SCM in FMCG Sector Dheeraj Kumar Soni Winter Report

A PROJECT REPORT ON
SUPPLY CHAIN MANAGEMENT

IN
INDIAN FMCG INDUSTRY
SUBMITTED
BY
PRAMOD B. PATIL
MASTER IN FINANCIAL MANAGEMENT

3rd Year
JBIMS,Mumbai
JBIMS,
PART-TIME MASTER’S DEGREE IN MANAGEMENT
CERTIFICATE FROM GUIDE
This is to certify that the project entitled “SUPPLY CHAIN MANAGEMENT IN

INDIAN FMCG INDUSTRY” has been successfully completed by PRAMOD
B.PATIL,
B.PATIL, under my guidance during the Third year i.e. in the 2009-2012 in partial
fulfillment of his course, Master Degree in Financial Management under the
University of Mumbai through the JBIMS,
JBIMS,
Name of Project Guide: PROF. RAMBABU
Address of Guide:
Tel. No.:
Signature of Project Guide:

Date:
ACKNOWLEDGEMENT
The satiation and euphoria that accompanied the successful completion of the project
would be incomplete without the mention of the people who made it possible. So within
immense gratitude, I acknowledge all those whose guidance and encouragement
crowned my efforts with success.
I sincerely thank, Prof. Rambabu for being excellent project guide to me. Despite his
demanding schedule, he made all possible resources available and gave the much needed
direction, and inputs to me at various stages of the project.
CONTENTS
1. INTRODUCTION OF SCM……………………………………………….. 1
2. RESEARCH MTHODOLOGY ……………………………………………… 1
3. SUPPLY CHAIN MANAGEMENT……………………………………... 4

2.1 What is Supply Chain? : Definition …………………………….. 4
2.2 SCM as Management Philosophy ………………………………. 7
2.3 SCM as Activities ………………………………………………. 8
2.4 SCM as set of Management Process …………………………… 11
2.5 Key Components of Supply Chain Management ………………. 11
2.6 Typical Benefits of Successful SCM …………………………… 16
2.7 Five Stages to an agile SCM ………………………………… 16
2.8 Balanced Supply Chain ……………………………………… 19
2.9 The 7 Principles of Supply Chain Management …………… 20
2.10 Link between SCM and Financial Management…………… 21
4. BULL WHIP EFFCET
4. Supply Chain Management in Indian FMCG Industry ……………… 32

3.1 Implementation of SCM Practices in Indian FMCG Industry 32
3.2 SCM in Indian Business Scenario …………………………….. 32
3.3 Indian Fast Moving Consumer Goods (FMCG) Industry …… 33
3.4 Synthesis of Supply Chain Management Literature ………… 34
3.5 SCM as a Management Philosophy …………………………… 35
3.6 SCM as a Set of Activities ……………………………………… 35
3.7 SCM as a Set of Management Process ………………………… 36
3.8 SCM Practices in Indian FMCG Industry ……………………… 36
3.8.1 The Research Construct ……………………………… 39
3.8.2 The Sampling Plan …………………………………….. 39
3.8.3 Data Collection Methodology ………………………… 40
3.8.4 Non-response Bias …………………………………….. 41
3.8.5 Common Method Bias ………………………………… 41
3.9 Analysis and Interpretation ……………………………………… 41
3.9.1 Reliability Analysis ……………………………………. 41
3.9.2 Factor Analysis ………………………………………… 42
5. Modern Technology used in SCM ……………………………………….. 44

4.1 The technological evolution of SCM ……………………………. 44
4.1.1 The Business Benefits Technology can deliver ………... 45
4.1.2 Making the Right Choice ……………………………… 45
4.1.3 The Outsourcing Solution ……………………………... 45
CONTENTS
4.2 New techniques adopted by FMCG firms to improve efficiency46

4.2.1. RFID in the FMCG SCM Application ……………….48
4.2.2 System Solution ……………………………………….48
4.2.3 RFID in FMCG Supply Chain ………………………..49
4.2.4 RFID in Manufacturing Chain ………………………..49
4.2.5 RFID in Distribution and Retail ……………………...50
4.2.6 RFID has brought convenience to customer …………50
4.2.7 RFID cold chain ……………………………….. 50
4.3 GREEN SCM………………………………………………… 52
5. Future of Supply Chain Management ……………………………………

5.1 A new approach essential to survival in the 21st century
……… 87
- An interview with David Simchi-Levi by Penny Guyer
5.2 Rural Supply Chain Networks: The Future ……………………..
92
5.2.1 Introduction …………………………………………...
5.2.2 The Rural Supply Chain Network …………………….
93
5.2.3 Reinventing the Supply Chain ………………………...
95
5.2.4 Value Delivery Process in the IRSN ………………….
95
5.2.5 Production of Basic Agriculture Products (Farming) ...
96
5.2.6 Rural Retailing ………………………………………...
5.2.5 Small Scale Industries in Rural Areas ………………..
.96
5.2.5 Conclusions ……………………………………………
6. Conclusion ………………………………………………………………..
REFERENCES ……………………………………………………………..
1. INTRODUCTION
1.1 A brief History of Supply Chain Management:
The post-World War II supply chain was a set of linear, individualized processes that
linked manufacturers, warehouses, wholesalers, retailers and consumers together in the
form of a human/paper chain. "People and paper physically connected all of the tiers of
the chain together," which often created miscommunication between the front- and back-
end processes. The syncing of procurement, demand planning and forecasting, inventory
management, shipping and tracking was far from a definitive science. However, as
manufacturing and economic growth flourished during the 1950s, there developed a
greater interest in the need for SCM.
The 1960s saw the birth of the first inventory management software systems, which
were typically customized, to aid inventory control in the manufacturing sector.
In the 1970s, SCM innovations brought forth Material Requirements Planning (MRP) –
a system that phases out the release of production and purchase orders to ensure that the
flow of raw materials and in-process inventories matches the manufacturer's production
schedules for finished products.
By the 1980s, Manufacturing Resources Planning (MRP-II) was developed, bringing

with it systems that could be used for planning all manufacturing resources, including
those related to operational planning, financial planning, business planning, capacity
requirements planning, and master production scheduling. It was MRP-II's extension
into the business enterprise that evolved into an entirely new information technology
sector: Enterprise Resource Planning, or ERP.
In 1988, SCM took a significant leap of its own. Sanjiv Sidhu, founder of Dallas, Texas-
based i2 Technologies and a former artificial intelligence expert with Texas Instruments,
developed a new breed of software that was based upon the "theory of constraints."
Sidhu's product would allow a "company's factories (to) communicate internally, with
each other, and with headquarters to improve the flow of materials and orders."
By 1997, this software had become Internet-enabled. Other firms have since developed
expertise in either specific industries, such as consumer goods and process industries, or
very specific niches of the supply chain, such as execution and tracking.
SCM has taken on additional names, such as business-to-business or B2B. Its processes
and capabilities have also allowed for more focused, "one-on-one" extensions – namely
exchanges. An exchange is a two-sided marketplace where buyers and suppliers
negotiate prices and fulfill online transactions between one another and are either private
or public. For example, a private exchange would involve Company a selling widgets to
Company B, meeting together on a secure web site to place and fulfill orders exclusively
and by invitation only; a public exchange is more of an auction or bidding place for pre-
qualified subscribers or members.
“Management is on the verge of a major breakthrough in understanding how industrial

company success depends on the interactions between the flows of information,
materials, money, manpower, and capital equipment. The way these five flow systems
interlock to amplify one another and to cause change and fluctuation will form the basis
for anticipating the effects of decisions, policies, organizational forms, and investment
choices.”
Forrester introduced a theory of distribution management that recognized the integrated

nature of organizational relationships. Because organizations are so intertwined, he
argued that system dynamics can influence the performance of functions such as
research, engineering, sales, and promotion.
He illustrated this phenomenon utilizing a computer simulation of order information

flow and its influence on production and distribution performance for each supply chain
member, as well as the entire supply chain system. More recent replications of this
phenomenon include the “Beer Game” simulation and research covering the “Bullwhip
Effect” (Lee, Padmanabhan, and Whang 1997).
Discussing the shape of the future, Forrester (1958, p. 52) proposed that after a period of
research and development involving basic analytic techniques, “there will come general
recognition of the advantage enjoyed by the pioneering management who have been the
first to improve their understanding of the interrelationships between separate company
functions and between the company and its markets, its industry, and the national
economy.” Though his article is more than forty years old,
It appears that Forrester identified key management issues and illustrated the dynamics
of factors associated with the phenomenon referred to in contemporary business
literature as Supply Chain Management (SCM).
The term supply chain management has risen to prominence over the past ten years
(Cooper et al. 1997). For example, at the 1995 Annual Conference of the Council of
Logistics Management, 13.5% of the concurrent session titles contained the words
“supply chain.” At the 1997 conference, just two years later, the number of sessions
containing the term rose to 22.4%. Moreover, the term is frequently used to describe
executive responsibilities in corporations (La Londe 1997). SCM has become such
a “hot topic” that it is difficult to pick up a periodical on manufacturing, distribution,
marketing, customer management, or transportation without seeing an article about SCM
or SCM-related topics (Ross 1998).
There are many reasons for the popularity of the concept. Specific drivers may be traced
to trends in global sourcing, an emphasis on time and quality-based competition, and
their respective contributions to greater environmental uncertainty. Corporations have
turned increasingly to global sources for their supplies. This globalization of supply has
forced companies to look for more effective ways to coordinate the flow of materials
into and out of the company. Key to such coordination is an orientation toward closer
relationships with suppliers. Further, companies in particular and supply chains in
general compete more today on the basis of time and quality. Getting a defect-free
product to the customer faster and more reliably than the competition is no longer seen
as a competitive advantage, but simply a requirement to be in the market. Customers are
demanding products consistently
delivered faster, exactly on time, and with no damage. Each of these necessitates closer
coordination with suppliers and distributors. This global orientation and increased
performance-based competition, combined with rapidly changing technology and
economic conditions, all contribute to marketplace uncertainty. This uncertainty requires
greater flexibility on the part of individual companies
and supply chains, which in turn demands more flexibility in supply chain relationships.
Despite the popularity of the term Supply Chain Management, both in academia and
practice, there remains considerable confusion as to its meaning. Some authors define
SCM in operational terms involving the flow of materials and products, some view it as
a management philosophy, and some view it in terms of a management process (Tyndall
et al. 1998). Authors have even conceptualized SCM differently within the same article:
as a form of integrated system between vertical integration and separate identities on one
hand, and as a management philosophy on the other hand (Cooper and Ellram 1993).
Such ambiguity suggests a need to examine the phenomena of SCM more closely in
order to clearly define the term and concept, to identify those factors that contribute to
effective SCM, and to suggest how the adoption of a SCM approach can affect corporate
strategy and performance. The purpose of this paper is to examine the existing research
in an effort to understand the concept of “supply chain management.” Various
definitions of SCM and “supply chain” are reviewed, categorized, and synthesized.
Definitions of supporting constructs of SCM and a framework are then offered to
establish a consistent means to conceptualize SCM. Antecedents and consequences of
SCM are identified, and the boundaries of SCM in terms of business functions and
organizations are proposed. A conceptual model and definition of SCM are then
presented that indicate the nature, antecedents, and
consequences of the phenomena. The model is accompanied by a series of managerial
and research implications.
Supply Chain Management
2. SUPPLY CHAIN MANAGEMENT
2.1 What is SUPPLY CHAIN MANAGEMENT?
Figure 1: Supply Chain Management
It has been noted that discussions of SCM often use

complicated terminology, thus limiting management’s
understanding of the concept and its effectiveness for
practical application (Ross 1998).
This section is, thus, dedicated to reviewing, classifying,

and synthesizing some of the widely-used definitions of
“supply chain” and “supply chain management” in both
academia and practice. The goal of this discussion is the
development of one, comprehensive definition upon
which managers and future researchers can build.
Defining the Supply Chain
Supply Chain Management in Indian FMCG Industry

