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Management: Basics
AMAR SAPRA
I. Definition
What is a Supply Chain?
• What comes to your mind when you think about supply
chain management?
• What kind of flows occur in a supply chain and in which
direction?
• What are various stages in a supply chain?
• Roles?
• Is it necessary for every supply chain to have every stage?
• Can you give an example of a supply chain without a retailer?
Supply Chain at Marico
Industries
Plants
Depots
Super
• 1.6 m retailers, 1000 Distributor
Distributor distributors and 2500
stockists Stockist
Retailer • 24% of sales come from
rural areas Retailer
• Top three rural network
Urban Rural
• Sells 35 m consumer
Consumer
packs to 18 m households Consumer
II. Classification of Decisions
Supply Chain Decisions
• Imagine yourself to be responsible for supply chains
management at Patanjali Ayurved Limited (PAL).
• ~ 5,000 retail outlets, one online channel and one major
food park (with more than a dozen processing units).
Products also sold through several prominent chains such
as Reliance Retail, Hypercity, Star Bazaar, and Big Bazaar.
◦ Identify at least four strategic, tactical and operational
decisions at PAL.
Strategic Decisions
Where to locate the next food park/processing units?
What should these food parks make?
Should we continue to make Ayurvedic products in-house or should we
outsource?
Should we outsource delivery or keep it in-house?
Should we purchase a supply chain optimization software suite?
Should we continue with our online channel or sell products primarily
through Amazon or Flipkart?
Tactical and Operational
Decisions
Tactical decisions
Should we continue with our policy of not giving any discounts?
Which distribution centre will ship to which channel?
How many acres to contract with for herbal/agricultural ingredients?
Operational Decisions
Given orders from our own retail stores, how best to fill them?
What is the deadline for filling orders?
How best to fill orders from retail chains?
How to transport them?
III. Supply Chain Management
in India
Supply Chain Management in
India
Most Indian firms have traditionally neglected
logistics
• Taxation drives location decisions
• Pharmaceutical factories are located in Baddi (HP).
• AC and diesel power generator manufacturing units are concentrated in
Silvasa.
• Due to central sales tax, most firms have a distribution centre in each state.
• How is the Indian warehousing industry?
• Poor state of logistics infrastructure
• Both warehousing and transportation industries are unorganized.
• 90% of trucks belong to owners who have less than five trucks.
• Unreliable lead-times and high in-transit damages are common.
Logistics Costs in India
• I dia’s logistics sector accou ts for % of the GDP of I dia.
• In comparison, the percentage for other countries is US (9%), Europe
(10%), Japan (11%) and China (18%)
• In India, 10 to 15% of product cost is logistics-related while in US/EU it
is about 7 to 8%
Supply Chain Management in
India: Hurdles
• FMCG/CPG Sector: Fourth largest with a size of Rs. 900 billion.
• Low unit cost but large volumes
• Characterized by complex distribution network and intense competition
• Leader in supply chain innovation
Efficiency Responsiveness
Drivers
Logistics spending is roughly equivalent to 18% of GDP, higher than in other developing countries
(India and South Africa spend 13-14% of GDP) and double the level seen in the developed world. Li
Keqiang, the prime minister, recently echoed industry’s complaints that sending goods from Shanghai
to Beijing can cost more than sending them to America.
Most warehouses are old and unmechanised. Goods are transferred up to a dozen times from vehicle
to vehicle as they make their way across the country. There are no cargo hubs that help link freight
from rail to road. The decrepit and overloaded lorries that ply the new highways are unable to find a
return cargo on more than one third of their trips.
China has over 700,000 trucking operators, most of them one-man outfits. (America has about 7,000.)
Scale is essential to the business, but the top 20 firms together make up barely 2% of the market.
Nancy Qian of KXTX, a logistics firm, observes that companies compete so fiercely on price that
most barely make any money, and so lack the funds needed to modernise or achieve economies of
scale.
The industry is carved into niches, making it hard for integrated service providers to emerge. Sleepy
state-owned enterprises such as Sinotrans and China Post control the markets for air freight and
domestic post. Foreign express-delivery firms are salivating over the market but FedEx and UPS, for
example, have been granted only limited licences for domestic delivery. More importantly, foreign
firms are burdened with high costs that make it hard to compete for frugal customers against lean
local rivals.
For all firms, local or foreign, a tangle of regulations, local protectionism and corruption makes
getting goods across China a problem. Logistics, broadly defined, falls under the authority of nine
ministries and commissions. Local governments often levy taxes on operators and demand they obtain
special licences to operate. There are also heavy tolls on China’s roads, and lorries are restricted from
entering most urban areas so must transfer goods onto smaller vehicles.
But the brighter hope for reform is coming from the private sector. Much money, including from
private-equity funds, is now going into creating bigger logistics firms. Some four dozen deals have
recently been done. Initiatives are also under way to organise data-sharing platforms so that trucking
firms can match up with customers to reduce the number of empty return journeys.
E-commerce firms in particular are worried that a bottleneck in logistics could choke off their
spectacular recent growth. Even more than industrial customers, consumers demand high levels of
customer service at low prices. Fox Chu of Accenture, a consultancy, observes that the average
purchase online in China is below 100 yuan ($16), but he reckons the delivery cost of the last leg
alone could be 8-15 yuan.
Concerned about this, online retailers are taking matters into their own hands. JD, a leading e-
commerce firm, is developing its own distribution network of warehouses, lorries and deliverymen. In
this, it is inspired by the “asset heavy” approach taken by Amazon, an American e-commerce pioneer.
Ye Lan, chief marketing officer of JD.com, said recently that the firm’s own logistics system can now
reliably deliver goods either the same day or next day in some 300 cities across the country. Whether
the firm can afford to expand its excellent logistics network to less populated areas remains to be
seen.
Alibaba, China’s biggest e-commerce firm, prefers an “asset light” approach. Rather than owning its
own delivery trucks, it has joined hands with a number of existing courier firms who plan to invest
some 100 billion yuan to develop a “smart logistics” network relying on big data. Among other
things, this coalition plans to analyse customer information so that resources can be deployed more
efficiently. It has also recently entered into a strategic co-operation pact with China Post. By sharing
warehouses, processing centres and delivery personnel, the firm hopes to be able to deliver online
purchases within 24 hours even to small cities and villages.
