like Wal-Mart, on an item that is identical to an in-
stock item, except for its packaging. Sometimes we even tear boxes apart and repackage by
hand!"

The hardware manufacturer in Exhibit 4 solved this problem by determining the point at
which a standard bracket turned into multiple SKUs. This point came when the bracket had to
be packaged 16 ways to meet particular customer requirements. The manufacturer further
concluded that overall demand for these brackets is relatively stable and easy to forecast,
while demand for the 16 SKUs is much more volatile. The solution: make brackets in the
factory but package them at the distribution center, within the customer order cycle. This
strategy improved asset utilization by cutting inventory levels by more than 50 percent.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Realizing that time really is money, many manufacturers are questioning the conventional
wisdom that lead times in the supply chain are fixed. They are strengthening their ability to
react to market signals by compressing lead times along the supply chain, speeding the
conversion from raw materials to finished products tailored to customer requirements. This
approach enhances their flexibility to make product configuration decisions much closer to
the moment demand occurs.

Consider Apple's widely publicized PC shortages during peak sales periods. Errors in
forecasting demand, coupled with supplier inability to deliver custom drives and chips in less
than 18 weeks, left Apple unable to adjust fast enough to changes in projected customer
demand. To overcome the problem, Apple has gone back to the drawing board, redesigning
PCs to use more available, standard parts that have shorter lead times.

The key to just-in-time product differentiation is to locate the leverage point in the
manufacturing process where the product is unalterably configured to meet a single
requirement and to assess options, such as postponement, modularized design, or
modification of manufacturing processes, that can increase flexibility. In addition,
manufacturers must challenge cycle times: Can the leverage point be pushed closer to actual
demand to maximize the manufacturer's flexibility in responding to emerging customer
demand?
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLE 5: Manage sources of supply strategically to reduce the total

cost of owning materials and services.

Determined to pay as low a price as possible for materials, manufacturers have not
traditionally cultivated warm relationships with suppliers. In the words of one general
manager: "The best approach to supply is to have as many players as possible fighting for
their piece of the pie--that's when you get the best pricing." Excellent supply chain
management requires a more enlightened mindset--recognizing, as a more progressive
manufacturer did: "Our supplier's costs are in effect our costs. If we force our supplier to
provide 90 days of consigned material when 30 days are sufficient, the cost of that inventory
will find its way back into the supplier's price to us since it increases his cost structure."

While manufacturers should place high demands on suppliers, they should also realize that
partners must share the goal of reducing costs across the supply chain in order to lower prices
in the marketplace and enhance margins. The logical extension of this thinking is gain-
sharing arrangements to reward everyone who contributes to the greater profitability.

Some companies are not yet ready for such progressive thinking because they lack the
fundamental prerequisite. That is, a sound knowledge of all their commodity costs, not only
for direct materials but also for maintenance, repair, and operating supplies, plus the dollars
spent on utilities, travel, temps, and virtually everything else. This fact-based knowledge is
the essential foundation for determining the best way of acquiring every kind of material and
service the company buys.

With their marketplace position and industry structure in mind, manufacturers can then
consider how to approach suppliers--soliciting short-term competitive bids, entering into
long-term contracts and strategic supplier relationships, outsourcing, or integrating vertically.
Excellent supply chain management calls for creativity and flexibility.

For one manufacturer whose many divisions all were independently ordering the cardboard
boxes they used, creativity meant consolidating purchases, using fewer and more efficient
suppliers, and eliminating redundancy in such processes as quality inspection. For many
small manufacturers, creativity means reducing transportation costs by hitching a ride to
market on the negotiated freight rates of a large customer. For the chemical company in
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Exhibit 5, creativity meant tackling the volatility of base commodity prices by indexing them
(rather than negotiating fixed prices), so supplier and manufacturer share both the pain and
the gain of price fluctuations.

While the seven principles of supply chain management can achieve their full potential only
if implemented together, this principle may warrant early attention because the savings it can
realize from the start can fund additional initiatives. The proof of the pudding: Creating a data
warehouse to store vast amounts of transactional and decision-support data for easy retrieval
and application in annual negotiations consolidated across six divisions . It cut one
manufacturer's operating costs enough in the first year to pay for a redesigned distribution
network and a new order management system.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLE 6: Develop A Supply Chain-Wide Technology Strategy That

Supports Multiple Levels Of Decision Making And Gives A Clear View Of
The Flow Of Products, Services, And Information.

To sustain reengineered business processes (that at last abandon the functional orientation of
the past), many progressive companies have been replacing inflexible, poorly integrated
systems with enterprise-wide systems. One study puts 1995 revenues for enterprisewide
software and service, provided by such companies as SAP and Oracle, at more than $3.5
billion and projects annual revenue growth of 15 to 20 percent from 1994 through 1999.

Too many of these companies will find themselves victims of the powerful new transactional
systems they put in place. Unfortunately, many leading-edge information systems can capture
reams of data but cannot easily translate it into actionable intelligence that can enhance real-
world operations. As one logistics manager with a brand-new system said: "I've got three feet
of reports with every detail imaginable, but it doesn't tell me how to run my business."

This manager needs to build an information technology system that integrates capabilities of
three essential kinds. For the short term, the system must be able to handle day-to-day
transactions and electronic commerce across the supply chain and thus help align supply and
demand by sharing information on orders and daily scheduling. From a mid-term perspective,
the system must facilitate planning and decision-making , supporting the demand and
shipment planning and master production scheduling needed to allocate resources efficiently.

To add long-term value, the system must enable strategic analysis by providing tools, such as
an integrated network model, that synthesize data for use in high-level "what-if" scenario
planning to help managers evaluate plants, distribution centers, suppliers, and third-party
service alternatives. Despite making huge investments in technology, few companies are
acquiring this full complement of capabilities. Today's enterprise wide systems remain
enterprise-bound, unable to share across the supply chain the information that channel
partners must have to achieve mutual success.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Second, excellent supply chain managers determine their true profitability of service by
identifying the actual costs and revenues of the activities required to serve an account,
especially a key account. For many, this amounts to a revelation, since traditional cost
measures rely on corporate accounting systems that allocate overhead evenly across accounts.
Such measures do not differentiate, for example, an account that requires a multi-functional
account team, small daily shipments, or special packaging. Traditional accounting tends to
mask the real costs of the supply.