The definition of “supply chain” seems to be more

common across authors than the definition of “supply
chain management” (Cooper and Ellram 1993; La Londe
and Masters 1994; Lambert, Stock, and Ellram 1998). La
Londe and Masters proposed that a supply chain is a set
of firms that pass materials forward. Normally, several
independent firms are involved in manufacturing a
product and placing it in the hands of the end user in a
supply chain—raw material and component producers,
product assemblers, wholesalers, retailer merchants and
transportation companies are all members of a supply
chain (La Londe and Masters 1994). By the same token,
Lambert, Stock, and Ellram define a supply chain as the
alignment of firms that brings products or services to
market. Note that these concepts of supply chain include
the final consumer as part of the supply chain.
Another definition notes a supply chain is the network of

organizations that are involved, through upstream and
downstream linkages, in the different processes and
activities that produce value in the form of products and
services delivered to the ultimate consumer (Christopher
1992). In other words, a supply chain consists of multiple
firms, both upstream (i.e., supply) and downstream (i.e.,
distribution), and the ultimate consumer.
Given these definitions, for the purposes of this paper, a

supply chain is defined as a set of three or more entities
(organizations or individuals) directly involved in the
upstream and downstream flows of products, services,
finances, and/or information from a source to a customer.
Encompassed within this definition, we can identify

three degrees of supply chain complexity: a “direct
supply chain,” an “extended supply chain,” and an
“ultimate supply chain.” A direct supply chain consists of
a company, a supplier, and a customer involved in the
upstream and/or downstream flows of products, services,
finances, and/or information (Figure 1a). An extended
supply chain includes suppliers of the immediate supplier
and customers of the immediate customer, all involved in
the upstream and/or downstream flows of products,
services, finances, and/or information (Figure 1b). An
ultimate supply chain includes all the organizations
involved in all the upstream and downstream flows of
products, services, finances, and information from the
ultimate supplier to the ultimate customer.

Figure 1c illustrates the complexity that ultimate supply

chains can reach. In this example, a third party financial
provider may be providing financing, assuming some of
the risk, and offering financial advice; a third party
logistics (3PL) provider is performing the logistics
activities between two of the companies; and a market
research firm is providing information about the ultimate
customer to a company well back up the supply chain.
This very briefly illustrates some of the many functions
that complex supply chains can and do perform.
Although we will address this point in greater depth later

in this paper, it is important to realize that implicit within
these definitions is the fact that supply chains exist
whether they are managed or not. If none of the
organizations in Figure 2 actively implements any of the
concepts discussed in this paper to manage the supply
chain, the supply chain—as a phenomenon of business—
still exists. Thus, we draw a definite distinction between
supply chains as phenomena that exist in business and
the management of those supply chains. The former is
simply something that exists (often also referred to as
distribution channels), while the latter requires overt
management efforts by the organizations within the
supply chain.
Given the potential for countless alternative supply chain

configurations, it is important to note that any one
organization can be part of numerous supply chains. Wal-
Mart, for example, can be part of the supply chain for
candy, for clothing, for hardware, and for many other
products. This multiple supply chain phenomenon begins
to explain the network nature that many supply chains
possess.
For example, AT&T might find Motorola to be a
customer in one supply chain, a partner in another, a
supplier in a third, and a competitor in still a fourth
supply chain.
Note also that within our definition of supply chain, the

final consumer is considered a member of the supply
chain. This point is important because it recognizes that
retailers such as Wal-Mart can be part of the upstream and
downstream flows that constitute a supply chain.
TYPES OF CHANNEL RELATIONSHIPS

FIGURE 2a – DIRECT SUPPLY CHAIN
FIGURE 2b – EXTENDED SUPPLY CHAIN
FIGURE 2c – ULTIMATE SUPPLY CHAIN
Figure 2: Types of Channel Relations
Although definitions of SCM differ across authors (see

Table 1 for a representative sample), they can be
classified into three categories: a management
philosophy, implementation of a management philosophy,
and a set of management processes. The alternative
definitions and the categories they represent suggest that
the term “supply chain management” presents a source of
confusion for those involved in researching the
phenomena, as well as those attempting to establish a
supply chain
approach to management. Research and practice would be
improved if a single definition were adopted.
AUTHORS & DEFINITIONS OF SUPPLYCHAIN

MANAGEMENT
Monczka, Trent, and Handfield (1998)

SCM requires traditionally separate materials functions to
report to an executive responsible for coordinating the
entire materials process, and also requires joint
relationships with suppliers across multiple tiers. SCM is
a concept, “whose primary objective is to integrate and
manage the sourcing, flow, and control of materials using
a total systems perspective across multiple functions and
multiple tiers of suppliers.”
La Londe and Masters (1994)

Supply chain strategy includes: “Two or more firms in a

supply chain entering into a long-term agreement; the
development of trust and commitment to the relationship;
the integration of logistics activities involving the sharing
of demand and sales data, the potential for a shift in the
locus of control of the logistics process.”
Stevens (1989)
“The objective of managing the supply chain is to
synchronize the requirements of the customer with the
flow of materials from suppliers in order to affect balance
between what are often seen as conflicting goals of high
customer service, low inventory management, and low
unit cost.”
Houlihan (1988)
Differences between supply chain management and
classical materials and manufacturing control:
1) The supply chain is viewed as a single process.

Responsibility for the various segments in the chain is not
fragmented and relegated to functional areas such as
manufacturing, purchasing, distribution, and sales.
2) Supply chain management calls for, and in the end
depends on, strategic decision making. “Supply” is a
shared objective of practically every function in the chain
and is of particular strategic significance because of its
impact on overall costs and market
share.
3) Supply chain management calls for a different
perspective on inventories which are used as a balancing
mechanism of last, not first, resort.
4) A new approach to systems is required—integration
rather than interfacing.”
Jones and Riley (1985)

“Supply chain management deals with the total flow of
materials from suppliers through end users”
Cooper et al. (1997)

Supply chain management is “An integrative philosophy
to manage the total flow of a distribution channel from
supplier to the ultimate user.”
2.2 SCM as a Management Philosophy
As a philosophy, SCM takes a systems approach to

viewing the supply chain as a single entity, rather than as
a set of fragmented parts, each performing its own

function (Ellram and Cooper 1990; Houlihan 1988;

Tyndall et al. 1998). In other words, the philosophy of
supply chain management extends the concept of
partnerships into a multifirm effort to manage the total
flow of goods from the supplier to the ultimate customer
(Ellram 1990; Jones and Riley 1985). Thus, SCM is a set
of beliefs that each firm in the supply chain directly and
indirectly affects the performance of all the other supply
chain members, as well as ultimate, overall supply chain
performance (Cooper et al. 1997).
SCM as a management philosophy seeks synchronization

and convergence of intra firm and inter firm operational
and strategic capabilities into a unified, compelling
marketplace force (Ross 1998). SCM as an integrative
philosophy directs supply chain members to focus on
developing innovative solutions to create unique,
individualized sources of customer value. Langley and
Holcomb (1992)
suggest that the objective of SCM should be the
synchronization of all supply chain activities to create
customer value. Thus, SCM philosophy suggests the
boundaries of SCM include not only logistics but also all
other functions within a firm and within a supply chain to
create customer value and satisfaction. In this context,
understanding customers’ values and requirements is
essential (Ellram and Cooper 1990; Tyndall et al. 1998).
In other words, SCM philosophy drives supply chain
members to have a customer orientation.
Based upon the literature review, it is proposed that SCM

as a management philosophy has the following
characteristics:
1. A systems approach to viewing the supply chain as a

whole, and to managing the total flow of goods inventory
from the supplier to the ultimate customer;
2. A strategic orientation toward cooperative efforts to
synchronize and converge intra-firm and inter-firm
operational and strategic capabilities into a unified whole;
and
3. A customer focus to create unique and individualized
sources of customer value, leading to customer
satisfaction.
2.3 SCM as a Set of Activities to Implement a

Management Philosophy

In adopting a supply chain management philosophy, firms

must establish management practices that permit them to
act or behave consistently with the philosophy. As such,
many authors have focused on the activities that
constitute supply chain management. This previous
research has suggested various activities necessary to
successfully implement a SCM philosophy
SCM ACTIVITIES
1. Integrated Behavior
2. Mutually Sharing Information
3. Mutually Sharing Risks and Rewards
4. Cooperation
5. The Same Goal and the Same Focus on Serving
Customers
6. Integration of Processes
7. Partners to Build and Maintain Long-Term
Relationships
Bowersox and Closs (1996) argued that to be fully

effective in today’s competitive environment, firms must
expand their integrated behavior to incorporate
customers and suppliers. This extension of integrated
behaviors, through external integration, is referred to by
Bowersox and Closs as supply chain management. In this
context, the philosophy of SCM turns into the
implementation of supply chain management: a set of
activities that carries out the philosophy. This set of
activities is a coordinated effort called supply chain
management between the supply chain partners, such as
suppliers, carriers, and manufacturers, to dynamically
respond to the needs of the end customer (Greene 1991).
Related to integrated behavior, mutually sharing

information among supply chain members is required to
implement a SCM philosophy, especially for planning
and monitoring processes (Cooper et al. 1997; Cooper,
Lambert, and Pagh 1997; Ellram and Cooper 1990;
Novack, Langley, and Rinehart 1995; Tyndall et al. 1998).
Cooper, Lambert, and Pagh emphasized frequent
information updating among the chain members for
effective supply chain management. The Global Logistics
Research Team at Michigan State University (1995)
defines information sharing as the willingness to make
strategic and tactical data available to other members of
the supply chain. Open sharing of information such as
inventory levels, forecasts, sales promotion strategies,
and marketing strategies reduces the uncertainty between
supply partners and results in enhanced performance