GLP’s warehouse is large and well laid out, which helps clients organise their goods. With
mechanisation, it can be run by just six people. Wireless scanners and bar codes enable inventory
management to be digitised. A raised loading bay allows shipments, neatly stacked on palates, to be
transferred by forklift truck into waiting lorries. Valuable goods such as integrated circuits are secured
with electronic locks and tracked by GPS. If officials would just get out of the way, China’s domestic
logistics system could yet take off.
Z-Chart & Loss Function
F(Z) is the probability that a variable from a standard normal distribution will be less than or equal to Z, or
alternately, the service level for a quantity ordered with a z-value of Z.
L(Z) is the standard loss function, i.e. the expected number of lost sales as a fraction of the standard
deviation. Hence, the lost sales = L(Z) x sDEMAND
0
Z
z z-scale
Performance
Metrics
RECAP AND EXTENSION
Fill Rate and Cycle Service
Level
Fill Rate = Fraction of demand satisfied from stock/on time
RS
Cu
Cu C o
Cu R W ; C o W S
Cost of having too little Cost of having too much
An Example
• Demand: Normally distributed with a mean = 350 units and standard
deviation of = 150
• Purchase price = Rs. 100
• Retail price = Rs. 250
• Salvage value = Rs. 80
𝐿𝑜 − 𝑎𝑙 = 𝜎𝐿 𝑧
𝑄∗ −𝜇
𝑧=
𝜎
• In Excel:
L(z)=Norm.s.dist(A1,0)-A1*(1-Norm.s.dist(A1,1))
where z is defined in A1. [Mathematically, f(z)-z(1-F(z)); f=pdf and F=cdf]
Exercise
• Demand: Normally distributed with a mean = 350 units and standard
deviation of = 150
• Purchase price = Rs. 100
• Retail price = Rs. 250
• Salvage value = Rs. 80
• With optimal order quantity=528, calculate expected lost-sales,
expected leftover inventory, expected sales and expected profit.
• 8.6/186.7/341.4/47,469.
III. Insights
(1) Expected Profit
𝑜 𝑖 =Π =
−𝑊 . −
− 𝑊 . max − , 0 + 𝑊 −
At 𝑖 = 0:
R W
1
Q(W ) F
RS
R W
m (W ) (W M ) F
1
RS
R
S: Salvage value
for unsold units
Open auctions
◦ English
◦ Dutch
II. Principles of Auction
Design
Auction Design
(1) Should a buyer use sealed-bid or open auction format?
• When one supplier has clear cost advantage
• When two or more suppliers have similar costs
(2) Lowest bidder wins auction subject to passing the technical audit.
◦ Must be disclosed in advance (suppliers find it unethical)
◦ Useful when technical audit is expensive
(2) Hardware/kiosk
a) Setup in house of a literate, respectable person (Sanchalak)
b) Served around 600 farmers from 8-10 villages within a 5-km area
c) Kiosk had a computer, printer, modem and a solar battery charger.
d) Sanchalak received commission on number of transactions in kiosk.
e) Also aggregated village demand for ITC products and placed orders.
E-Choupal
• Supply chain before e-Choupal:
Other Buyers
• ITC hub
• Located within driving distance
• Place where farmers deposited grains
• A marketing channel for sale of ITC products
• Included laboratories with soil-testing capabilities
Results
• Boosted soy produ tio a d far ers’ i o e.
• Four million farmers in 35,000 villages from 10 states were using 6,100
kiosks.
• In 2007, 87% of farmers in the e-choupal area knew about its services
• 78% were using them.
• Expanded to include other crops such as wheat, rice, pulse and coffee
• Plus shrimps and prawns.
• Challenges
• Attempts to discredit the auction system by traders
• New process did not prevent hoarding
• Further steps
• Setting up coconut collection centres
• Centres process coconuts into copra
• Attempts to buy directly from producers
Supply Chain Cost Optimization
Somnath Chatterjee
Head Procurement & Logistics
ITC Foods
10.02.18
IIM , Bangalore
1
SCM
2
Need for Efficient SCM
• With intensifying competition across sectors
• Millions of Rupees at stake!
• Excess Inventory / Freight costs
• Volatile commodity markets
• Lost sales / Stock-out
• Shorter product life cycles
• Higher demand on time and energy
• End customer satisfaction
• Real Estate Costs - Warehousing
4
9 C’s
Currency
Collaboration Commodities
Counter
Consumer
party
9 C’s
Cost Country
(BREXIT)
Crude Competition
5
Key Challenges In Agri Commodity
Sourcing
6
1. Global Characteristics
7
i) Global in Nature
Implication: efficient & effective sourcing across the globe
8
ii) Weather Vagaries
Implication: consistency of availability & price volatility
• El Nino – causes extra warming- affected Oceania, Indonesia, Australia. E.g.
Increase in veg oil prices due to concern over soya crop in USA due to less
rains
• La Nina effects – causes extra cooling- extra rains in Africa, Asia, South
America.
La Nina
El Nino
9
iii) Food vs. Fuel War
Implication: Price Volatility
• Biofuels from crops such as maize, sugar and palm oil have more than tripled since
2000.
• 40% of maize crop in US goes to production of fuel & fuel additives.
• Brazil, largest sugar producer toggles between production of sugar or ethanol (40:60)
depending on price of petrol in the world market.