Ironically, the information that most companies require most urgently to enhance supply
chain management resides outside of their own systems and few companies are adequately
connected to obtain the necessary information. Electronic connectivity creates opportunities
to change the supply chain fundamentally--from slashing transaction costs through electronic
handling of orders, invoices, and payments to shrinking inventories through vendor-managed
inventory programs.

A major beer manufacturer learned this lesson the hard way. Tracking performance from
plant to warehouse, the manufacturer was pleased--a 98 percent fill rate to the retailer's
warehouse. But looking all the way across the supply chain, the manufacturer saw a very
different picture. Consumers in some key retail chains found this company's beer out of stock
more than 20 percent of the time due to poor store-level replenishment and forecasting. The
manufacturer now is scrambling to implement "real-time" information technology to gain
store-specific performance data. . .data that is essential to improving customer service.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Without this data, the manufacturer cannot make the inventory-deployment decisions that
will boost asset utilization and increase revenue by reducing store-level stockouts. Many
companies that have embarked on large-scale supply chain reengineering attest to the
importance of information technology in sustaining the benefits beyond the first annual cycle.
Those that have failed to ensure the continuous flow of information have seen costs, assets,
and cycle times return to their pre-reengineering levels, which undermines the business case
for broad-based supply chain programs.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

PRINCIPLE 7: Adopt Channel-Spanning Performance Measures To

Gauge Collective Success In Reaching The End-User Effectively And
Efficiently.

To answer the question, "How are we doing?" most companies look inward and apply any
number of functionally oriented measures. But excellent supply chain managers take a
broader view, adopting measures that apply to every link in the supply chain and include both
service and financial metrics.

First, they measure service in terms of the perfect order--the order that arrives when
promised, complete, priced and billed correctly, and undamaged. The perfect order not only
spans the supply chain, as a progressive performance measure should, but also views
performance from the proper perspective, that of the customer. Chain--focusing on cost type
rather than the cost of activities and ignoring the degree of control anyone has (or lacks) over
the cost drivers.

Deriving maximum benefit from activity-based costing requires sophisticated information

technology, specifically a data warehouse. Because the general ledger organizes data
according to a chart of accounts, it obscures the information needed for activity-based
costing. By maintaining data in discrete units, the warehouse provides ready access to this
information.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

To facilitate channel-spanning performance measurement, many companies are developing

common report cards, like that shown in Exhibit 7. These report cards help keep partners
working toward the same goals by building deep understanding of what each company brings
to the partnership and showing how to leverage their complementary assets and skills to the
alliance's greatest advantage. The willingness to ignore traditional company boundaries in
pursuit of such synergies often marks the first step toward a "pay-for-performance"
environment.

Consider the manufacturer of scientific products who kept receiving low marks from a
customer on delivery--even though its own measures showed performance to be superior. The
problem was that the two were not speaking the same language. The customer accepted only
full truckloads; anything brought next week because it wouldn't fit onto the truck this week
was deemed backordered. To the manufacturer, however, this term did not apply.

A common report card can also help partners locate and capitalize on synergies across the
supply chain . As a manufacturer of health products did by working with a major customer to
develop a joint return-on-invested-capital model and then used it to make such decisions as
where to hold slow-moving inventory most cost effectively. Of course, such success is
possible only between partners who begin with deep understanding of their own financial
situation.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

TRANSLATING PRINCIPLES INTO PRACTICE

Companies that have achieved excellence in supply chain management tend to approach
implementation of the guiding principles with three precepts in mind.

 Orchestrate Improvement Efforts

The complexity of the supply chain can make it difficult to envision the whole, from end to
end. But successful supply chain managers realize the need to invest time and effort up front
in developing this total perspective and using it to inform a blueprint for change that maps
linkages among initiatives and a well-thought-out implementation sequence. This blueprint
also must coordinate the change initiatives with ongoing day-to-day operations and must
cross company boundaries.

The blueprint requires rigorous assessment of the entire supply chain--from supplier
relationships to internal operations to the marketplace, including customers, competitors, and
the industry as a whole. Current practices must be ruthlessly weighed against best practices to
determine the size of the gap to close. Thorough cost/benefit analysis lays the essential
foundation for prioritizing and sequencing initiatives, establishing capital and people
requirements, and getting a complete financial picture of the company's supply chain--before,
during, and after implementation.

A critical step in the process is setting explicit outcome targets for revenue growth, asset
utilization, and cost reduction. While traditional goals for costs and assets, especially goals
for working capital, remain essential to success, revenue growth targets may ultimately be
even more important. Initiatives intended only to cut costs and improve asset utilization have
limited success structuring sustainable win-win relationships among trading partners.
Emphasizing revenue growth can significantly increase the odds that a supply chain strategy
will create, rather than destroy, value.

 Remember That Rome Wasn't Built In A Day

As this list of tasks may suggest, significant enhancement of supply chain management is a
massive undertaking with profound financial impact on both the balance sheet and the
income statement. Because this effort will not pay off overnight, management must carefully
balance its long-term promise against more immediate business needs. Advance planning is
again key.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Before designing specific initiatives, successful companies typically develop a plan that
specifies funding, leadership, and expected financial results. This plan helps to forestall
conflicts over priorities and keeps management focused and committed to realizing the
benefits.

 Recognize The Difficulty Of Change

Most corporate change programs do a much better job of designing new operating processes
and technology tools than of fostering appropriate attitudes and behaviors in the people who
are essential to making the change program work. People resist change, especially in
companies with a history of "change-of-the-month" programs. People in any organization
have trouble coping with the uncertainty of change, especially the real possibility that their
skills will not fit the new environment.