(Adel 1997; Lewis and Talalayevsky 1997; Lusch and

Brown 1996; Salcedo and Grackin 2000).
Effective SCM also requires mutually sharing risks and

rewards that yield a competitive advantage (Cooper and
Ellram 1993). Risk and reward sharing should happen
over the long term (Cooper et al. 1997). Risk and reward
sharing is important for long-term focus and cooperation
among the supply chain members (Cooper et al. 1997;
Cooper, Lambert, and Pagh 1997; Ellram and Cooper
1990; Novack, Langley, and Rinehart 1995; Tyndall et al.
1998).
Cooperation among the supply chain members is

required for effective SCM (Ellram and Cooper 1990;
Tyndall et al. 1998). Cooperation refers to similar or
complementary, coordinated activities performed by firms
in a business relationship to produce superior mutual
outcomes or singular outcomes that are mutually
expected over time (Anderson and Narus 1990).
Cooperation is not limited to the needs of the current
transaction and happens at several management levels
(e.g., both top and operational managers), involving
cross-functional coordination across the supply chain
members (Cooper et al. 1997).
Joint action in close relationships refers to carrying out

the focal activities in a cooperative or coordinated way
(Heide and John 1990). Cooperation starts with joint
planning and ends with joint control activities to evaluate
performance of the supply chain members, as well as the
supply chain as a whole (Cooper et al. 1997; Cooper,
Novack, Langley, and Rinehart 1995; Spekman 1988;
Tyndall et al. 1998). Joint planning and evaluation
involve
ongoing processes over multiple years (Cooper et al.
1997). In addition to planning and control, cooperation is
needed to reduce supply chain inventories and pursue
supply chain-wide cost efficiencies (Cooper et al. 1997;
Dowst 1988). Furthermore, supply chain members should
work together on new product development and product
portfolio decisions (Drozdowski 1986). Finally, design of
quality
control and delivery systems is also a joint action
(Treleven 1987).
La Londe and Masters proposed that a supply chain

succeeds if all the members of the supply chain have the
same goal and the same focus on serving customers.

Establishing the same goal and the same focus among

supply chain members is a form of policy integration.
Lassar and Zinn (1995) suggested that successful
relationships aim to integrate supply chain policy to avoid
redundancy and overlap, while seeking a level of
cooperation that allows participants to be more effective
at lower cost levels. Policy integration is possible if there
are compatible cultures and management techniques
among the supply chain members.
The implementation of SCM needs the integration of

processes from sourcing, to manufacturing, and to
distribution across the supply chain (Cooper et al. 1997;
1998). Integration can be accomplished through cross-
functional teams, in-plant supplier personnel, and third
party service providers (Cooper et al. 1997; Cooper,
Manrodt, Holcomb, and Thompson 1997; Novack,
Langley, and Rinehart 1995; Tyndall et al. 1998).
Stevens (1989) identified four stages of supply chain

integration and discussed the planning and operating
implications of each stage:
Stage-1 Represents the base line case. The supply chain is

a function of fragmented operations within the individual
company and is characterized by staged inventories,
independent and incompatible control systems and
procedures, and functional segregation.
Stage-2 Begins to focus internal integration,

characterized by an emphasis on cost reduction rather
than performance improvement, buffer inventory, initial
evaluations of internal trade-offs, and reactive customer
service.
Stage-3 Reaches toward internal corporate integration

and characterized by full visibility of purchasing through
distribution, medium-term planning, tactical rather than
strategic focus, emphasis on efficiency, extended use of
electronics support for linkages, and a continued reactive
approach to customers.
Stage-4 Achieves supply chain integration by extending

the scope of integration outside the company to embrace
suppliers and customers.

Effective SCM is made up of a series of partnerships and,

thus, SCM requires partners to build and maintain
long-term relationships (Cooper et al. 1997; Ellram and
Cooper 1990; Tyndall et al. 1998). Cooper et al. believe
the relationship time horizon extends beyond the life of
the contract— perhaps indefinitely—and, at the same
time, the number of partners should be small to facilitate
increased cooperation.
Gentry and Vellenga (1996) argue that it is not usual that

all of the primary activities in a chain— inbound and
outbound logistics, operations, marketing, sales, and
service—will be performed by any one firm to maximize
customer value. Thus, forming strategic alliances with
supply chain partners such as suppliers, customers, or
intermediaries (e.g., transportation and/or warehousing
services) provides competitive advantage through
creating customer value (Langley and Holcomb 1992).
2.4 SCM as a Set of Management Processes
As opposed to a focus on the activities that constitute

supply chain management, other authors have focused on
management processes. Davenport (1993) defines
processes as a structured and measured set of activities
designed to produce specific output for a particular
customer or market. La Londe proposes that SCM is the
process of managing relationships, information, and
materials flow across enterprise borders to deliver
enhanced customer service and economic value through
synchronized management of the flow of physical goods
and associated information from sourcing to
consumption.
Ross defines supply chain process as the actual physical

business functions, institutions, and operations that
characterize the way a particular supply chain moves
goods and services to market through the supply pipeline.
In other words, a process is a specific ordering of work
activities across time and place, with a beginning, an end,
clearly identified inputs and outputs, and a structure for
action (Cooper et al. 1997; Cooper, Lambert, and Pagh
1997; Ellram and Cooper 1990; Novack, Langley, and
Rinehart 1995; Tyndall et al. 1998).
Lambert, Stock, and Ellram (1998) propose that, to

successfully implement SCM, all firms within a supply
chain must overcome their own functional silos and adopt
a process approach. Thus, all the functions within a

supply chain are reorganized as key processes. The

critical differences between the traditional functions and
the process approach are that the focus of every process is
on meeting the customer’s requirements and that the firm
is organized around these processes (Cooper et al. 1997;
1998). Lambert, Stock, and Ellram suggest the key
processes typically include customer relationship
management, customer service management, demand
management, order fulfillment, manufacturing flow
management, procurement, and product development and
commercialization.
2.5 Key Components of Supply Chain Management
Supply chain management is an enormous topic covering

multiple disciplines and
employing many quantitative and qualitative tools.
Within the last few years, several textbooks on supply
chain have arrived on the market providing both
managerial overviews and detailed technical treatments.
For examples of managerial introductions to supply chain
see Copacino (1997), Fine (1998) and Handfield &
Nichols (1998), and for logistics texts see Lambert,
Stock, Ellram, & Stockdale (1997) and Ballou (1998).
For more technical, model-based treatments see
Silver et al. (1998) and Simchi-Levi, Kaminsky, &
Simchi-Levi (1998). Tayur, Magazine, & Ganeshan
(1999) is an extensive collection of research papers while
Johnson & Pyke (2000b) is a collection papers on
teaching supply chain management. Also, there are
several casebooks that give emphasis to global
management issues including Taylor (1997), Flaherty
(1996), and Dornier, Ernst, Fender, & Kouvelis (1998).
Introductory articles include Cooper, Lambert, & Pagh
(1997b), Davis (1993), Johnson (1998a), and Lee &
Billington (1992). To help order our discussion, we have
divided supply chain management into twelve areas.4 We
identified these twelve areas from our own experience
teaching and researching supply chain management, from
analysis of syllabi and research papers on supply chain,
and from our discussions with managers. Each area
represents a supply chain issue facing the firm.
For any particular problem or issue, managers may apply
analysis or decision support tools. For each of the twelve
areas, we provide a brief description of the basic content
and refer the reader to a few research papers that apply.
We also mention likely Operations Research based tools

that may aid analysis and decision support. We do not

provide an exhaustive review of the research literature,
but rather provide a few references to help the reader get
started in an area. For a more detailed review of recent
research and teaching in supply chain management see
Ganeshan, Jack,
& Magazine (1999) and Johnson & Pyke (2000a)
respectively.
The twelve categories we define are
 Location
 Transportation and logistics
 Inventory and forecasting
 Marketing and channel restructuring
 Sourcing and supplier management
 Information and electronic mediated environments
 Product design and new product introduction
 Service and after sales support
 Reverse logistics and green issues
 Outsourcing and strategic alliances
 Metrics and incentives
 Global issues
Location pertains to both qualitative and quantitative

aspects of facility location
decisions. This includes models of facility location,
geographic information systems (GIS), country
differences, taxes and duties, transportation costs
associated with certain locations, and government
incentives (Hammond & Kelly (1990)). Exchange rate
issues fall in this category, as do economies and
diseconomies of scale and scope. Decisions at this level
set the physical structure of the supply chain and
therefore establish constraints for more tactical decisions.
Binary integer programming models play a role here, as

do simple spreadsheet models and qualitative analyses.
There are many advanced texts specially dedicated to the
modeling aspects of location (Drezner (1996)) and most
books on logistics also cover the subject. Simchi-Levi
etal. (1998) present a substantial treatment of GIS while
Dornier et al. (1998) dedicate a chapter to issues of taxes,
duties, exchange rates, and other global location issues
(Brush, Maritan, & Karnani (1999)). Ballou & Masters
(1999) examine several software products that provide
optimization tools for solving industrial location
problems.