10
100,0000
110,0000
120,0000
130,0000
90,0000
2010-01-01
2010-03-01
2010-05-01
2010-07-01
2010-09-01
DXY (LHS)
2010-11-01
2011-01-01
2011-03-01
2011-05-01
2011-07-01
2011-09-01
2011-11-01
Currency Fluctuations-
2012-01-01
2012-03-01
2012-05-01
Implication: price volatility
2012-07-01
2012-09-01
2012-11-01
2013-01-01
2013-03-01
2013-05-01
Dollar Index
2013-07-01
2013-09-01
2013-11-01
2014-01-01
2014-03-01
2014-05-01
2014-07-01
2014-09-01
2014-11-01
2015-01-01
2015-03-01
2015-05-01
iv) Currency Fluctuation
2015-07-01
2015-09-01
Brent Crude ($/bbl)
2015-11-01
2016-01-01
2016-03-01
2016-05-01
2016-07-01
2016-09-01
2016-11-01
2017-01-01
2017-03-01
2017-05-01
2017-07-01
2017-09-01
• Geopolitical tension, political decisions, affect the currency in a major way
2017-11-01
Crude Oil (LHS)
2018-01-01
20,00
30,00
40,00
50,00
60,00
70,00
80,00
90,00
11
100,00
110,00
120,00
130,00
140,00
v) Commodity Exchanges
International
• CBOT – Soy Bean, Maize, Wheat
• LIFFE – Sugar
• NYMEX – Crude Oil
• BURSA – Palm Oil
Domestic
• NCDEX – Soy Bean, Maize, Wheat, Sugar
• MCX – Soy Bean, Maize, Wheat, Sugar
• NSE - Soy Bean, Maize, Wheat, Sugar
12
vi) Seasonality
Implication: in- season buy v/s round the year
SUGAR
Country Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
India
Brazil
Thailand
Palm Oil
Malaysia
Indonesia
Soy Beans
Brazil
Argentina
US
India
Wheat
EU -27
China
India
US
Canada
Australia
13
vii) Geopolitical Tensions/Natural Calamities
Implication: price volatility & supply disruption
• Geopolitical tensions domestically & internationally
are causing supply disruption in agri – commodities &
leading to price volatility
14
2. Government Laws &
Regulations
15
Government Laws & Regulations
Implication: restricted sourcing & frequent change in planning strategy
Export &
Import
Policies PDS
Tariff & System
Non-Tariff
barriers
GST
Govt. W&M
Policy Act
APMC
16
FSSAI
17
i) Characteristic- Monsoon Dependency
Implication: restricted sourcing & frequent change in planning strategy
• Indian agriculture is dependent on
monsoons even today.
18
ii) Characteristic- Festivals / Strikes
Implication: Supply bottleneck
Festivals & Peak Seasons
• Logistics constraints
• Kanwar festival in July in Haridwar: roads get blocked for one month
• Kumbh Mela
• Mango / Wheat / Rice season: FCI gets rake, private parties don’t.
• Telanga movement - strikes & impacting stock movement
• Transporters strike against toll fee, tax on diesel, third party insurance, etc.
Kanwar Mela
19
iii) Characteristic- Shelf Life
Implication: increased cost on supply chain
20
iv) Characteristic- Post Harvest
Wastage
Implication: non-availability/high price during lean season
• Lack of processing facility in India
21
v) Characteristic- Area Diversion
Implication: supply & demand gaps & increase in price
• Herd mentality
22
Hobsons Choice for Managers
Ultra thin margins in FMCG business cannot absorb input cost increases
23
How ITC Optimized supply chain
costs?
24
1. Transformation in wheat supply
chain
25
ITC : Largest buyer of Wheat after GOI
Plants in East
South Warehouses
North Warehouses
Field, Mandi ,
Choupal
27
Cost optimization through 3 year analysis
28
Transformation in supply chain for ITC
Movement
During
Monsoon
30
Why co-load?
• Co-located facilities
• Wheat Flour + Snacks
• Common customers
Dead space
Wheat Flour
Weight
Wheat Flour
9 MT
Current Truck loading pattern
Volume
Wheat Flour Wheat Flour
1 MT
33
Cost - benefit
• Loadabilty improvement of 6%
34
3. Collaborative Procurement
35
Collaboration – Win Win
Vendor
Rs 20 Rs 20 Rs 20 Rs 20 Rs 10 Rs 10 Rs 100
Vendor
Rs 20 Rs 20 Rs 18 Rs 17 Rs 10 Rs 10 Rs 95
36
4. Hedging
37
Price Volatility
Wheat Prices Delhi (NCDEX) El-Nino effect.
1.640 Hoarding
1.620
1.600
1.580 Crop damage ruled
1.560
out. arrivals OMSS &
1.540
1.520 News- Crop international
1.500 damage prices
1.480
1.460
Arrivals
1.440
01.Apr.14 01.Mai.14 01.Jun.14 01.Jul.14 01.Aug.14
39 39
Planning is indispensable
Price Supply
Forecast Projection
Growth Target
Industry
Perspective
Demand
Estimate
Competitive
Intelligence
Market
Outlook
Internal
Budget
40 40
Monitoring- Its all about timing
NYMEX Crude Oil,
CBOT Soy Oil, Dalian rates for
S.America weather & Soybean & Soy oil
Crop condition
Release of
USDA data
Trade on domestic
Physical market & exchanges start
high seas trade starts, (MCX & NCDEX),
get quotes from currency markets
vendors open
41 41
42
Transportation
SUPPLY CHAIN MANAGEMENT
I. Transportation Decisions and Key
Drivers
Transportation Decisions
• Strategy: Designing the most effective way of transporting products to markets from plants.
• In-house vs outsource
• Size and number of trucks
• DC or no DC
• Milk runs or direct shipping
• Cross-docking along the way?
• What is cross-docking and why is it a strategic decision?
Initial days
◦ Vacation traveler was required to book 14-21 days in advance
◦ Saturday night stay requirement
Now,
◦ Fares move dynamically in response to supply and demand
Almost all airlines use it. Hotels and car rental companies also utilize the
approach.
Basics of Revenue
Management
Success stories
◦ Revenue at American Airlines increased by USD 500
million per year
◦ Price optimization at Inter-Continental Hotels increased
revenue by USD 400 million per year
◦ National Car Rental was facing bankruptcy in 1993.
Implementation of RM increased revenue by USD 56
million in the first year and saved the company.
Airline Seats, Hotel Rooms and Car
Rentals: Basic Characteristics
Product characteristics
• Product or service is perishable.
• Total capacity is difficult to adjust.
• Fixed costs are high and variable costs low.
Characteristics of implementation
• Customers are segmented, with different prices for each segment.
• To discriminate among different customer segments
• Commitments (prices and corresponding capacities) are made when future
demand is uncertain.
• Similar product serves all segments.
Revenue Management
• Revenue management is also applicable when
(1) Demand has seasonal and other peaks.