Implementing the seven principles of supply chain management will mean significant change
for most companies. The best prescription for ensuring success and minimizing resistance is
extensive, visible participation and communication by senior executives. This means
championing the cause and removing the managerial obstacles that typically present the
greatest barriers to success, while linking change with overall business strategy.

Many progressive companies have realized that the traditionally fragmented responsibility for
managing supply chain activities will no longer do. Some have even elevated supply chain
management to a strategic position and established a senior executive position such as vice
president-supply chain (or the equivalent) reporting directly to the COO or CEO. This role
ignores traditional product, functional, and geographic boundaries that can interfere with
delivering to customers what they want, when and where they want it.

The executive recruited for this role must have some very special attributes—

* The breadth of vision needed to understand and manage activities from receipt of
order through delivery;

* The flexibility required to experiment and make mid-course corrections, coupled with
the patience demanded by an inherently long-term effort;

* The superior communication and leadership skills essential to winning and sustaining
commitment to the effort at every level of the organization, including the translation of
intellectual commitment into financial commitment.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

REAPING THE REWARDS OF EXCELLENT SUPPLY CHAIN

MANAGEMENT

The companies mentioned in this article are just a few of the many that have enhanced both
customer satisfaction and profitability by strengthening management of the supply chain.
While these companies have pursued various initiatives, all have realized the need to
integrate activities across the supply chain. Doing so has improved asset utilization, reduced
cost, and created price advantages that help attract and retain customers (and thus enhance
revenue).

At the same time, these companies have recognized the importance of understanding and
meeting diverse customer needs. Such tailoring of products and services enhances the
effectiveness of the supply chain and thus wins customer loyalty. This loyalty translates into
profits--Xerox has found satisfied customers six times more likely to buy additional Xerox
products over the next 18 months than dissatisfied customers.

By simultaneously enhancing customer satisfaction and profitability, the seven principles of

supply chain management can turn these once warring objectives into a formula for
sustainable competitive advantage.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

ROLE OF ERP IN SUPPLY CHAIN

MANAGEMENT

INTRODUCTION

Today, material suppliers, channel supply partners (wholesalers/distributors, retailers), and

customers themselves, as well as supply-chain management consultants, software product
suppliers and system developers, are all key players in supply-chain management. Managing
the supply chain includes the concept of "seamless supply chain", by encouraging market
place information to move through the supply chain with as little distortion as possible. The
essence is to serve the customer, by putting all the members to work "seamlessly" Supply
chain management can be more articulately defined as the optimization of the delivery of
goods and services, and optimization of information from the supplier to the customer.

To the customer optimization means that the supplier knows what the customer needs and
understands the correct timing in the delivery of goods or services. To the supplier,
optimization of delivery means that the right goods or services are available in the right
quantities at the right time the customer needs them without creating excess -inventory or
excess-capacity situation for the supplier. The supply-chain and its effective management
hold for an organization, the key to a virtually untapped source of competitive advantage.
Market dynamics expand and intensify as a result of changing customer demands.
Organizations that are in a position to adjust rapidly are the final survivors.  

ERP: SUPPLY CHAIN ENABLERS OR DISABLERS ?

Individual computing systems are no longer able to cater to the increasing needs of the
organizations. Merely automating systems will not help organizations any more. Systems
must be tightly integrated with business objectives to compete in the changing environment.

Enterprise-wide Resource Planning (ERP) is an enterprise wide management system made

possible by information technology. Organizations have been implementing ERP Packages
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

for integrating various functions. ERP has been helping companies to automate their
processes and to use MRP (Material Requirements Planning) mechanism for planning and
control of materials and other resources.

ERP can help organizations in addressing needs like reduced cycle time, reduced inventories
and sharing information seamlessly across the organization. Companies, which have
implemented ERP, have made improvements in cross-functional coordination and improved
business performance at various levels.

THE EVOLUTION:

ERP has evolved originally from the famous Material Requirements Planning (MRP)
systems. MRP then evolved into Manufacturing Resource Planning (MRP II) by
incorporating few other important aspects of business. MRP is a sequential technique, which
is used for converting the MPS for the end products into detailed schedule for raw material
and components. It starts with the Sales and Operation Planning, Detailed Management and
ends with detailed schedule for components made in-house as well as purchased from
vendors. MRP II, is a tool for planning engineering, operational and financial resources of an
organization. The heart of MRP II is the MRP system and around this other resources are
planned and controlled.  

CHANGING MARKET PLACE AND MANUFACTURING

ENVIRONMENT

The market place has been changing continuously. With increasing competition customers
have become more demanding. The product life cycles have come down drastically. New
technologies are changing the way organizations do business. A planning and control system
like MRP II is becoming less relevant in today’s context because of the following important
changes. 

* Manufacturing moving towards a make to order environment. This era is seeing a

transition of products from being standardized to being highly customized. Hence making the
planning process complex.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

* Competition more on delivery. The quality and cost have become "entry-tickets" for
the players who wish to compete in the market place. The competition is now going to be
based on delivery lead times and flexibility.

* Need for a greater integration with the customers and suppliers.

* Greater product differentiation

  SUPPLY CHAIN MANAGEMENT

Organizations have felt the need for going beyond mere transaction processing and
automation of business processes. They have come to realize that the hierarchical
organizational structures, vertically integrated manufacturing and distribution processes,
arm's length relationships with suppliers and customers, inflexible IT systems, are henceforth
inadequate for the success. What is required to operate in a complex business environment is
a tool, which can help in identifying and planning resources based on certain organizational
constraints, which are dynamic in nature. SCM is a concept, which will look at a business as
a chain of inters connected entities and thus providing a see through perspective of the entire
business.