The transportation and logistics category encompasses

all issues related to the flow of goods through the supply
chain, including transportation, warehousing, and
material handling. This category includes many of the
current trends in transportation management including
vehicle routing (Bodin (1990), Gendreau, Laport, &
Seguin (1996), and Anily & Bramel (1999)), dynamic
fleet management with global positioning systems, and
merge-in-transit. Also included are topics in warehousing
and distribution such as cross docking (Kopczak, Lee, &
Whang (1995)) and materials handling technologies for
sorting, storing, and retrieving products
(Johnson & Brandeau (1999) and Johnson (1998b)).
Because of globalization and the spread of outsourced

logistics, this category has
received much attention in recent years. However, we will
define a separate category to examine issues specifically
related to outsourcing and logistics alliances. Both
deterministic (such as linear programming and the
travelling salesman problem) and stochastic optimization
models (stochastic routing and transportation models with
queuing) often are used here, as are spreadsheet models
and qualitative analysis.
Recent management literature has examined the changes

within the logistics functions of many firms as the result
of functional integration (Greis & Kasarda (1997)) and
the role of logistics in gaining competitive advantage
(Fuller, O'Conor, &
Rawlinson (1993)).
Inventory and forecasting includes traditional inventory

and forecasting models.
Inventory costs are some of the easiest to identify and
reduce when attacking supply chain problems. Simple
stochastic inventory models can identify the potential cost
savings from, for example, sharing information with
supply chain partners (Lee & Nahmias (1993)), but more
complex models are required to coordinate multiple
locations. A few years ago, multi echelon inventory
theory captured most of the research in this area that
would apply to supply chains.
However, in nearly every case, multi echelon inventory

models assume a single decision-maker. Supply chains,
unfortunately, confront the problem of multiple firms,
each with its own decision maker and objectives. Of
course there are many full texts on the subject such as

Silver et al. (1998) and Graves, Rinnooy Kan, & Zipkin

(1993)). Useful managerial articles focusing on inventory
and forecasting include Davis (1993) and Fisher,
Hammond, Obermeyer, & Raman (1994). Clark & Scarf
(1960) perform one of the earliest studies in serial
systems with probabilistic demand. They introduce the
concept of an imputed penalty cost, wherein a shortage at
a higher echelon generates an additional cost. This cost
enables us to decompose the multi echelon system into a
series of stages so that, assuming centralized control and
the availability of global information, the ordering
policies can be optimized. Lee & Whang (1999a) and
Chen (1996) both propose performance measurement
schemes for individual managers that allow for
decentralized control (so that each manager makes
decisions independently), and in certain instances, local
information only. The result is a solution that achieves the
same optimal solution as if we assumed centralized
control and global information.
Marketing and channel restructuring includes

fundamental thinking on supply chain structure (Fisher
(1997)) and covers the interface with marketing that
emerges from having to deal with downstream customers
(Narus & Anderson (1996)). While the inventory category
addresses the quantitative side of these relationships, this
category covers relationship management, negotiations,
and even the legal dimension. Most importantly, it
examines the role of channel management (Anderson,
Day, & Rangan (1997)) and supply chain structure in
light of the well-studied phenomena of the bullwhip
effect that was noted in the introduction.
The bullwhip effect has received enormous attention in

the research literature. Many authors have noted that
central warehouses are designed to buffer the factory
from variability in retail orders. The inventory held in
these warehouses should allow factories to smooth
production while meeting variable customer demand.
However, empirical data suggests that exactly the
opposite happens. (See for example Blinder (1981), and
Baganha & Cohen (1998).) Orders seen at the higher
levels of the
supply chain exhibit more variability than those at levels
closer to the customer. In other words, the bullwhip effect
is real. Typically causes include those noted in the
introduction, as well as the fact that retailers and
distributors often over-react to shortages by ordering
more than they need. Lee, Padmanabhan, & Whang
(1997) show how four rational factors help to create the

bullwhip effect: demand signal processing (if demand

increases, firms order more in anticipation of further
increases,
thereby communicating an artificially high level of
demand); the rationing game (there is, or might be, a
shortage so a firm orders more than the actual forecast in
the hope of receiving a larger share of the items in short
supply); order batching (fixed costs at one location lead
to batching of orders); and manufacturer price variations
(which encourage bulk orders). The latter two factors
generate large orders that are followed by small orders,
which imply increased variability at upstream locations.
Some recent innovations, such as increased

communication about consumer demand, via electronic
data interchange (EDI) and the Internet, and everyday
low pricing5 (EDLP) (to eliminate forward buying of
bulk orders), can mitigate the bullwhip effect.6 In fact,
the number of firms ordering, and receiving orders, via
EDI and the Internet is exploding. The information
available to supply chain partners, and the speed with
which it is available, has the potential to radically reduce
inventories and increase customer service.7 Other
initiatives can also mitigate the bullwhip effect. For
example, changes in pricing and trade promotions
(Buzzell, Quelch, & Salmon (1990)) and channel
initiatives, such as vendor managed inventory (VMI),
coordinated forecasting and replenishment (CFAR), and
continuous replenishment (Fites (1996), Verity (1996),
Waller, Johnson, & Davis (1999)), can significantly
reduce demand variance. Vendor Managed Inventory is
one of the most widely discussed partnering initiatives for
improving multi-firm supply chain efficiency.
Popularized in the late 1980s by Wal-Mart and Procter &
Gamble, VMI became one of the key programs in the
grocery industry’s pursuit of “efficient consumer
response” and the garment industry’s “quick response.”
Successful VMI initiatives have been trumpeted by other
companies in the United States, including Campbell Soup
and Johnson & Johnson, and by European firms like
Barilla (the pasta manufacturer).
In a VMI partnership, the supplier—usually the
manufacturer but sometimes a reseller or distributor—
makes the main inventory replenishment decisions for the
consuming organization. This means the supplier
monitors the buyer’s inventory levels (physically or via
electronic messaging) and makes periodic resupply
decisions regarding order quantities, shipping, and
timing. Transactions customarily initiated by the buyer
(like purchase orders) are initiated by the supplier instead.

Indeed, the purchase order acknowledgment from the

supplier may be the first indication that a transaction is
taking place; an advance shipping notice informs the
buyer of materials in transit. Thus the manufacturer is
responsible for both its own inventory and the inventory
stored at is customers’ distribution centres (Figure 2).
Figure 3: Typical VMI implementation (adapted from

Waller et al.(1999)).
Because many of these initiatives involve channel

partnerships and distribution agreements, this category
also contains important information on pricing, along
with anti-trust and other legal issues (Train (1998)).
These innovations require interfirm, and often intrafirm,
cooperation and coordination that can be difficult to
achieve.
While marketing focuses downstream in the supply chain,
sourcing and supplier
management looks upstream to suppliers. Make/buy
decisions (Venkatesan (1992), Carroll (1993), Christensen
(1994), Quinn & Hilmer (1994), Kelley (1995), and
Robertson & Langlois (1995)) fall into this category, as
does global sourcing (Little (1995) and Pyke (1994)). The
location category addresses the location of a firm’s own
facilities, while this category pertains to the location of
the firm’s suppliers. Supplier relationship management

falls into this category as well (McMillan (1990) and

Womack, Jones, & Roos (1991)). Some firms are putting
part specifications on the web so that dozens of suppliers
can bid on jobs. GE, for instance, has developed a trading
process network that allows many more suppliers to bid
than was possible
before. The automotive assemblers have developed a
similar capability; and independent Internet firms, such as
Digital Market, are providing services focused on certain
product categories. Other firms are moving in the
opposite direction by reducing the number of suppliers, in
some cases to a sole source (Helper & Sako (1995) and
Cusumano & Takeishi (1991)). Determining the number
of suppliers and the best way to structure supplier
relationships is becoming an important topic in supply
chains (Cohen & Agrawal (1996), Dyer (1996), Magretta
(1998), and Pyke (1998)).
Much of the research in this area makes use of game

theory to understand supplier
relationships, contracts, and performance metrics. See, for
instance, Cachon & Lariviere (1996); Cachon (1997); and
Tsay, Hahmias, & Agrawal (1999).
The information and electronic mediated environments

category addresses long-standing applications of
information technology to reduce inventory (Woolley
(1997)) and the rapidly expanding area of electronic
commerce (Benjamin & Wigand (1997) and Schonfeld
(1998)). Often this subject may take a more systems
orientation, examining the role of systems science and
information within a supply chain (Senge (1990)). Such a
discussion naturally focuses attention on integrative ERP
software such as SAP (Whang, Gilland, & Lee (1995)),
Baan and Oracle, as well as supply chain offerings such
as i2’s Rhythm and Peoplesoft’s Red Pepper. The many
supply chain changes wrought by electronic commerce
are particularly interesting to
examine, including both the highly publicized retail
channel changes (like Amazon.com) and the more
substantial business to business innovations (like the GE
trading process network). It is here that we interface most
directly with colleagues in information technology and
strategy, which again creates opportunities for cross-
functional integration (Lee & Whang (1999b)).
2.6 Typical Benefits of Successful Supply Chain

Management

There is further evidence to support the idea that key

industry sectors have achieved significant performance
improvements in the areas of inventory and time to
customer
For example, in Fast Moving Consumer Goods (FMCG),
retailers and consumers enjoy wide choice, relatively low
prices and good customer service. Retailers have seen
inventory levels cut from 10 weeks to 2-3 weeks. Order to
delivery lead times for ambient products have typically
been reduced from 7 days to 48 hours and for chilled
products, delivery lead times can be as short as 4 hours.
This is due to an overall reduction in supply costs over the
last 15 years, made possible by a clear SCM strategy that
supports the business objectives, efficient managed supply
chains, improved IT systems and electronic
communications.
In Hi-tech and Electronics, market conditions require

many organizations to adopt a mass customization
business model. To maintain customer service levels,
companies produce sub- assemblies based on forecast and
complete the final configuration when an exact order is
placed. This process demands close alignment of
manufacturing sites to forecast and customer demand
signals. Reported benefits of SCM include reduced global
planning cycle time from 28 to 14 days; a switch from
weekly to daily scheduling; reduced manufacturing time
from more than 5 days to less than 1 day; and improved
delivery performance by 130%.
2.7 Five Stages to an Agile Supply Chain
Externally integrated, Internet-enabled supply chains are

highly complex. They will only deliver benefits if the
supply chain strategy is aligned with overall business
strategy. This can’t happen overnight but should progress
in manageable steps to allow the organization to buy into
and become familiar with the changes that will occur.