(2) Product is sold both through long-term contract and on the spot market.
• The lower the index, the higher the fare (f1 > f2).
BL for Class 3
f1 Pr( D1 Q) f 2
f2
Pr( D1 Q)
f1
probability density
Std. Dev. = 8
f2 = Rs. 3000
• Exact method
• = > AND + >
• Protection level for two highest classes=q
• Protection level for highest class=Q.
For all analyses, assume that the margin associated with internal production is 30% (of cost) per
style and the average cost of overstocking is 10%. Thus, a short that retails for Rs. 1,300 has a cost
of Rs. 1,000, a margin of Rs. 300, and a cost of overstocking of Rs. 100. For all analysis, use the
seasonal demand (for the six-month season) shown in Exhibit 7.
1. What are some challenges in the Indian market that make it difficult to establish and
succeed with a chain of retail stores? Given the challenges, how do you think Wills Lifestyle
was positioned at the time of writing the case?
2. First consider the case in which LRBD sources from a third party (as was the case prior to
2003). The third party has a unit cost that is Rs. 50 per style lower than the costs implied in
Exhibit 7. The manufacturer requires advance commitment (i.e., a single order for the
season) and a minimum lot size of 2000 units. What are the performance metrics that LRBD
should focus on when judging performance of the third party? How much could LRBD
benefit if the third party reduced the minimum order size but maintained the requirement
of a single advance order for the season?
3. What are the metrics that LRBD hoped to improve by bringing production in-house to a
more flexible and responsive facility?
4. Consider the revised process implemented by LRBD since 2003. The LRBD divides the sales
season into three periods and arranges for multiple replenishments after bringing in an
initial order quantity. Assume that each order cycle averages about one-third of the
season’s demand. What quantity of each style should LRBD ask for in the initial order (and
successive replenishment orders) if the minimum order quantity is 2000? How is the
optimal ordering policy affected as the minimum order quantity drops from 2000 to 500, in
increments of 500? Do you think that LRBD should make an effort to reduce minimum order
quantities below 500?
5. How should the LRBD structure its sourcing strategy? What are appropriate metrics to judge
the sourcing strategy?
6. What are the threats and opportunities for the LRBD as the Indian apparel retailing sector is
opened to foreign competition? What role can the capabilities that the LRBD has developed
play in the global apparel supply chains?
Increased responsiveness
Reduction of financial risk
Addressing the apparel business’s need for variety and rapid changes major challenge
Indian Institute of Management Bangalore
Supply Chain Management
New Balance Athletic Shoes, Inc.: Case Analysis Questions
1. Evaluate New Balance’s current operations strategy. What are the key decisions
implicit in this strategy?
2. Assuming that the total US market for athletic footwear was 400 million pairs in
2005, how costly was New Balance’s decision to maintain 25% of its manufacturing
in the US? (Derive a dollar figure.) What is your assessment of that decision?
3. How should the Davises react to Adidas’ planned acquisition of Reebok? What
aspects of New Balance’s operations strategy should they change?
4. Moving forward, how important is the NB2E initiative for New Balance?
Supply Chain Management
Roll numbers
1711267
1711327
1711330
1711338
1711341
1711352
Executive Summary
Bharti Airtel Limited, formerly known as Bharti Tele-Ventures limited, is the country-wide
market leader in wireless communication, with 25% market share. Initially a regulated sector,
the wireless communication market saw an increase in subscribers from 4.2 Million in 1989 to
54 Million in 2003 due to liberalization and foreign direct investment.
As of now in 2005, the wireless communication network is highly commoditized where there
is no difference in product offerings and low ARPU among competitors. Thus, the players try
their best to provide value-added services which require more bandwidth in upcoming
technologies like 2.5G and 3G. This, in-turn, requires heavy capital investment.
Bharti Airtel also faces issues in terms of keeping up with the pace of network expansion,
frequent negotiations with vendors, hiring and retaining the best employees and obsolescence
of equipment. Bharti Airtel has an inherent conflict with the vendors of 'boxes' like MSC, BSC
etc. The vendors want to sell a high quantity of boxes to increase their profits while the
operators want to maximize their coverage with minimum equipment requirement and reduce
the risk of product obsolescence.
Faced with this situation Bharti Airtel has come with an option to strategically outsource its
responsibility of build-up, maintenance and servicing of telecom networks to its vendors. This
option is being discussed with different functions (IT, Operations, HR, etc.) and board of Bharti
Airtel. The initial response has been negative. Also, this first of its kind option has also made
its vendors hesitant. How Bharti Airtel is going to deal with the current challenge depends on
how this negotiation would proceed.
1)
With the ramp-up of operations and the growing capital expenditures, it is the need of the hour
to implement lean principles and invest in innovation.
1. To improve its operating margin, Airtel should focus on improving the operational metrics
such as ARPU (Average monthly Revenue per customer). This can be done by providing value-
added services (VAS) to the customers in the form of digital payments, wallets, caller tunes
etc. Keeping the pricing competitive and increasing the VAS, will enable Bharti Airtel to
capture a larger market share while maintaining cost leadership. Focusing on VAS with low
prices will also be useful against local service providers like Spice in rural and semi-urban
geographies.
2. Bharti leads the wireless market segment with a market share of 25%. Growth is expected
to increase exponentially in the coming 18 months. Currently, Airtel has mobile operation
licenses in 15 circles out of 23. To maintain its position as the market leader, Airtel can exploit
first-mover advantage by expanding into states like Gujarat, Madhya Pradesh, and Eastern
states where its presence is not prominent but where there is a growing and large user base
(Exhibit 9).
3. Telecom industry is plagued with high debts due to huge capital expenditures. IT capital
expenditures form a major part of the Capex which needs to be kept in control by developing
a lean and predictable cost structure. By outsourcing its telecom network, Bharti Airtel will be
able to convert their fixed costs into variable costs which is the key to become the lowest-cost
producer of minutes. As this is going to be the first ever outsourcing plan by any telecom
operator at such a scale, Bharti Airtel should invest in Vendor Management Systems to reduce
lead time and bring in operational efficiencies. Relationship management with its vendors will
also be crucial if Bharti goes forward with the outsourcing proposal.