It holds untapped source of competitive advantage for organizations that need to get products
or services to market in competition with other organizations. Information Technology in
today's supply chain management is the most important cornerstone of an enterprise's ability
to successfully compete in the global marketplace. In this context the channel the
organization uses to leverage the potential of information is critical. Supply chain
management has been used by a few organizations and they have obtained immense benefits
from the same. P&G and Wall Mart in the US have linked their distribution and retail
systems using IT. Now P&G will monitor the shelf inventories of Wall Mart directly and plan
for replenishments accordingly.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

WHERE DOES ERP STOP?

ERP has indeed assisted companies in integrating various functions and in enhancing the
business performance. But it is not totally free of pitfalls, which arise due to the basic design
of the system. The heart of the ERP is the transaction processing system and the MRP, both
of which are internally focused and which help only in the planning and control of processes
internal to the organization. They do not provide means with which the organization can be
integrated with that of the customers and suppliers. A standard ERP package (in this case
SAP, which is a representative of ERP products in general) has been taken to explain the ERP
perspective of Supply Chain Management. The procurement side of the chain is taken care by
functionalities like Purchase (Pur.), Inventory Management (IM) and Sub contacting (sub
con.).

The planning and production side, which seems to be the heart of ERP here, is taken care by
Sales and Operations Planning (SOP), Demand Management (DM), Profitability Analysis
(PA), Capacity Planning (CP), Sales Information System (SIS), Master Production
Scheduling (MPS), Material Requirements Planning (MRP) and Shop Floor Control (SFC).
The distribution side is taken care by Sales Order (SO), Delivery (Delv.) and Billing. The
financials are taken care by Accounts Payable (AP), Accounts Receivable (AR), General
Ledger (GL), Product Costing (PC) and Cost Center Accounting (CCA).

It could be easily seen that the ERP package is strong in the planning and production areas
and weak in the distribution and procurement side. Even though enhancements like net
enabled ERP can help in a customer giving the order through the Net, there is no means by
which we can look at his inventory levels and supply to his requirements. To sum up, any
business organization which is looking to compete in the market place and drastically change
the way they have been working, needs to look at the following aspects. 

* Process changes within the organization - ERP can address process changes to some
extent. When an organization is implementing an ERP solution, what essentially happens is
the processes get realigned on the lines of what the package suggests. This realignment brings
in the best practices, which are built in to the package. This happens during the
implementation exercise of an ERP package.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

* Integrating the activities supporting the processes - ERP performs an excellent job of
integrating disparate activities that constitute a process. The true information integration
brings in added productivity for the given processes.

 Strategic alignment among participating organizations within the structure of the

market they operate in - ERP packages are insufficient in meeting this specific need of the
organization. Even though some supplier and customer information is captured by ERP
systems, it is mainly for the internal needs of the organization. On the other hand a Supply
Chain system can integrate the supplier and the customer in to the organization.

The planning engines of ERP or legacy MRP systems are transaction-based and not designed
to take into account constraints such as available capacity, shipment costs within the network,
or supplier capacity. To maximize resources, ERP customers must also use a constraint-based
planning engine from an Advanced Planning Solutions vendor.

Because these two planning engines have very different paradigms, the integration between
them is expensive and not effective. The need is to implement externally focused
client/server-based enabling information technologies, as against internally focused
"Enterprise Planning systems" alone. Using these externally focused systems organizations
can optimize the performance of the supply chain and deliver measurable benefits. Choosing
supply chain planning applications has become more difficult as ERP vendors now engage in
direct competition with their SCP partners. Should a company go with an ERP solution, or
will it achieve bigger benefits by taking a best-of-breed approach?

A large number of enterprises are betting their IT strategy on the assumption that their ERP
vendor(s) will deliver differentiation in supply chain performance. For many, the ERP
vendors appear as the only vendors to have the clout to bring together the technology and the
functionality. Yet many of today’s elements of supply chain competitiveness are coming in
areas not currently or well addressed by ERP vendors. This is due to the burgeoning of
vendors, who are developing competence to tackle specific areas of the supply chain and
address the functionality issues thereof.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

CONCLUSION

ERP or Supply Chain?

Much has been publicized in the literature about ERP and supply chain. Many companies
believe there is a choice between the two, and they struggle to decide whether the
implementation of ERP or supply chain would benefit the company more. In fact, supply
chain management is the next logical step in an ERP implementation. An ERP system is
simply a computer tool that facilitates the planning of all resources in the enterprise. In
addition, the traditional ERP system also collects detailed feedback with transactional data
with which to close the planning loop.

However, the ERP system implementation is only as good as the data that feed the se moves
into supply chain management. ERP is the linchpin in an overall integrated enterprise
resource management process, which is focused throughout the operational enterprise and
provides the alignment for all functional departments. Once planning system. This data
accuracy is critical as the enterprise this link is strong, the next logical application is to tightly
integrate this operational enterprise with its suppliers and customers. This integrated linkage
is supply chain management.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

SUPPLY CHAIN MANAGEMENT IN INDIA

PROBLEMS AND CHALLENGES

INTRODUCTION:

This outlines the need for effective management of supply chain in Indian context and brings
out the problems and challenges being faced. It presents an analysis of various components of
logistics system and lists strengths, weaknesses, opportunities and threats in each with
specific thrust on the role of IT and communication in supply chain management.

‘Integrated logistics’ is to be interpreted in a total systems perspective implying linking of

production, distribution and marketing. Logistics is the science of movement of materials,
intermediaries and final products from the producer to the consumers. Its main objective is to
fulfill the demand at the right place, at the right time with the right quality at the lowest
possible cost.

Raw Materials
Product Ordering
Channel
Seamless Supply Chain

Material Flow
Channel

End Customer

Figure 1 : Seamless Supply Chain

 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

The supply chain mission of an enterprise is to develop a system that meets service policies at
the lowest possible cost. Logistical performance is measured through availability, capability,
and quality while the cost of logistic system pertains to the overall cost at which the
performance level is achieved. An optimal balance between both is called for.