We view the design and delivery of successful supply

chain management initiatives in 5 stages. The different
stages of this approach are shown in the table below, and
summarized in the following paragraphs.
A PRACTICAL APPROACH TO SUPPLY CHAIN
MANAGEMENT
Figure 4: A practical approach to Supply Chain

Management
Stage 1 - Strategy
Starting out, you must consider how SCM will support
and contribute to achievement of business strategy and
goals. That means assessing your current supply chain
operation and carrying out relevant audits and analyses
internally and externally amongst partners and customers,
enabling you to assemble the business case for investment

in supply chain management initiatives and start to assess

technical solutions.
Stage 2 – Scope
The next step is to map out the business objectives into a
series of plans that lay the foundations on which advanced
SCM can be developed and implemented. This will
include outlining the delivery
Vehicles - systems, processes and people, the standards
that need to be adopted, defining the parameters of change
and selecting the project team. Key to any successful
change project is the identification of key sponsors who
can help drive and draw commitment to change through
the organization.
With the complete SCM solution mapped out, you need to

understand the measurements and Key Performance
Indicators on which the project will be measured, and on
which performance improvement will be assessed. At the
same time you will need to have a clear idea of the impact
that the project will have on the rest of the business -
particularly for the people within your organization,
customers and partner organizations - so contingencies
can be planned as necessary.
Stage 3 - Integration
At this stage all planning has been completed and the
organization and partners now need to be prepared for the
changes about to take place. The measurement system will
need to be checked and reconfirmed. Building a test
scenario is fundamental to any major project and helps to
iron out the creases before ‘go live’ takes place. Consider
setting up a formal operating plan to manage alliances and
trading relationships in order to ensure long term success.
Stage 4 - Delivery
‘Go Live’ is more than just switching on a system. It is the
time for final tuning, familiarizing users with the system
and getting their understanding and commitment to using
it. It is also time to communicate the changes to customers
and shareholders in terms of the benefits and improvement
they will experience from your organization.
Stage 5 - Evolution
Finally, the project is implemented but it certainly doesn’t
end there. Once your SCM initiative is up and running
there needs to be an ongoing process of measurement,
monitoring, feedback and improvement to ensure that
SCM delivers against the original objectives and continues
to evolve in line with business changes and delivers

customer satisfaction.
2.8 Balanced Supply Chain

Figure 5: The Balanced Supply Chain
This should begin with the identification of the critical

areas of your business that must be controlled in order to
realize the business objectives of SCM. Responsibility for
these areas is then allocated to teams and individuals and
benchmarked performance targets set.
However, it is important that performance-based

management is approached holistically. In other words,
change and improvement must be integrated and
supported by the entire business and by supporting
partners in order for the full benefits to be realized.
Managers must carefully consider what they are trying to
achieve within their market and their business, and how to
integrate business processes, staff skills and technology

systems in order to increase business value over the long

term. It requires high levels of co-operation and team
working internally and externally, and timely availability
of accurate enterprise wide information, often enabled by
the company’s ERP system.
Adopting a performance management approach is not

without difficulty. Individuals may feel threatened by the
transparency of performance information and by the
changes in their remuneration and bonus structure
necessary to encourage appropriate business decisions that
support strategy realization. For these reasons, it is often
advisable to seek support from people whose
independence makes them better able to tackle the ‘sacred
cows’ which often constrain an organization’s ability to
increase business performance.
2.9 The 7 Principles of Supply Chain Management
The most requested article in the 10-year history of

Supply Chain Management Review was one that
appeared in our very first issue in the spring of
1997. Written by experts from the respected
Logistics practice of Andersen Consulting (now
Accenture), “The Seven Principles of Supply Chain
Management,” layed out a clear and compelling
case for excellence in supply chain management.
The insights provided here remain remarkably fresh
ten years later.
By David L. Anderson, Frank F. Britt, and Donavon J.

Favre -- Supply Chain Management Review, 4/1/2007
 Principle 1: Segment customers based on the

service needs of distinct groups and adapt the
supply chain to serve these segments profitably.
 Principle 2: Customize the logistics network to
the service requirements and profitability of
customer segments.
 Principle 3: Listen to market signals and align
demand planning accordingly across the supply
chain, ensuring consistent forecasts and optimal
resource allocation.
 Principle 4: Differentiate product closer to the

customer and speed conversion across the supply
chain.
 Principle 5: Manage sources of supply
strategically to reduce the total cost of owning
materials and services.
 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.
 Principle 7: Adopt channel-spanning performance
measures to gauge collective success in reaching
the end-user effectively and efficiently.
 Translating Principles into Practice
 Reaping the Rewards
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:
1. 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).
2. They pursue tangible outcomes—focused on
revenue growth, asset utilization, and cost.
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 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.
 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. The typical result, as one manager
admits: “We don't fully understand the relative
value customers place on our service offerings.”
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.
Viewed from the classic perspective, this needs-

based segmentation may produce some odd
couples. For the manufacturer in Exhibit 1,
“innovators” include an industrial distributor

(Grainger), a do-it-yourself retailer (Home
Depot), and a mass merchant (Wal-Mart).
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.
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.
 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.
 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 preceded 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 boundaries 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 2 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. 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.
 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 3 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.
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.
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 a 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?
 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.
 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. Yet 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. (See Exhibit 4.)

o 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.
o 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.
o 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.
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.
 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 measurement should, but also view
performance from the proper perspective, that of the
customer.
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 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.
To facilitate channel-spanning performance measurement,

many companies are developing common report cards.
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.
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. (See Exhibit 5.) 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. 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.
Reaping the Rewards
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.
2.10 Link between SCM and Finance

Management
In many companies, financial, information and physical
flows are often not synchronised. Managers take
decisions from an operational or financial point of view
and do not recognise the impact of supply chain
management on financial performance or vice versa.
Growth, profitability and capital utilisation are better
optimised through information, financial and physical
supply chains integration. There is a strong
interdependency. Operations and finance departments
have to collaborate to reach common objectives.
Both operations and finance managers have to be
bilingual and understand each other’s language. They
must speak a common business language. The first step in
developing this dual competency is a better understanding
of how various concepts (in operations) and financial
accounts are interrelated.
Better links between supply chain and finance The value
of supply chain initiatives should be measured in terms of
impact on cash flow and market value, and on key
internal financial performance metrics such as economic
profit (EVA), return on capital, return on equity, working
capital, etc.
This objective can be reached by a three-step approach
that provides a comprehensive vision of the existing
relationship between companies’ operational and financial
performance.
Understanding the answers to three key questions
provides the basis for the approach.
1) How does operational performance impact the
components of the financial statement (income statement
and balance sheet)?
2) What is the impact of the operations in term of
profitability, asset utilisation and financial leverage
efficiency?
3) What is the impact of the operations on the ‘real’ profit
that takes into account the cost of capital?
The financial impact of the supply chain components can
be identified on the income statement and balance sheet.
The income statement reflects the operating activities of
the company during the year. It provides financial

analysts and investors with key measures of profitability:

revenue, expenses and net income.
This approach links the company strategy to the
operational performance. If the company wants to
increase its sales, or reduce its cost, it will act on different
components of the supply chain. For example if the
company’s strategic priority is to increase its market share
and therefore its revenue, it will focus on leverage
parameters such as perfect order fulfillment, order
fulfillment cycle time, and so on.
In order to optimise the overall performance of the
company, it is important to help establish the link
between effective supply chain management and
improved financial performance.

BULL WHIP EFFECT
The Bullwhip Effect (or Whiplash Affect) is an observed phenomenon in forecast-
driven distribution channels. The concept has its roots in J Forrester's Industrial
Dynamics (1961) and thus it is also known as the Forrester Effect. Since the
oscillating demand magnification upstream a supply chain reminds someone of a
cracking whip it became famous as the Bullwhip Effect.
Customer demand is rarely perfectly stable, businesses must forecast demand to
properly position inventory and other resources. Forecasts are based on statistics, and
they are rarely perfectly accurate. Because forecast errors are a given, companies
often carry an inventory buffer called "safety stock".
Moving up the supply chain from end-consumer to raw materials supplier, each
supply chain participant has greater observed variation in demand and thus greater
need for safety stock. In periods of rising demand, down-stream participants increase
orders. In periods of falling demand, orders fall or stop, thereby not reducing
inventory. The effect is that variations are amplified as one moves upstream in the
supply chain (further from the customer)
Case Study Barilla S.p.A

Barilla S.p.A is a major Italian and European food company founded in 1877. It
produces several kinds of pasta and it is the world's leading pasta maker with 40-45%
of the Italian market and 25% of the US market.
The company sells to a wide range of Italian retailers, primarily through third party
distributors.
During the late 1980s, Barilla suffered increasing operational inefficiencies and cost
penalties that resulted from large week-to-week variations in its distributors’ order
patterns.
Causes for Demand Fluctuations
 Transportation discounts
 Volume discount
 Promotional activity
 No minimum or maximum order quantities
 Product proliferation
 Long order lead times
 Poor customer service rates
 Poor communication
To address this problem, the director of logistics suggests the implementation of Just-
in-Time Distribution (JITD), with Barilla’s distributors.
Under the proposed JITD system, decision-making authority for determining
shipments from Barilla to a distributor would transfer from the distributor to Barilla.
Specifically, rather than simply filling orders specified by the distributor, Barilla
would monitor the flow of its product through the distributor’s warehouse, and then
decide what to ship to the distributor and when to ship it.
Implementation Issues Resistance from the Distributors

Managing stock is my job; I don’t need you to see my warehouse or my figures.”
“I could improve my inventory and service level myself if you would deliver my
orders more quickly; I would place my order and you would deliver within 36 hours.”
“We would be giving Barilla the power to push products into our warehouse just so
that Barilla can reduce its costs.”
Implementation Issues Resistance from Sales and Marketing

Our sales levels would flatten if we put this program in place.”
“How can we get the trade to push Barilla product to retailers if we don’t offer some
sort of incentive?”
“If space is freed up in our distributors’ warehouses, the distributors would then push
our competitors’ product more than ours.”
“It seems that the distribution organization is not yet ready to handle such a
sophisticated relationship.”
We run the risk of not being able to adjust our shipments sufficiently quickly to
changes in selling patterns or increased promotions.”
“We increase the risk of having our customers’ stock out of our product if we have
disruption in our supply process.”
“We wouldn’t be able to run trade promotions with JITD.”
“It is not clear that costs would even be reduced.”
Solutions the Implementation Problems.

Demonstrate that JITD benefits the distributors (lowering inventory, improving their
service levels and increasing their returns on assets); Run experiment at one or more
of Barilla’s 18 depots
Middle Management needs to look at JITD not as a logistics program, but as a
company-wide effort; Get top management closely involved.
Built Trust among all liked entities such as distributors, sales team, retailers.
Weekly Demand for Barilla Dry Products from Cortese’s
Northeast Distribution Center to the Pedrignano CDC, 1989.
Causes for Demand Fluctuations
• Transportation discounts
• Volume discount
• Promotional activity
• No minimum or maximum order quantities
• Product proliferation
• Long order lead times
• Poor customer service rates
• Poor communication
To address this problem, the director of logistics suggests the implementation of Just-
in-Time Distribution (JITD), with Barilla’s distributors.
Under the proposed JITD system, decision-making authority for determining
shipments from Barilla to a distributor would transfer from the distributor to Barilla.
Specifically, rather than simply filling orders specified by the distributor, Barilla
would monitor the flow of its product through the distributor’s warehouse, and then
decide what to ship to the distributor and when to ship it.
Implementation Issues Resistance from the Distributors

Managing stock is my job; I don’t need you to see my warehouse or my figures.”
“I could improve my inventory and service level myself if you would deliver my
orders more quickly; I would place my order and you would deliver within 36 hours.”
“We would be giving Barilla the power to push products into our warehouse just so
that Barilla can reduce its costs.”
Implementation Issues Resistance from Sales and Marketing

Our sales levels would flatten if we put this program in place.”
“How can we get the trade to push Barilla product to retailers if we don’t offer some
sort of incentive?”
“If space is freed up in our distributors’ warehouses, the distributors would then push
our competitors’ product more than ours.”
“It seems that the distribution organization is not yet ready to handle such a
sophisticated relationship.”
We run the risk of not being able to adjust our shipments sufficiently quickly to
changes in selling patterns or increased promotions.”
“We increase the risk of having our customers’ stock out of our product if we have
disruption in our supply process.”
“We wouldn’t be able to run trade promotions with JITD.”
“It is not clear that costs would even be reduced.”
Solutions the Implementation Problems.