4. As the industry becomes increasingly competitive, Bharti Airtel should also focus on
developing a customer-centric approach to attract and retain its customers. Since mobile phones
and mobile services are offered separately in India, switching costs of the consumer to other
mobile networks is lower. Airtel should focus on increasing these switching costs by providing
users with value-added services, increasing the involvement level of the consumer with the
‘Airtel’ brand will enhance brand loyalty and recall.
5. Finally, a step in the right direction would be to work towards outsourcing IT and
communication technology to competent vendors which will allow Airtel to focus on network
communications.
Core Competency
Airtel’s core competency lies in its operations and a large customer base that will be difficult
to replicate for any new entrant in the telecom industry. A diversified portfolio of mobile,
broadband, individual and business services gives Airtel a competitive edge in the telecom
industry. This also provides a sustainable core proposition against the competitors.
2)
To arrive at a decision, we need to see both, positives and negatives, of such agreements.
The advantages of outsourcing agreements are:
1.Transfer of risk/uncertainty to vendors: With the proposed outsourcing agreement, the
responsibility of build-up, maintenance and servicing of the telecom network is transferred to
the vendors. Therefore, any need to install excess capacity, to meet the uncertainty in demand,
lies with the vendor.
2. Charges as per actual usage: As per the agreement, Bharti makes the actual payment only
when the installed capacity is commissioned and used by the customers. Presently, Bharti
follows industry practice of 40% excess capacity to compensate for any forecasting error. This
outsourcing agreement would avoid the payment of unused excess capacity.
3. Low cost of Human Resource: The development of IT and network infrastructure require
huge human capital which is a scarce resource. With the outsourcing agreement, the burden of
human resource is eliminated. Also, the transfer of 1000 present employees to vendor
companies would significantly bring down the cost of HR.
4. Quality control: To ensure better quality service to end consumers, the Service Level
Agreements (SLA) lay down several quality checks which are linked to penalties and rewards
for vendors.
5. Easy adaptation to new technologies: The telecom equipment vendors can utilize their
industry experience and expertise to upgrade to technologies such as 2.5G or 3G services. This
outsourcing agreement can bring efficient technologies in future.
2. Concern for transferred employees: The cultural differences between the companies and
the unwillingness of employees to transfer to vendor companies would pose difficulties in
managing around 1000 employees within the company.
4. Security and confidentiality threats: Since the vendors would be providing services to
multiple telecom companies, there could be a chance of critical information leakage.
5. Efficient outsourcing concerns: It is for the first time that these kinds of outsourcing
agreements related to network management and operations have been proposed. Since there is
no reference, it is uncertain whether such an arrangement will yield the desired results.
A careful evaluation of both, positives and negatives of the proposed agreements, shows that
even though there are risky elements in the contracts, the positives outweigh the negatives and
thus, Bharti must go ahead with the contracts. Their focus at this point must be on expanding
the network infrastructure into different geographic locations, which requires huge capital
outlay. Hence, it is logical to go ahead with the proposal made by Gupta.
For Bharti Airtel, outsourcing the business activities makes sense if it can increase their supply
chain value. Outsourcing will help Bharti to divert its resources and expertise to focus on
building its core competencies. The overall cost of operation is expected to come down by
outsourcing since the vendors aggregate capacity and achieve economies of scale. Hence,
Bharti can free up their capital as there is no need to invest in excess capacity and maintenance
of the equipment. Another benefit of outsourcing is that the human resource issue would be
resolved. Also, by having multiple vendors for outsourcing, the risk in business activities would
be diversified. Thus, the possibilities of building upon core competencies would be spread out.
3)
Outsourcing to giants like IBM and Nokia, Siemens or Ericson comes with its own set of
challenges. Some of them are:
1. Intellectual Property Concerns: In a country like India where IP regulations are not
stringent and often not followed, there is always the risk of proprietary information getting
leaked.
2. Hidden Costs: Forecasting costs is currently a challenge for Bharti Airtel. It needs to ensure
that long-term outsourcing costs are not underestimated.
3. Increased Dependence: Dependence on the vendors may prove to be risky in future for the
company as it will be hard to survive if it loses the vendors’ services. Handing over the network
management and operations of the company is also a source of concern as it will lead to loss
of internal capabilities of the company
4. Limited Availability of New Technology: One of the major concerns about entering an
outsourcing agreement with IBM is the limitation to available software and applications that
IBM does not provide. Bharti Airtel needs to discuss this with IBM so that outsourcing to IBM
does not result in the unavailability of third-party software and hardware that have worked well
and may work well for Bharti Airtel.
5. Human Resource Management: Provided the environment of India’s job sectors, it will be
very difficult to transfer as many as 270 IT staff and 800 network staff to the vendors’
companies. There is a huge cultural difference in working methods and work environments of
the Indian companies and worldwide companies like IBM, Nokia etc. which will also be a
concern to all the employees and Bharti Airtel in this transfer of employees to vendors. Bharti
Airtel needs to ensure that this transition and integration of different work cultures is in
coherence with Bharti Airtel’s strategy of providing a good working environment to its
employees
4)
Agreement Structure
1. Payment Structure: Bharti Airtel should break down the costs into fixed and variable
components. Instead of an upfront fixed payment for network capacity, Bharti Airtel should
reach an agreement to pay the vendor when the network capacity is up and running and is being
used by the subscribers, effectively eliminating payment for unused capacity.
2. Revenue Sharing Agreement: An agreement that clearly states the revenue sharing terms
would reduce uncertainty in an unpredictable market. Bharti should clearly articulate that
(keeping in line with the very encouraging growth predictions), the percentage of shared
revenue will decrease as the overall revenue increases.
4. Service Level Agreements: To ensure that the quality of Bharti Airtel’s service is not
compromised, it is imperative that quality controls be in place. Bharti Airtel should sign an
SLA that clearly delineates the service quality levels in terms of network quality measures like
the percentage of dropped calls and incomplete calls. It is the vendor’s responsibility to ensure
that the service provided is top-notch. An incentive program should be designed with rewards
and penalties built into the contract.
5. Network Compatibility: IBM must cooperate with other vendors to support the network
operations of Bharti. The agreement should entail that IBM must upgrade its systems to
accommodate software or hardware applications (especially those used by Bharti Airtel’s
marketing and IT) not compatible with IBM. Bharti Airtel should prevent the loss of supply
chain visibility.