COMPONENTS OF LOGISTICAL SYSTEM

Five components combine to form a logistical system. These are:-

i. Facility structure

ii. Transportation

iii. Inventory

iv. Communication

v. Warehousing and packaging

The term ‘logistics’ itself is not very well understood though its individual components are
often over-emphasized without seeing the inter-relationships. For example in India logistics is
the most important aspect given the country’s size, geographical heterogeneity, population
pressures, natural calamities, shortage of essential commodities, etc., yet there is no
professional society or association which professes integrated systems approach to logistics.

Performance appraisal systems for logistical systems are hardly clear about what constitutes a
good performance. Reducing visible cost at the expense of significant increase in invisible
(hidden) cost is taken to be a measure of system performance, whereas quality, availability
and timeliness of supplies are taken for granted. Even costs are narrowly interpreted rather
than on life-cycle cost basis. Short-term gains dominate over total cost considerations .
Quality of services is neither explicitly defined nor is objectively monitored.

Optimal level of service quality by judicious balancing of performance and cost is an

exception rather than a rule in management of logistics operations. There is a visible
difference in the management styles of public sector logistics system with its private
counterparts. In public sector, supply systems tend to be over-controlled and under-managed,
sluggish to accept change, high in overhead costs and low in performance levels, particularly
in the quality of service.

On the other hand, privately-managed systems consider profits to be the sole corporate
objective and tend to exploit and tend to exploit the shortage economy by fleecing the
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

customer. Thus in the real sense, none could be considered to be doing very well
.Technological up-gradation is an urgent requirement in most logistical operations in India. In
transportation, communication, storage and warehousing, the level of technology employed is
much lower than India can afford, given the large base of technological institutions and R&D
laboratories the country possesses. The extent of mechanization , automation and decision-
support systems employed in Indian situation is much lower than required, leading to poor
traffic management, delays, wastage of materials, high lead times and excessive inventories.
Information Technology (IT) can and should play a vital role in improving logistical
performance.

Managerial decision-making often does not relate to total system cost considerations. Narrow
sub-system segmented considerations and risk-avoiding, ‘play-safe’ approaches (particularly
in public sector systems) hardly lend any degree of professionalism or objectivity to the
decision process. Even tools techniques of decision making like system analysis/operation
research are more talked about then really used to improve the quality of decisions. Many
times, these are used as ‘cosmetics’ to give signals of a professional image to the outside
world or used to ‘justify’ the pre-designed options rather than seeking truly optimal solutions
to problems.

Vendors’ reliability and dependability are dubious. Source development and vendor
performance play a vital role ion improving the supply environment but unfortunately they
are by and large an ignored factor in Indian logistical systems. Inadequate transport facilities,
lack of well developed road networks, poor quality of roads and bad maintenance level,
paucity of rail-road co-ordination, poor communication, non-exploitation of water ways and
unscientific storage methods constitute major infrastructure bottlenecks/constraints in
efficient logistics.

Human element factors—training, skills, motivation, attitudes, value system, work is a major
stumbling block. Logistics being primarily a service system, a high degree of sensitivity and
concern for the customer, in short a good service attitude is called for. In the absence of
inspiring performance-appraisal systems to distinguish performance from non-performance,
indifferences set in. the situation is beyond repair in public systems with assured job security.
The lack of concern for the customer can play havoc with systems performance. There is an
urgent need to mold these values.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

SWOT ANALYSIS FOR MICRO-LEVEL COMPONENTS.

We will try to enumerate the component-wise strengths/weaknesses in the Indian context and
opportunities and threat in the futuristic framework as follows.

Facility Structure
OPPORTUNITIES THREATS
STRENGHTS WEAKNESSES
Vast geographical Inadequate facilities Need to develop a total Clustering of
area for design of system network facilities
distribution network

Land cost generally Facility location Optimal location of Congestion,

not high as compared decisions are not facilities pollution.
to international level professionally taken

Budget constraints.
Poor maintenance

Communication and IT

Coordination and communication are very important in effective logistics management.

Unfortunately, one of the weakest links in developing countries is communication, both

in hardware and software terms. Some reflections of communications in SWOT

framework is as follows:

STRENGHTS WEAKNESSES OPPORTUNITIES THREATS

Technology base Inadequate hardware Technology up- Work culture
Poor maintenance gradation
Technical know-how Design of effective Attitude toward
communication customer
Trained manpower in Misuse of facilities network
software Spreading Technology life cycle
communication

PCs easily available Low level of network to far-flung

technology employed areas
Good infrastructure
through VSAT, Spread of Internet
ISDN, etc
Transportation
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

We are fortunate to have a vast network of railways, roadways, ports and air

STRENGHTS WEAKNESSES OPPORTUNITIES THREATS

Possible multiple Poor road quality and Distribution planning Pollution

modes of maintenance
transportation Exploit water ways Hazard accidents
Non-coordinated rail-
Vast rail network road systems Cost control Congestion

Cheap and abundant Inadequate transport Energy Conservation

manpower facilities/equipment through better
maintenance, freight
Indigenous Budget constraint consolidation
technology base
Oil crises, fuel bill,
delays at toll booths
Maintenance of fleet
Difficult to reach terrain
due to geographical and
climate heterogeneity
Low level of technology
employed in equipment
Handling
damages/losses

Inventory Control

Inventories may be taken as a barometer of effectiveness of materials function.

Inventory turnover taro in the Indian scenario is very low due to a variety of reasons.

This is due to partly a volatile supply environment with excessive lead times and its

uncertainties.