Demonstrate that JITD benefits the distributors (lowering inventory, improving their
service levels and increasing their returns on assets); Run experiment at one or more
of Barilla’s 18 depots
Middle Management needs to look at JITD not as a logistics program, but as a
company-wide effort; Get top management closely involved.
Built Trust among all liked entities such as distributors, sales team, retailers.
Methods of Coping with BULL WHIP EFFCET
Methods for Coping with the Bullwhip Effect Our ability to identify and quantify the
canes of the but bullwhip effect lead to a number of suggestions for reducing the
bullwhip effect or for eliminating its impact. These include reducing uncertainty.
reducing the satiability of the customer demand process, reducing lead times, and
engaging in strategic partnerships. These issues are discussed briefly below.
1. Reducing uncertainty: One of the most frequent suggestions for decreasing or elim-
inating the bullwhip effect is to reduce uncertainty throughout the supply chain by
centralizing demand information, that is,by providing each stage of the supply chain
with complete information on actual customer demand. The results presented in the
previous subsection demonstrate that centralizing demand information can reduce the
bullwhip effect. Note, however, that even if each stage uses the same demand data,
each may still employ different forecasting methods and different buying practices.
both of which may contribute to the bullwhip effect. In addition, the results presented
in the previous subsection indicate that even when each stage uses the same demand
data. the same forecasting method, and the same ordering policy, the bullwhipeffect
will continue to exist.
2. Reducing variability: The bull whip effect can be diminished by reducing the vari-
ability' inherent in the customer demand process. For example, if we can reduce the
variability of the customer demand seen by the retailer, then even if the bull whip
effect occurs. the variability of the demand seen by the wholesaler will also be
reduced. We can reduce the variability of customer demand through, for example. the
use of an -everyday low pricing- (EDIT) strategy. When a retailer uses EDI.P, it offers
a product at a single consistent price, rather than offering a regular price with periodic
price promotions. By eliminating price promotions, a retailer can eliminate many of
the dramatic shifts in demand that occur along these promotions. Therefore, everyday
low pricing strategies can lead to much more stable—that is, less variable—customer
demand patterns.
3.Lead-time reduction: The results presented in the previous subsections clearly indi-
cate that lead times serve to magnify the increase in variability due to demand
forecasting. We haw demonstrated the dramatic effect that increasing lead times can
have on the variability at each stage of the supply chain. Therefore. lead-time
reduction can significantly reduce the bull whip effect throughout a supply chain.
Observe that lead times typically include two components: order lead times (i.e.. the
time it takes to produce and ship the item and inform lead time i.e.. the time it takes to
process an order). This distinction is important since order lead times can he reduced
through the use of cross-docking while information lead time can be reduced through
the use of electronic data interchange(EDI).
4. Strategic partnership: The bull whip effect can be eliminated by engaging in any of
a number of strategic partnerships. These strategic partnerships change the way
information is shared and inventory is managed within a supply chain, possibly
eliminating the impact of the bull whip effect. For example, in vendor managed
inventory .the manufacturer manages the inventory of its product at the retailer outlet,
and therefore determines for itself how much inventory to keep on hand and how
much to ship to the retailer in every period. Therefore, in VMI the manufacturer does
not rely on the orders placed by a retailer, thus avoiding the bullwhip effect entirely.
Other types of partnerships are also applied to reduce the bull whip effect. The
previous analysis indicates, for example. that centralizing demand information can
dramatically reduce the variability seen by the upstream stages in a supply chain.
Therefore, it is clear that these upstream stages would benefit from a strategic part-
nership that provides an incentive for the retailer to make customer demand data
available to the rest of the supply chain.
3. Supply Chain Management in Indian FMCG Industry
3.1 Implementation of SCM Practices in Indian FMCG Industry
In recent years, the basis for global competition has changed. No longer are
organizations competing against other organizations, but rather supply chains are
competing against supply chains. The success of an organization is now invariably
measured neither by the sophistication of its products nor by the size of the market
share. It is usually seen in the light of the ability, sometimes forcefully and
deliberately harnesses its supply chain and to opt for innovative approaches of supply
chain flows such as single-piece-flow, to deliver responsively to the customers as and
when they demand it.
This paper tries to identify and analyze the importance and adoption of various
SCM practices in Indian FMCG industry. The paper is based on empirical study
conducted by the author in Indian FMCG industry and various SCM practices are
clubbed in different factors through Factor analysis.
It is rightly said that manufacturers now compete less on product and quality – which
are often comparable – and more on inventory turns and speed to market (John
Kasarda, 1999). This statement shows the beliefs that supply chain management will
increasingly be the principal determinant of the ability to compete. Every link in it can
add up to a competitive advantage. There was time when companies looked at their
supply chains – the upstream part of their value chain from the company’s perspective
as a means of focusing on their own core competencies, and of leveraging those of
vendors and lowering their cost to increase their responsiveness towards consumers .
Those goals can not be swept away by supply chain but they will be superseded by a
single super objective as to compete on the basis of how well organization manage its
supply chain – thus the competitive advantage is shifting from the shop floor. The
question arises why it is so important to optimize the supply chain. It is so because
inefficiencies in the supply chain leads to higher inventories at all points of the chain.
This adds costs related to wastages, blocked funds and risk of holding obsolete
products with chances of quality depletion.
3.2 SCM in Indian Business Scenario
Indian organizations are still juggling among the Material Resource Planning (MRP-
II), Enterprises Resource Planning (ERP), Logistics and Supply Chain Management
(SCM). However, it is quite evident that Indian corporate sector is fast recognizing the
need of SCM, which can integrate all other practices and processes. SCM in India
offers one of the fastest growth areas in revenues as well as employment. According
to ETIG, there is no reliable estimate of the market opportunities for supply chain and
its components exist in India today. Even though, ETIG estimates the Indian market
value for supply chain / logistics at 13 percent of GDP is more than US $50 billion, a
lion’s share of which is accounted for by transportation and warehousing.
India started a little late for restructuring and reformulating the strategies related with
supply chain. However, there is no doubt that Indian industries are fast catching and
gearing up for meeting the new business environment. A study of available literature
related with Indian business practices after 1991’s liberalization policies shows that
organizations are concerned about their value chain and identifying that competition is
shifting towards the efficiency and effectiveness of entire supply chain activities.
The traces of SCM adoption by Indian organizations are given as:
• Until 1990, logistics was treated as the management of transportation,

inventories and warehousing and organizations had to perform these activities
individually in an efficient manner.
• Before opening of Indian market, Indian business giants were enjoying the solo
play with continuous expansion of capacities. Later on when they heard the
music of competition, they found themselves with excess capacities with huge
cost burdens. This forced organizations to control the cost factor for the
survival at marketplace.
• At the same time of 1990’s, Indian organizations got fascinated by Business

Process Re-engineering (BPR). Organizations treated BPR as remedy of their
illness across the organizations’ processes and functions by eliminating the
non-value adding activities and streamlining the operations with a promise of
higher returns.
• Later on, the emergence of Enterprises Resource Planning (ERP) gave boost to
BPR. For the first time, organizations could have an integrated view of the
various ‘silos’ that existed in their businesses, giving an opportunity to
rationalize, remove duplication and speed up the processes.
• Rapid growth and improvement of telecommunication networks and wide spread

of information technology tools and techniques after mid 1990s posed the
biggest challenge in handling well-informed customers. Nevertheless, these
changes also provided the biggest boost to Indian industries because
organizations found themselves able to reach out vendors or suppliers on one
end, and customers to the other. Due to this revolution only, ERP-II integrated
the internal departments into a seamless organization, whereas, SCM attempts
to integrate the external factors and processes into the internal processes.
Changes can be implemented easily when tough times reign. Companies in India
have been looking at ways of cutting costs and improving process efficiencies, in
their quest to become globally competitive through taking initiatives for supply
chain management practices because SCM recognizes that distinct functions like
purchases, inventory management, distribution and production planning work
best when integrated. At the same time, supply chain management in India seems
to be following the path of more advanced industrial countries, involving not
only the customers, manufacturers, and vendors but also the third party service
providers, consultants, software providers etc.
3.3 Indian Fast Moving Consumer Goods (FMCG) Industry
Indian Fast Moving Consumer Goods (FMCG) industry has a long history. However,
the Indian FMCG industry began to take shape only the last fifty years. Even today,
the Indian FMCG industry continues to suffer from a definitional dilemma as well as
the exact estimation of market size. Nevertheless, more than Rs. 43,000 crores ( in
organized sector) fast moving consumer goods (FMCG) industry is a critical
component of the Indian economy. The actual size of industry is phenomenal, if one
adds the turnover of unorganized sector. That is why, this sector has potential to drive
growth, enhance quality of life and create jobs. The Indian FMCG sector is primarily
a low margin business, where success depends on the volume. Presently, the FMCG
sector is one of the largest in the country, which accounts for more than 14.5 per cent
of GDP with whooping sum of domestic consumption capacity of nearly 20 billion
U.S. Dollar. With the average growth of Indian economy in the range of 6-8% per
year will witness a consistence rise in demand and purchasing power of Indian
market. Following the trend, the FMCG sector will grow by 5-6% per year in mature
categories and 8-10% per year in upcoming categories. However, factors such as low
rural penetration, dependence on monsoon, the price sensitivity of the consumers and
increased level of competition could result in decreasing profit margins in the
industry.
The following section examines the different philosophies related to development of