6. Time to Market: Bharti should clearly lay down that the time to market for new IT services
should not go up, at the same time, steps in the development process should not be skipped lest
a substandard service should be rolled out.
7. Data Compliance: Outsourcing will open the possibilities of compromising sensitive data,
especially if the vendors serve Bharti Airtel’s competitors. A strict onsite server access policy
should be formulated to prevent leakage of data. IP breaches must be avoided by all means.
8. Ownership and Maintenance of Assets: It should be clarified that the ownership of assets
on completion would be transferred to Bharti Airtel, but the responsibility for maintaining the
network rests with the vendor.
Governing Mechanism
A governing coalition is necessary to ensure that the decision-making stays with Bharti
Airtel. It will also be the go-to authority in case of any conflict. Here is our proposed governing
mechanism:
5)
IBM’s Concerns
Revenue Sharing and Heavy Investment: IBM will have to enter an initial contract of 5-year
revenue sharing with Bharti (extendable for 5 more years). The estimation of Bharti’s revenues
over the 5 to 10 years will be very crucial for IBM as it has to estimate its revenues accordingly
and invest in software, human resources, hardware. Also, IBM will have to upgrade the existing
software facilities of Bharti Airtel, which would demand heavy investments from IBM.
Quality Controls: IBM will be subject to a number of quality controls as specified in the SLAs
(ex: hotline satisfaction of customers). In line with these controls, IBM will be under a penalty
and reward system which may prove costly for IBM.
No Scope for Price Negotiations: A fixed contract for 5 years implies no or very little scope
for price negotiations for this duration. It is very unlikely that IBM would be able to raise the
prices of equipment.
Human Capital: IBM would also be burdened with costs of retraining and cross training as it
must accommodate former Bharti Airtel’s employees into its organization.
Nokia’s Concerns
Risk of Under-Utilization and Over-Investment: Bharti wants to transfer the risk of
investing in equipment by outsourcing to vendors like Nokia. Airtel would be paying Nokia
for the actual erlangs used. This transfers the risk of unused and excess capacity to Nokia.
Although a one-time fee will be paid by Bharti for the installed capacity to Nokia, this would
not cover Nokia’s investments. The highly volatile customer demand coupled with potent
competition from other players places Nokia at higher risk.
Saturation of Revenues: Falling ARPUs and increased competition in India would lead to
saturation in the number of subscribers. This will force Airtel to operate at lower rates leading
to a sag or dip in Airtel’s revenues, ultimately this will affect the revenues of Nokia.
Nokia is also subject to Quality Controls and Human Resource Costs as was the case of IBM.
Agreement:
1. As the work cultures are very different, mandatory training classes for employees that require
certifications should be in place.
2. A complete understanding of financial obligations, investment risks and rewards should be
achieved. A payment structure with two components; fixed, for equipment and training costs,
and variable i.e. revenue sharing based should be implemented. This will reduce the unlimited
risk to vendors and make Bharti cautious of the expenses.
3. The SLA should have well-defined parameters and it should also allow some flexibility in
certain criteria, as the contract period is large. A system must be put in place for the long-term
and skill-based resource management and performance management for quality and SLA
management.
4. Policies regarding renewal of employee contracts and transferring back of employees to
Bharti if they don't meet expectations and standards should be laid down clearly.
5. Full corroboration and collaboration between the two parties to share their innovations and
benchmarking practices should be established.
6. There should be a clause based and periodic review for risk assessment.
7. There should be a strategic alignment between all the verticals for best practices for value
delivery which is a vital ingredient for customer satisfaction.
Governance Mechanism:
Here is our proposed governing mechanism:
Indian Institute of Management Bangalore
Supply Chain Management
1. What must Bharti do well to succeed in the Indian mobile phone market? What are Bharti’s
core competencies?
2. Do you think Bharti should enter the outsourcing agreements outlined by Gupta? What do
you see as advantages and disadvantages of such agreements? How do the different
outsourcing agreements work towards building these core competencies?
3. If you were Bharti, what major concerns would you have about entering an outsourcing
agreement with IBM? With Ericsson, Nokia, or Siemens?
4. How would you structure the agreements to address your concerns and capture any
advantages you have identified? What governance mechanism would you design for the
agreements?
5. Assume the role of IBM or Nokia. What major concerns would you have about entering an
agreement with Bharti? How would you structure the agreement and the governance
mechanisms?
Indian Institute of Management Bangalore
Supply Chain Management
Movie Rental Business: Case Analysis Questions
Roll numbers
1711267
1711327
1711330
1711338
1711341
1711352
Executive Summary
Blockbuster was the largest brick and mortar video rental chain in 2010. Established in 1985, it
had generated a revenue of $5.5 billion in 2007. It provided videos through an in-store rental
service, Blockbuster online services, and Blockbuster direct access. But by 2009, its market
capitalization dropped by 47% to $62 million primarily because of stiff competition from
competitors like Netflix and Redbox.
Netflix, which was launched in 1997, provided DVDs on rent and video streaming and
subsequently became world’s largest subscription service provider with 13 million subscribers.
Redbox, through its 23,000 kiosks, rented DVDs of latest videos to customers instantly.
Moreover, big players like Amazon, Google and Apple entered the business.
Blockbuster, which was valued at $8.4 billion when it was bought by Viacom in 1994, was
valued at a meagre $24 million in 2010. Thus, with the shift of customer preference from DVDs
to internet streaming, Blockbuster which was once a market leader in the video rental business,
was facing serious financial trouble and was looking at possible bankruptcy.
Answer 1)
Transportation: Blockbuster’s physical store model incurred low transportation cost, while
Netflix had to bear the high shipping cost of transporting DVDs by mail. Redbox incurred low
replenishment cost in restocking its kiosks.
Aggregating the demand for numerous stores decreased the inbound transportation cost for
Blockbuster while the outbound transport cost was borne by the customer.
In 2010, Netflix had 60 regional distribution centers (DC) across the United States. Operation
through regional DCs resulted in very low inbound transportation cost. However, shipping about
two million discs each month contributed to relatively high outbound transportation cost. Netflix
estimated this number would rise to $600 million in 2010.