STRENGHTS WEAKNESSES OPPORTUNITIES THREATS

Indigenous supply Excessive lead time Lead time reduction Shortages
of material possible
for most cases
Materials cost a Uncertain vendors Source development Black marketing
major factor
Knowledge base Excess variety
exists
Too much dead
stock
Low inventory
turnover ratio
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

Demand
uncertainties

Warehousing and Packaging:

Packaging, storage and retrieval methods employed in Indian situation are not the best and
there is tremendous room for improvement in packaging and warehousing front. Many times,
poor storage of materials leads to damage, loss, pilferage and even hazards. There is a need to
update the quality of storage methods with a high degree of mechanization and automation.
In a SWOT framework, a preliminary listing will be as follows:

STRENGHTS WEAKNESSES OPPORTUNITIES THREATS

Technology base Package poor Value analysis in Hazards
packaging
Manufacturing
base Excessive packaging Mechanization Pilferage
cost
Manpower base
Lot of challenge Insufficient storage Automation Budget
for improvement with excessive constraint for
retrieval time AS/RS
Poor house keeping,
low technology Storage layout planning Maintenance of
Damage during Improved work mechanized
storage environment system
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

FUTURE POTENTIAL OF SUPPLY CHAIN MANAGEMENT

There is tremendous scope for improvement based on the present status of integrated systems
of logistics in India. Some concrete steps in this direction are identified as:

 By appropriate restructuring of the supply chain function in an organization, better

understanding can be achieved. This requires a total systems perspective. There is recognition
that customer service needs to be measured and monitored if the supply chain performance is
to be improved.

 Increasing awareness of integrated logistical systems through training and awareness

workshops.

 Creating attitudinal changes to impart service attitude and a sincere work culture on the
part of the people managing the logistical systems.

 Creating a supply cabin management association as a professional society to propagate

the philosophy of integrated systems of logistics and as a facilitator of training , seminars,
consultancy, etc. in the field of supply systems.

 Increasing privatization in public distribution systems, with safeguards for the customer.

 Exchanging the technology in hardware of logistics for transportation, warehousing and

increasing usage of IT for logistical operations.

 Vendor development, vendor rating to reduce the volatility of supply environment.

These measures will usher in welcome changes in the present supply chain management
scenario as only logistics can solve the problems faced by our country.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

CASE STUDY : PROJECT LEAP

HLL’S E-ENABLED SCM

INTRODUCTION:

Project LEAP is a major pilot project undertaken by the Rs. 11392- crore. FMCG company
Hindustan Lever Ltd (HLL) . The objective is to find ways to seamlessly network with HLL’s
7000 odd redistribution stockiest via the Internet. HLL reckons Rs. 1400-crore of inventory is
locked up at the stockiest and retailer level. If it can find a way to free that, the results could
be dramatic, even for the company that operates on negative working capital. Many good
distributors used to carry two weeks of stock. After the project went live, the stock will
reduce to 10 days .The idea is to bring it down to 5 days.

” The last word has not been said on supply chain efficiency “, avers Finance Director D.
Sundaram. Already 35 % of HLL’s distributors in the home and personal care business have
been connected .But the project isn’t just about cutting costs from the system and ratcheting
up efficiencies in the supply chain. Says Sundaram : “ Cutting cost is a benefit , but the prime
impetus for this is Growth .” For the past two years, Lever has been trapped in a slow-down
that has pared its growth to barely 4 % a year. In larger part, this is because consumer
demand has been less predictable.

The General Manager Commercial (Detergents) Mr. S.P.Mustafa says: “The complexity has
increased, the penetration has increased and so has the competition. So we have to made our
supply chain responsive to the secondary sales so that every time the stockiest sells to the
retailer, we are able to immediately replenish his stock. “That would ensure that the right
product is in the right place in the right time .But there are over a million retailers reached
directly, 7000 distributors, 1200 stock keeping units and 100 factories. Merely managing the
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

mass of information flowing through the system is a challenge. But, if the project Leap
succeeds, Lever brands could aim for an in-store availability of at least 99 %.

Apart from the ready availability of stock, there are other benefits of the system. If a brand is
under attack, its sales and marketing team can get to know about it only when the information
from the secondary sales level finds its way up and is collected. That period would often be
of four weeks. Reducing lead time means massive investments in infrastructure. But with the
project Leap, it can also be curtailed as illustrated in the following pages.

HISTORICAL BACKGROUND:

Till now, much of Lever’s supply chain initiatives were confined to the four walls of the
enterprise. Limitation of the technology restricted control over business partners like retailers
and suppliers. That was the era of Enterprise Resource Planning (ERP) systems. In 1996,
when it went in for the MFG Pro-based ERP system, the company reaped the first benefit.
For instance, the detergent business was able to lower its working capital requirements by 50
%, while customer product availability went up from 70 % to 90 %. “Besides, the ERP
system gave us basic hygiene in data collection and accounting.” says Sundaram .

But, by the end of 1990s, when the competition increased and the market become more
complex, Lever needed to find ways to improve the responsiveness of its supply chain. Two
years ago , it adopted the philosophy of continuous replenishment – replace a product as soon
as the stockiest sells it . Mustafa says: “It marked a major change in our supply chain
philosophy. For the customers, it meant availability and also freshness of product.”But
implementing it was difficult without restructuring the system. Four regional buffer depots
were created to stock 70 slow-moving stock-keeping units (SKUs), while the 30 key SKUs
that contributed 80 % of the division sales were stocked in the main depots.

This replaced the earlier system where all products were stocked at all 13 depots . The change
helped cut freight costs because very often the slow-moving products would not make a full
truckload. Says Mr. P.K. Chattopadhyay , Head , Supply Chain Projects : “ The buffer depots
were used to break bulk . “ So, the stock was taken from the factory to these four buffer
depots. From there, a combination of these slow-moving products (about 60 – 70 SKUs) was
sent to the main depots for further distribution . The concept worked in a limited way since
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

true replenishment wasn’t possible without access to secondary sales data. Still, that is , the
Internet opened up further possibilities . On one hand, the cost of local IT infrastructure was
coming down and on the other, the quality of the bandwidth was increasing.”