Redbox had to incur high inbound transportation cost to keep its 23,000 kiosks stocked in 2010.
Also, since customers could return DVDs to any kiosk, the redistribution cost would be high.
However, outbound transportation did not result in any cost.
Facility: Blockbuster used a high-cost brick and mortar model. Blockbuster leased the stores in
popular neighborhood locations frequented by public at high costs. Managing multiple stores
increased the facility cost.
In contrast, Redbox utilized low-cost vending machines in popular locations such as grocery
stores, malls, and had to pay lower facility costs (23% of its sales) when compared to
Blockbuster (62% of its sales). Some retailers also offered discounts to install kiosks (because
they increased customer footfalls) and that brought the rental cost further down.
Netflix had a no retail store model with a wide range of titles available in centralized DCs.
Netflix had about 60 DCs, from where DVDs were shipped across the US. These DCs were
located close to post offices, enabling Netflix timely processing and delivery at relatively low
cost. Thus, Netflix had much lower facility costs than Blockbuster.
Inventory: Inventories at Blockbuster were high (as a percentage of revenue) because of its
decentralized operations. Carrying many low-volume rental titles aggravated the inventory
requirements. This increased the inventory cost for Blockbuster.
Netflix had low inventory costs (2.21% of revenue) compared to that of Blockbuster (15.73% of
revenue). Netflix had a wider range of titles in its DCs but was able to carry lower inventories
because of aggregation. Netflix generally had contracts with the studio wherein after the
completion of the rental term they could either return, destroy or buy the DVDs. This helped
manage the inventory.
Redbox stocked newly released DVDs, which were rented in large volumes with relatively
predictable demand. As a result, they had far lower levels of inventory. On an average Redbox
rented its DVD 15 times before they sold them to their customers. This high inventory turnover
and subsequent sale helped them in reducing their inventory costs.
Answer 2)
Studios: The various channels of revenue were theatres, digital releases, DVDs and VOD or per
view payments. DVD purchases were more profit making for studios than rentals. They earned
up to $18 on each DVD purchase as compared to $4 on the rentals.
Theatres: Theatres were usually the first to release the movies and played them anywhere from
2 weeks to 12 months. In the opening weeks the studios had a greater cut from 70% to 90% of
the sales on tickets and the theatres’ share increased over the later weeks. In recent years, the
theatrical window length had declined.
Retail store for DVDs: The DVD formats were released to retailers like Walmart after the
theatre release window. Because of the high profitability as compared to other revenue channels,
the studios were more attracted to the retail stores channel. To tap the huge revenue potential
from these channels, the DVD release to rental and other channels was delayed by the studios.
Netflix: Netflix started as a pay-per-rental and an order by mail video rentals company. Its
reputation was built on unlimited rentals which were flat fee and mandated no penalty fees, due
dates, free shipping and delivery charges. It differentiated itself by heavy promotions and by
partnering with DVD player companies. Its strategy was to offer a large collection of titles and
faster delivery to the customers. It offered customers more than 1,00,000 DVD choices which
included foreign and individual films not carried by competitors.
Netflix introduced a recommendation program called CineMatch which used the customer’s
history of rentals and preferences and coupled them with the ratings by other users to make
recommendations to the customers. Netflix users were encouraged to rate the movies. The
ratings and the recommendations reduced the search time and cost. Netflix was also successful in
generating revenues for the older titles by using CineMatch. Netflix uniquely strategized to offer
a wide range of choices in a low-cost subscription service.
Redbox: The target customers of Redbox were the budget-conscious renters of movie.
Delivering content at lower costs at easily accessible and nearby kiosks was the primary value
proposition of Redbox. By setting up vending machines at high-traffic locations like
supermarkets and restaurants, and offering lower rental rates as low as $1, Redbox was able to
serve the needs of the customers who are underserved. By this Redbox was able to meet its needs
and surpass blockbuster by mid-2010.
Video on demand(VOD): VOD was the most convenient service for the customers in renting
and watching movies. Customers could easily rent and watch movies directly through the TV
sets and if they had a cable subscription and a set-top box. Studios also preferred VOD channels
as they earned more revenue through VOD than DVDs.
Digital on-demand channels: Digital channels like pay-per-view and on-demand channels
looked very attractive and hence players like Apple, Google, Amazon also became active in this
space and new devices such as Apple Tv, Roku, Google TV were developed. These devices
allowed the digital content by these companies to be streamed directly on TVs. Netflix was also
an active player in this space.
Answer 3)
Following factors led to the growth of Netflix in the very competitive movie rental business:
1. Business model: Their business model was based on flat and very low fee for unlimited
rentals without due dates, late fees, shipping and handling fees. One of the reasons for the
low cost was the difference in the operating expense of Blockbuster and Netflix. While
Blockbuster had operating expenses of $2533m, Netflix’s expenses were only $399m.
2. Vast range of titles: Netflix had a large pool of DVD titles from which their customers
could select according to their choice. Its inventory included 100,000 DVD titles against
Blockbuster’s 3000. These DVD titles included old and new titles, foreign and independent
films which were usually not available by other companies.
2. Adjust according to changes and diversify: They should have been proactive in analyzing
and adjusting to the changing market demands and customer behaviors which Netflix did
wonderfully. They should have diversified from their high cost rental store model early in
response to the growing online streaming requirement.
3. Increase variety: Blockbuster should have increased the variety of content (titles) offered by
them. Availability of only 3000 titles against 100,000 titles by Netflix was a major letdown
for its customers. Also, features like “late fees” and the limited availability of content were
not liked by their customers which worked in Netflix’s favor.
Answer 4)
In 2002, Redbox was started as a venture by McDonald’s to pull crowd to restaurants and was
later developed into a DVD rental kiosk. In a movie rental market dominated by Blockbuster and
Netflix, Redbox tackled the competition by targeting the budget-conscious movie renter in the
new-movie segment. The business model of Redbox focused on low cost and convenience to
customers.
Following are the factors that caused Redbox’s growth and allowed it to capture the already
crowded market:
1. Low cost business model: Redbox initiated the concept of vending machine which eventually
led to the DVD kiosk model in 2004. Unlike Blockbuster which had a high cost physical store,
Redbox’s business model of DVD kiosk was relatively inexpensive. Each kiosk costed $15,000
and generated average revenue of $30,000, $40,000 and $50,000 in year 1, 2 and 3. The revenue
resulted from renting DVDs as well as from sale of used DVDs.
2. Strategic location and convenience: Redbox setup DVD kiosks at many locations such as
grocery stores, supermarkets and restaurants which are high customer traffic zones in US. By
2010, Redbox had reached approx. 23000 kiosks across the country. Customers found kiosks as a
convenient way to rent the DVDs as they had easier access to kiosks than making an additional
trip to a Blockbuster store. Also, customers could return the DVD to any kiosk in the network
without any membership requirement.
3. Tie-up with partners: Another reason for the growth of Redbox kiosk business is the support
from retailers. Retailers who were witnessing low customer traffic felt that the installation of a
Redbox kiosk would increase the footfall. Certain retailers offered discounts or free installation
of a kiosk. Also, the revenue sharing model i.e. 15% of rental income incentivized the retailers to
have the kiosk.
4. Low price: Since the target customer group is budget conscious, the price offered is $1/night
rental which is relatively cheaper than the alternatives provided by Netflix and Blockbuster.
Hence customers preferred to pick DVD from Redbox kiosks. By 2010, DVD vending
companies captured 19% of DVD rental market and the number was expected to reach 30%
within a year.
The change in the preference of the customers from buying DVDs to renting them was a drastic
one. In this scenario, Blockbuster was not able to sustain the physical store model due to high
competition from Netflix and Redbox. Redbox also surpassed Netflix in annual sales and
emerged as the number one competitor by the end of the year 2010.
Answer 5)
The online on-demand rental option is continuously growing and with new players like Amazon,
Google and Apple also entering the fray, it looks highly probable that DVDs would be replaced
in the future, and content would be delivered via the internet.
Netflix
Netflix is aware of the changing trend and has provided the option of online streaming in its
subscription plan. The challenge for Netflix is to decide the content that it should focus on and
the cost of acquiring that content. They buy older DVDs from studios at a reasonable cost but
given the high initial cost of purchase for newly released DVDs, Netflix generally prefers to wait
for a few weeks before they buy new content. Thus, customers do not get entirely fresh content
from Netflix.
Netflix should pursue more licensing deals with movie studios so that it can offer the latest
content for its customers. Furthermore, since Netflix has a strong customer base in "long tail"
section, it can have tie-ups with studios providing obscure and niche content. Moreover, Netflix
should invest more in upcoming technologies that can be disruptive. Currently, Blockbuster is
struggling because the trend has shifted from brick and mortar to online streaming. Netflix
should not let that happen to it.
Redbox
Redbox has a niche wherein they operate. They rent out DVDs through their kiosks very
cheaply. Currently, they do not have a presence in the streaming business. They should look at
possible partnerships with companies that can provide them capabilities to stream their content.
This hybrid model would be helpful as through this model, Redbox can direct customers to their
preferred channels. Kiosks would serve price-sensitive customers who are looking for recent
content while the streaming option would cater to customers looking for variety.
Redbox can also look at international expansion. This might help them gain new customers like
Asian customers who are generally price sensitive. The cost of setting up a kiosk is very small in
comparison to the revenues that it can generate. It will help the company to derisk by not
focusing on one particular type of customer. Moreover, they should work with studios like 20th
Century Fox to reduce the 28 days wait period that they mandate.
Blockbuster
Blockbuster failed to make the transition from brick and mortar to online streaming. They have
filed for bankruptcy protection and now they should focus on ways to divest successfully.
Answer 6)
Let us consider a network consisting of p number of kiosks. The demand distribution of these
kiosks is a normal distribution with mean demand µ and standard deviation σ i.e N (µ, σ). Let us
assume that the demand of each kiosk be identical and is independent of each other.
Kiosk Network
If Redbox lets the customer know the availability of their preferred DVDs, it essentially is
integrating all the kiosks to meet the demand. The entire system acts as a single kiosk with a
demand which is normally distributed with
Mean = N* µ
Standard Deviation (S.D.) =√N*σ
Demand uncertainty is determined by the standard deviation of the demand. Since S.D. of the
integrated system decrease by factor √N, the demand uncertainty faced by kiosk decreases.
Redbox can also understand the demand pattern for DVDs across various geographies. If a
particular kiosk (say, K2) experiences high demand for a particular DVD, the resources (i.e.
DVDs of same title) of another kiosk with less demand (say K5) can be transferred to K2 to
minimize the probability of a stockout at K2. Hence, the demand uncertainty decreases.
Indian Institute of Management Bangalore
Supply Chain Management
Movie Rental Business: Case Analysis Questions
1. Compare the supply chains of Blockbuster, Netflix and Redbox in terms of total
(inbound as well as outbound) transportation cost, facility cost, and inventory
holding cost.
2. How do the different players in the movie rental value chain provide and capture
value?
3. What factors led to the growth of Netflix? How should Blockbuster have responded
to the challenges posed by Netflix?
4. What factors led to the growth of Redbox? How and why it was able to capture
market already dominated by big players such as Blockbuster and Netflix?
5. How would you advise these companies to modify their strategies and structures
going forward?
6. Redbox lets customers know which of the nearby kiosks has the DVD they are
looking for. Does it increase or decrease the uncertainty of demand faced by a
kiosk?
Global Supply Chain
Management V2 Simulation
How to Play Guide
This simulation illustrates how a few key decisions can improve the
ability of a company to accurately predict and fulfill demand.
You have just been hired as the Supply Chain Manager responsible for
production of two new lines of mobile phones. You will be able to make
key decisions and see the impact of your decisions on the performance
of your company over the span of 4 years.
Copyright © 2016 President and Fellows of Harvard College.
September 1, 2016 This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the 2
permission of Harvard Business Publishing.
Your Objectives
• You are in charge of releasing two models of mobile phones:
• Model A, a base model
• Model B, a high end model
• Decide which features to include and with whom to outsource the work.
Important Info:
• Sales season is May through December—there is no demand before May or after December
• Demand is anticipated to be consistent over these months
Good Luck!