The arrival of Internet protocol-enabled software made it possible to deploy software on the
web and make it available in remote locations in a cost effective manner. Also , the entire
area of data ware-housing , the ability to store and process vast amounts of information ,
matured considerably ,“ says Mr. K. G. Mohan , Head , Information Systems .That allowed
HLL to make sense of the data that was flowing from hundreds of servers around the country
into their hub . Mr. K. Ramesh , Head , e-commerce team , says : “ Without the Internet , it
was not possible to look at the supply chain in its entirety “. Thus Project Leap was born in
early 2001

THE PROJECT LEAP:

Earlier this year, Lever formed an e-commerce team headed by Mr. K. Ramesh to formulate a
plan to make the most of the Internet. From HLL’s discussions with business heads, it was
clear that instead of participating in the e-marketplace, it made much more sense to attack the
complexities in the supply chain in India. So today, Lever’s pilot project concerns its personal
wash business under the home and personal care division. It has four modules. Once these
modules are integrated, information will flow into a central hub – the data warehouse. The
stockiest connectivity, called the RSNet , is the most critical part of the supply chain since
nothing can be done without the secondary data that only they provide .

Only if the HLL could know what was being sold to the retailer (secondary sales) on a daily
basis , would instant replenishment be possible . But HLL decided not to impose an entirely
new system on the stockiest. Says Mohan: “Everyone uses different packages and it would
have been very difficult to standardize everyone. “ So HLL created a bit of software that
would sit on any system that the RS was using without disturbing anything on the RS’ end .
Due to RSNet , standardized sales information – sales by each and every SKU –is now sent
through the Internet back to HLL’s hub . That determines the next round of product
dispatches from the nearest depot.
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

But it isn’t just a one way communication. Through the RSNet , the stockiest too is kept
informed about the schemes , product launches and constant restages . With the pace of
innovation quickening, it is no longer possible to organizing launch of conferences every time
. By the system, the stockiest can download Power point presentations prepared by a brand
manager, explaining the rational behind a launch.” This ensures that the selling activity is that
much sharper,” says Kartik Chandrashekhar , Area sales Manager , Personal Products .

The area sales managers can log on the Net to track the performance of all the distributors of
his region against the target . Earlier the focus was on gathering information which was now
shifted to active use of it . The biggest benefit is to monitor trade schemes. If they are not
working , it is now possible to modify or pull them out before it’s too late . Also , the
advertising can be regulated depending on the initial offtake . Similarly predicting demand
for a new brand is always fraught with danger. Now if a new brand does well in a particular
region , the information is readily available , minimizing the chances of stock-outs . If the
launch ( product ) doesn’t do well , the factory can quickly stop producing it . It ensures
catering to sharp variations in demand.

Besides the stockiest connectivity, yet another important module is the supply chain
optimizer, a complex and intelligent software that helps optimize production and logistic
decisions . It is being tested in Lever’s Hard Soap business . Using the transaction data in the
data warehouse , the supply chain optimizer , considers all possibilities and then throws up
the best option . For instance , if a promotion on brand Lux is doing particularly well in the
North and the designated factory may not be able to meet the demand , the optimizer helps
decide which manufacturing option HLL should go for under the circumstances . It is more
cost effective to source from one of its many outsourcing options , or will it make sense to
give it to one of its existing factories ?

The ability to rapidly reconfigure the system is enormous . Doing it manually would have
been simply too cumbersome. Factories have different costing structures . Plus different
factories service different depots. There are also taxation issues involved across states . Using
algorithm built into the optimizer , Lever is able to drill down planning decisions to SKUs .
The bedrock of Lever’s new model is the data warehouse , which is the second module of
project Leap . It is the hub into which transactional systems are feeding in critical information
, sales and stocks ( RSNet ), information on actual cost , replacement cost etc. The third
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

module is the supply chain production planning , which will allocate decisions that the
optimizer takes . The fourth module is supplier connectivity , which will ensure that the
hundred odd suppliers are connected to the system and plan their material need based on the
current stock levels .

Once HLL has all these modules connected , the transparency in the system will go upto
unprecedented levels . The bucket size ( the frequency with which the organization looks at
its production schedules ) will go down from a week to a day and eventually to a shift . Once
information is seamless , the blindness in the system will go . So there will be no need to
stock up as much .

So every time replenishment is needed , it would immediately trigger a dispatch requirement

to a depot and that in turn would trigger replenishment instruction to a factory . The factory in
turn would translate that into a material requirement to a supplier. This brings down the total
system cost and minimises the cost of running the supply chain . But how does the Lever
benefit in the end ?

Once some of the inventory is released from the system , the channel partners ( stockiest,
suppliers ) are bound to gain . Stockiest can then be persuaded to spend more resources on
selling better by beefing up the sales infrastructure . There is another benefit : Much of the
HLL’s packing material is built for longevity ( atleast six months ) . If the stocks were more
closely monitored , it would lead to faster replenishment and hence lower packing cost .
That’s money ready to go back into growth strategies . This will become critical once project
Leap moves into the Food Business , where freshness is a must . The focus has to be on
delivered quality instead of manufactured quality .

With transparency in the system , the biggest impact will be on the sales organization inside
Lever . A pull based system will make it tougher to resort to the problem of stock ( dumping )
to reach targets . It is simply a question of changing the goal posts – from primary sales to
what the stockiest sells to the retailer . Ultimately the organization is driven by the goals set
which should be monitored and managed . By December , when the full e-enabled supply
chain is ready , HLL may have truly began shifting the goal posts again .
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

CONCLUSION

WHY SUPPLY CHAIN MANAGEMENT MATTERS

We've witnessed a steady progression of roles and responsibilities in our profession. Traffic
managers two decades ago worked in relative isolation, worrying about tariffs and other
regulatory minutiae. Then with the advent of deregulation, the notion of physical distribution
management took hold. Transportation managers discovered that it made good business sense
to talk with their carriers (and maybe even to their colleagues in other departments) about
how to manage their freight more effectively.

Next came logistics management, the concept of more fully coordinating the people and
functions responsible for transportation, warehousing, and inventory management. Some of
the more advanced practitioners at this stage also brought customer service under the logistics
umbrella.

Today, we've entered a new evolutionary stage. It's called supply chain management. In the
last couple of years, SCM has generated more ink in industry magazines and consumed more
time on conference agendas than any other topic. In essence, supply chain management seeks
to integrate the whole process of moving product to market--from sourcing of the raw
materials to delivery to the ultimate consumer. This perspective embraces internal operations
like procurement, supply management, logistics, forecasting, production planning, and
customer service as well as the external suppliers and customers. All of these supply chain
"partners" are seamlessly connected through advanced information technology.

Why should we care about the emergence of supply chain management? At least three
compelling reasons stand out.

1 Supply chain leaders are successful. Whether you're talking about Dell Computer,
Wal-Mart, Procter and Gamble, Sun Microsystems, Xerox … the leading supply chain
companies have enjoyed great business success. Though no one has yet been able to quantify
the direct relationship between supply chain efficiency and company profitability, the
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

circumstantial evidence is clear. Companies that have streamlined their supply chains
consistently outperform the competition.

2 The benefits of SCM are not reserved for the big companies. Though the most highly
publicized examples of successful supply chain management focus on the big guys,
organizations of any size can apply SCM principles for positive effect. Smaller companies
can execute JIT programs with customers and suppliers; they can implement cross-docking
programs to eliminate excess standing inventory; and they can more accurately align supply
and demand with the help of new software. These all are examples of supply chain initiatives.

3 Supply chain management is a marketable skill. Going forward, managers with an

understanding of supply chain management--and what it takes to successfully implement that
concept--will be in high demand. Already, we're starting to see the words "supply chain"
appear in corporate titles. The professional opportunities will only increase in the years to
come as supply chain management assumes parity with financial, marketing, and
manufacturing as core competencies.

Aligning the supply chain can significantly improve a company’s overall performance.
However, effective supply chain management is much more than automatically sending
requirement messages to suppliers; it integrates the people, processes, and programs from the
supplier’s supplier to the customer’s customer. Some myths exist in the management
paradigm about how to effectively focus the company’s product and service development and
offerings so that they will meet the needs of the customers.

Although every company is different in its products, markets, and management style, a
number of common strategies can be used to enhance overall success in the market. A key
part of long-term success for any company is the ability to align the entire extended
enterprise on the customer’s real needs and desires. First, we will examine the common
myths of markets and product development. Then, building on this background, a number of
practical ideas will be introduced to address supply chain integration.

MYTHS ABOUT SUPPLY CHAIN MANAGEMENT

Implementation of supply chain management should improve overall company profits by

improving the company’s competitive position. However, competitive factors seem to be
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

changing almost daily. This constant change can stress the management team, and managers
under stress will always return to their comfort zone. One global truth is that humans will
always behave according to how they are measured.

Profit is a key measure for any manager, of course, but there are a number of pervasive
myths about how to increase profits. In reality, these myths can actually decrease overall
profitability and irretrievably damage the company. An incorrect strategy is like traveling
down the wrong road: You may be making good time, but you will never arrive at your
desired destination. The most common of these myths follow:

1. More Sales = More Profits.

The old joke about this myth is that if you have a product that loses money, you will make it
up on volume. Selling more of a losing product simply loses more money. This may look like
common sense, but it is surprising how many managers still believe this myth. Higher profits
may be possible with lower revenue. Focusing on the profitable products and prioritizing
capacity bottlenecks by profitability will go much further to improve the business. This is the
key emphasis of the theory of constraints (TOC) philosophy. Optimizing the bottleneck by its
contribution to the overall company will ensure maximum profitability from limited
resources. Supply chain systems (advanced planning and scheduling systems) like I2 and
Manugistics have the ability to very quickly complete the calculations required to achieve
this optimum.

2. Any Customer Is A Good Customer.

The reality is that it takes less time and money to keep current customers than to develop new
customers. Considering that sales are not typically made in the first sales visit and given the
expense of direct sales calls, targeting those customers who give the "biggest bang for the
buck" is good use of a scarce resource. At times, new customers can also reduce the focus on
 SUPPLY CHAIN MANAGEMENT- PRINCIPLES AND PRACTICES

core competencies and draw a company into an attempt to be everything to everyone.

Tracking and attempting to satisfy a wide range of customers, profitable or not, can severely
affect the company’s resources. Integrating a customer relationship management solution into
the supply chain architecture can help identify these profitable customers. It is not uncommon
to find that a company is more profitable selling fewer items to fewer customers when those
items and customers are selected based on the contribution to the bottom line.

3. Build A Better Mousetrap And The World Will Buy It

Development people who think they have a great product have started many entrepreneurial
companies. Some really do have a great product; they produce exactly what the market has
been waiting for and experience great success. However, in many more cases, the market
does not accept the product and the business fails. Targeting customers’ real needs,
understanding them, and fulfilling them is a key success factor. Supply chain provides that
information quickly, permitting the management team to react before disaster strikes. Close
linkages to the supply base enable the enterprise to minimize its risk on new products.

4. Macro Markets Are More Profitable Than Niche Markets.

The shotgun approach is a favorite of many managers who do not understand how successful
niche marketing can be. Many managers incorrectly believe that going after a small part of a
large market is better than attacking a smaller niche market directly. But gaining entry into
the large market can be very costly. The large companies serving that market experience an
operational cost advantage that may not be overcome by late entrants into the market.
Understanding and targeting the niche market can be a successful marketing strategy
especially for small and medium-sized companies. Technology now provides sufficient
information to be able to effectively manage many different markets. The Internet provides
the opportunity for even the smallest company to do business on a global scale.
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Bibliography

 Supply Chain Management…………………………………Sunil Chopra

 Science direct online journals

 Websites:

 www.wikipedia.com

 www.google.co.in

 www.sciencedirect.com

 www.hll.com