SCM. Subsequent sections describe the research construct, which provides details of
sample design, design of questionnaire, survey methodology, followed by an analysis
of the results and the managerial implications of the study along with the future
research directions.
3.4 Synthesis of Supply Chain Management Literature
The concept of supply chain management first appeared in the literature in the mid-
1980 by Keith and Webber. However, the fundamental assumptions on which SCM
rests are significantly older. The management of inter-organizational operations can be
traced back to channel research in the 1960’s by Bucklin and systems integration
research in the 1960’s by Forrestter. According to Cooper et.al. (1997), the term
supply chain management has risen to prominence over the past ten years. La Londe
(1997) identified positions at forty-three different companies that carry ‘supply chain’
in their titles. By now, SCM has become such a hot topic that it is difficult to pick up
any periodicals on manufacturing, marketing, distribution, customer management, or
transportation without seeing an article about SCM or its related topics.
Despite the popularity of the term supply chain management, managers and
researchers have considerable confusion over the actual meaning of the term.
Some authors such as Tyndall et.al. (1998) defined SCM in operational terms
involving the flow of materials and products. Ellram and Cooper (1990) viewed
SCM as management philosophy and still others as La Londe (1997) viewed it in
terms of management process. In fact, some have questioned the existence and
benefits of the SCM phenomenon, for example, Bechtel and Jayaram (1997)
asked ‘Is the concept of SCM important in today’s business environment or is it
simply a fad destined to die with other short-lived buzzwords?’
Research in SCM evolved along three separate paths that eventually merged into a
common body of literature, with a primary focus on integration, customer satisfaction
and business results i.e. creation or enhancement of value of the products or services.
Jones and Riley (1985) stated that supply chain management deals with the total flow
of materials from suppliers through end users.
Three differences between supply chain management and classical materials and
manufacturing control are identified by Houlihan (1988) as:
• The supply chain is viewed as a single process. Responsibilities for the various
segments in the chain are not fragmented and relegated to functional areas such as
manufacturing, purchasing, distribution and sales.
• Supply chain management calls for and in the end depends on strategic decision
making.
• Supply chain management calls for different perspective on inventories which are
used as balancing mechanism of last, not first, resort. A new approach to systems is
required – integration rather than interfacing.
3.5 SCM as a Management Philosophy
The philosophy of SCM emphasized to extend the concept of partnerships into a

multiform effort to mange the total flow of goods from the supplier to the ultimate
customer. Ellram and Cooper (1990) emphasized that SCM as a management
philosophy takes a systems approach to viewing the channel as a single entity, rather
than a set of fragmented parts, each performing its own function. Langley and
Holcomb (1992) suggested that the objective of SCM should be the synchronization
of all channel activities to create customer value. Mentzer et.al.(2001) proposed that
SCM as management philosophy has the following characteristics: y
• A systems approach to viewing the channel as a whole and to managing the total
flow of goods inventory from the supplier to the ultimate customer.
• A strategic orientation toward cooperative efforts to synchronize and converge intra-
firm and inter-firm operational and strategic capabilities into a unified whole and
• A customer focused orientation to create unique and individualized sources of
customer value, leading to customer satisfaction.
3.6 SCM as a Set of Activities
For adopting the supply chain management philosophy, organization has to establish
management practices that permit them to act or behave consistently. Bowersox and
Closs (1996) argued that to be fully effective in today’s competitive environment,
firms must expand their integrated behaviour to incorporate customers and suppliers.
The philosophy of SCM turns into implementation of supply chain management as a
set of activities. According to Greene (1991), the set of activities as a coordinated
effort is called supply chain management between the supply chain partners, such as
suppliers, carriers and manufacturers to respond dynamically to the needs of the end
customer. So supply chain management activities such as mutually sharing
information, risks and rewards with chain members (Ellram and Cooper, 1990),
integrated behaviour and processes and an effort to build and maintain long term
relationship are vital for realization of the management philosophy behind SCM.
Gentry and Vellenga (1996) argued that it is not usual that all the primary activities in
a value chain – inbound and outbound logistics, operations, marketing, sales and
service – are performed by any one of firm to maximize customer value. Thus,
forming strategic alliances with channel partners such as suppliers, customers, or
intermediaries e.g. logistics service providers, provides competitive advantage
through creating customer value (Langley and Holcomb, 1992).
3.7 SCM as a Set of Management Process
Davenport (1993) defined a process as a structured and measured activities designed

to produce a specific output for a particular customer or market. La Londe (1997)
proposed that SCM is the process of managing relationships, information and
materials flow across enterprise borders to deliver enhanced customer service and
economic value through synchronized management of the flow of physical goods and
associated information from sourcing to consumption. Ross (1998) defined supply
chain processes as the actual physical business functions, institutions and operations
that characterize the way a particular channel system moves goods and services to
market through the supply pipelines. The same idea was reflected by Cooper,
Lambert, et al. (1997), a process is a specific ordering of work activities across time
and place, with a beginning, an end, clearly identified inputs and outputs and a
structure of action. Lambert et al. (1998) suggested that the key processes would
typically include customer relationship management, customer service management,
demand management, order fulfillment, manufacturing flow management,
procurement and product development and commercialization.
3.8 SCM Practices in Indian FMCG Industry

In a low margin and high volume business like FMCG, it requires a very close
attention on the planning and operational part of the entire value chain activities
because these mini test details can change the fortune of any organization. While
branding differentiates the image of the product, the distribution system will
determine the faith of the organization up to a very large extent in FMCG
industry. The diversity of India and existence of vast untapped markets of rural
areas provide the bundle of opportunities to companies. The best price or quality
product offerings combined with heavy promotional and advertising budgets will
not help the product succeed if one of the major ingredients of the marketing mix
as distribution is not properly focused. The table1 shows the types of FMCG
outlets are available across the India. Every organization needed to serve a large
percentage of these outlets to reap the economies of the scale.
TYPES OF OUTLETS PERCENTAGE TERMS
(%)
Total Outlets 100
Grocer 34.6
General Store 12.8
Food Store 7.1
Cosmetic Store 4.5
Chemist 5.9
Paan Bidi 16
Others 19
Table 1: Types of outlets in Indian FMCG Retail Industry
(Source: Org-Marg, 2003)

Supply Chain Planning & Management
Contract Manufacturing/Imports Own Manufacturing
Outbound Transportation
Depots
Depots
Carrying & Forwarding Agent
Stockiest / Distributors
Retailer
Customer
Figure 6: The Basic Supply Chain of Indian FMCG Industry
The traditional basic structure of FMCG supply chain has not changed over the years.
The basic supply chain related with distribution side of FMCG industry is shown in
Figure 1. The competitive scenario has changed the importance of each element of the
chain operation i.e. a detailed planning and analysis of every activity of the chain so
that to make the same efficient and effective.
Despite the importance and theoretical development of SCM, there is little

empirical research on how practitioners define and incorporate SCM practices
into overall corporate strategy and functioning. Similarly, little is known about
the specific practices or concerns of successful SCM implementation in Indian
FMCG organizations. This research paper investigates these issues by means of
empirical data.
3.8.1 The Research Construct
Organizations have downsized, focused on core competencies and attempt to achieve

competitive advantage be more effectively managing all internal and external value-
adding activities under the influence of global competitive market. Many firms have
reduced their supply base so they can more effectively manage relationships with
strategic suppliers (Tully, 1995). The literature indicates that buying firms are
developing cooperative, mutually beneficial relationships with suppliers and virtual
extension of their firms (Mason 1996; Copacino 1996). A key element of successful
SCM involves the downstream integration of business customers as well as the
management of upstream suppliers. It is always beneficial to recognize the specific
practices that results in successful SCM implementation while taking into
consideration the concerns hindering a successful supply chain. That is why, for the
purpose of this study few commonly cited SCM practices and concerns from the
literature were identified. These included practices and concerns related to SCM
enablement through IT practices, supplier relationships, manufacturing / operations
practices, logistics and warehousing practices and customer relationship practices.
Since this was an exploratory study, no attempt was made to organize or group
various practices into any specific order or category.
3.8.2 The Sampling Plan
The study is focused on the supply chain management practices in fast moving
consumer goods (FMCG) sector, so the population for this study is entire
organizations operating in India under FMCG sector. A simple random sample has
been opted for this study. Out of an initial population of over 120 FMCG companies,
88 companies were selected through simple random sampling followed by
convenience and executive judgment at second stage. Consequent upon the response
rate fifty-two companies have been selected for study of SCM practices in Indian
FMCG industry.
The following criteria have been adopted in selecting the sample units as:
 The companies under sample should have either fully adopted or partially
adopted or planned to adopt the Enterprises Resource Planning (ERP) or such other
application package.
 The sample company should have demonstrated potential with regard to
business needs and resources to adopt SCM practices or company should be planning
the SCM initiative on a systems basis.
 The company should have a manufacturing / processing / assembly unit head-
office preferably in National Capital Region (NCR) of Delhi and Mumbai and its sub-
urban areas.
 The sample company should have a turnover of at least 100 crores.
 Only the firms which fulfilled aforesaid criteria and were willing to participate
in the study were selected.
3.8.3 Data Collection Methodology
The methodology of data collection for present research is planned in such manner so
that every bit of information pertaining to different aspect of supply chain
management (SCM) in Indian FMCG industry has been collected. The following tools
have been used in data collection for the research work as:
Secondary Data: The secondary data has been tapped to know insight about the
Indian FMCG sector and various SCM practices world-over. Some of the sources
which helped me are such as: Associated Chambers of Commerce & Industry
(ASSOCHAM), New Delhi, Federation of Indian Chamber of Commerce and
Industry (FICCI), New Delhi, Confederation of Indian Industry (CII), New Delhi,
ETIG Knowledge Series, 2002, Supply Chain Council, www.supply-chain.com,
www.indiainfoline.com, www.scmr.org, Council of Logistics Management and
various other Libraries as Library of Faculty of Management Studies, Delhi
University, Central Reference Library, Delhi University, Ratan Tata Library, DSE,
Management Development Institute (MDI), IIT-Delhi etc.
Primary Data: The primary data has been collected through structured questionnaire
and individual depth interviews. A survey instrument in the form of a structured
questionnaire was designed based on constructs previously described. For getting the
responses to questionnaire basically, two types of scales were used as Agreement and
Adoption to assess the attitudes and opinions of respondents. Five-point Likert or
summated scale have been used with a maximum rating of 5 and minimum rating of
one with equal interval scale of 1.
The questionnaire was pre-tested by 20 supply chain managers for content validity.
Protocol analysis was also undertaken to help the respondents in answering the
questions, assess their problems in understanding some questions and suggest
modifications. A few pre-test questionnaires were also administered by mail wherein
comments were also invited from respondents. As a part of de-briefing, some of pre-
test respondents were also interviewed after they completed the questionnaire in order
to identify areas of confusions. Finally, pre-test questionnaire was also sent to two
SCM experts to suggest changes in questionnaire with regard to type of questions and
scales of measurement used therein. The pretest questionnaires were not used for
subsequent analyses.
3.8.4 Non-response Bias:
To investigate the possibility of non-response biasness in the data, responses of early

and late returned questionnaires were tested separately. The late received
questionnaires were considered to be representative of non-respondents (Lambert and
Harrington, 1990). Each sample was split into two groups on the basis of early and
late survey return times and t-tests were performed on the responses of the two
groups. The t-test yielded no statistically significant differences between the early and
late response group suggesting that non-response bias was not a problem in this study.
3.8.5 Common Method Bias:

This research collected data from a single respondent from each target FMCG
organization, without collecting and cross validating responses from a second
informant from the same organization. Some researchers can argue that relying
on a single informant to answer complex social judgments about organizational
characteristics increases random measurement error in terms of, strong
assessment of discriminate validity can not be made. However, the cost
associated with stipulated time factor for using multiple informants from each
organization is prohibitive. Therefore this research used data from single
respondents while attempting to minimize the extent of common method
variance by targeting the survey to top level executives or senior managers of the
organizations. It was assumed that the senior managers were more objective and
knowledgeable with respect to their organization’s operations.
3.9 Analysis and Interpretation:
3.9.1 Reliability Analysis
The reliability of the scales used for survey in questionnaire was evaluated using
Cronbach’s alpha (Cronbach, 1951). For two scales used as Agreement continuum and
Adoption continuum, the value of cronbach alpha came greater than 0.75, suggesting
that scales are reliable.
3.9.2 Factor Analysis
For each of the two item scales i.e. agreement and adoption continuum, exploratory
factor analysis was used to identify a smaller set of factors to represent the
relationships among the variables prudently i.e. to explain the observed correlation
with fewer factors. In this research, principal component analysis with eigenvalues
greater than one was used to extract factors and varimax rotation was used to facilitate
interpretation of factor matrix. The Bartlett Test of Sphericity (value = 1919.451 and
significance value = 0.000) was used to validate the use of factor analysis. The value
of KMO came out less than 0.5 because sample size for research was comparatively
small. The reason behind small sample size was that the total size of population as
Indian FMCG firms under organized sector is in itself limited to nearly 120 firms.
Factor analysis with aforesaid method was applied on agreement continuum and items
with factor loading above 0.50 (with a few exceptions) were considered to determine
item representation to a single factor.
The exceptions are given as:

• Sharing of real time demand and inventory information with suppliers/dealers,
• Key suppliers locate personnel within focal firm (JIT-II) and
• CRM is only 20 percent technology and 80 percent successful involvement of
employees
• Factor 1: Coordination with supply chain partners i.e. suppliers and customers.
This factor comprises the eight practices that address collaboration among supply
chain partners. This factor accounts for 16.4 percent of the variance in the data.
• Factor 2: Operational networking with suppliers and logistics service

providers. This factor involves the six operating practices related with suppliers and
logistics service providers. The factor accounts for 11.6 percent of the variance in the
data.
• Factor 3: Cross functionality in joint action with suppliers and customers. It

involves four practices, out of which two are directly related with the involvement of
suppliers and customers in new product development process. Rest two are concerned
with costing and manufacturing flexibility. This factor accounts for 8.64 percent of
the variance in the data.
• Factor 4: Mechanistic of SCM implementation. This is basically related to

strategic outsourcing and it involves three practices, which comprises 8.06 percent of
the variance in the data.
• Factor 5: Collaborative Forecasting and Sales planning: It involves two practices

and these two practices account for 7.65 percent of the variance in the data.
• Factor 6: Leanness of Supply Chain: It involves four practices, which indicate the
focal firm’s willingness to reduce waste and streamline the processes through proper
planning. These four practices account for 7.49 percent of the variance in the data.
These six factors accounted for a total of 59.88 percent of the total variance in
the data shown in table 2.
Rotation Sums of Squared

Initial Eigen values Loadings
Component Cumul
% of Cumulative % of ative
Total Variance % Total Variance %
1 7.951 25.649 25.649 5.085 16.404 16.404
2 3.683 11.881 37.530 3.608 11.640 28.043
3 3.232 10.427 47.957 2.680 8.644 36.687
4 2.114 6.821 54.778 2.498 8.059 44.745
5 1.890 6.096 60.874 2.370 7.646 52.392
6 1.665 5.369 66.243 2.322 7.490 59.882
Table 2: Total Variance Explained

The clubbing of various SCM practices of Indian FMCG organizations emerged as
few exclusive factors through research study, which were different on agreement
continuum and adoption continuum from each other. The result of study revealed that
supply chain partnership and supply chain networking are considered to be
dominating factors for Indian FMCG organizations. This seems to be quite true with
the rapid spread and development of IT and telecommunication tools and techniques
throughout India, which is facilitating the bi-directional flow of information and
enhanced level of coordination and collaboration. Besides that leanness or operational
efficiency factors have high degree of agreement but low level of adoption. The
reasons behind the same are basically infrastructural bottlenecks and the presence of
unskilled and semi-skilled suppliers at backend and distributors at front end of the
supply chain. However, cross functionality and strategic outsourcing are leading on
adoption continuum.
A truly integrated supply chain requires a huge amount of commitment by all

members of the supply chain. The focal firm might require to overhaul the purchasing
process and integrate suppliers’ R&D teams directly into its own decision making
processes so as to leverage on it’s own core competency and partners’ core
capabilities. Integrating the purchasing and logistics processes with other key
corporate processes creates a closely linked set of manufacturing and distribution
processes. It further allows focal firm to deliver products and services to both internal
and external customers in a more timely and effective manner.
Modern Technology used in Supply Chain Management
4. Modern Technology used in Supply Chain Management
4.1 The Technological Evolution of Supply Chain Management
SCM technology has come a long way since the early 60’s when systems were mainly
based around financial measures. As technology progressed, purchasing and order
entry were added, evolving into simple Manufacturing Requirements Planning (MRP)
systems. However the organizational model was still firmly based around
departmentalization. MRPII (Materials Resource Planning) organizations had realized
internal efficiencies the only way to achieve more was to extend the organization, and
SCM was born.
Progressing to SCM is an evolution, both in terms of technology and organizational

culture. There is no doubt that today’s SCM systems have the potential to deliver huge
competitive advantage in areas such as manufacturing and distribution. However,
successfully implementing them can be a significant challenge.
Figure 7: Evolution of Supply Chain Management Technology

4.1.1 The Business Benefits Technology Can Deliver
The Internet is bringing SCM to the front line of business management. As well as
providing the essential ‘back-office’ fulfillment for successful eBusiness, organizations
are discovering the real benefits of eBusiness where Internet exchanges are
streamlining purchasing operations, accelerating procurement cycles and cutting
inventories, thus taking significant cost out of key processes.
But Internet enabled SCM is having a more dramatic effect on the business model,
particularly the way that company performance is being measured. A major challenge
is whether your supply chain is nimble enough to accommodate the new customer-
centric demands for total connectivity with customers and suppliers; increased velocity
as a performance measure; greater flexibility to meet rapid shifts in customer demand;
and customer-beating service levels.
4.1.2 Making the right choice
When selecting the right SCM/AP S solution for your business, addressing the
following questions and issues will pay dividends:
Is the solution a specialist stand-alone product or an integrated part of a larger ERP
system?
Stand-alone may be better if you are running different ERP systems. However, if you
are using a single ERP system, the argument to select an APS add-on from the same
vendor becomes more compelling. You should also take into account the systems your
partners are running.
How well does the solution communicate with transactional ERP systems?
Does the technical architecture of the solution support scalability, i.e. can it grow as its
application in the organization grows?
Has the solution been developed organically or by acquisition?

Many AP S products, which have grown by acquisition, experience design integration
problems. What are the development plans for the product?
How much does it cost and what is its value potential?
How well does the solution address the specific needs of your industry? Are there
current reference sites available showing successful applications of this solution within
your industry?
4.1.3 The outsourcing solution
The increasing complexity and cost of maintaining I T systems in-house and the move
to focus more on core business activities have sent many organizations down the
outsourcing route. Apart from the strategic imperatives of cost, efficiency and short-
term profit performance, outsourcing also provides benefits at an IT level. The
complexity of ERP and SCM technologies (which are often in direct proportion to the
strategic value of the system to the company), the speed at which technology is
evolving, and the cost of specialist skills required to support these applications, means
outsourcing all or part of the management of an SCM system provides a cost effective
and flexible solution.
4.2 New techniques adopted by FMCG firms to improve efficiency
Companies looking at 10-20% improvement in production.
Fast moving consumer goods (FMCG) companies are looking at a 10-20 per cent
improvement in production and efficiency levels, thanks to adoption of new
technologies to track expansion of product portfolio, manufacturing locations,
aggregating godowns and shipment warehouses.
The new technology adoption by FMCG companies like Eveready, Marico, Emami
and Godrej Consumer Products, is expected to ensure faster access to shared
information, seamless integration, accuracy, cost-control and ease at the factory and
warehouse level. FMCG companies will spend around 10-15 per cent of net profit on
technology implementation and upgrade.
Over the last few years, most companies have forayed into a diverse portfolio of
businesses in FMCG alone, which has not only led to the rapid expansion of the
supply chain but has also enhanced its complexities.
Emami’s recent investment into IT, for instance, has ensured finalisation of its balance
sheet in a record 35 days, against the earlier norm of 60 days.
“We foresee a 10 per cent improvement in production and efficiency levels at Emami.
This will be achieved by implementing sales and operation planning, demand
management and distribution resource planning, which will enable system control to
forecast sales, check inventories at locations, plan manufacturing resources and
logistics to meet the customer schedules. It will also enable us to keep track of and
monitor finished goods inventories as our products are seasonal in nature,” according
to Manish Goenka, director, Emami Group.
Emami has implemented Wi-Fi at its corporate office. Also, for unified
communications, Cisco products like call manager and IP phones are under evaluation
and trial runs are on to connect the Emami corporate office with two factories in
Kolkata and Guwahati. This is expected to be implemented soon. A video conference
(VC) system has already been implemented at Emami corporate office.
“We have implemented SAP ECC 5.0 in all functions, including manufacturing and
supply chain that results in seamless integration of all business functions. This brings
about faster access to shared information, cost control and complete sales
information,” Goenka said.
It also helps in monitoring the inventory norms, no over stocking, MRP-generated

purchase requisition, control on finished goods from manufacturing date, as well as
secondary sales automation to get data instantly.
Emami is also introducing bar-coding at the warehouse for product identification,

traceability and managing finished good inventory.
Eveready, on its part, is investing close to Rs 3.5 crore, with a return-on-investment

(RoI) period of two years, to implement primary enterprise resource planning (ERP)
software and disaster recovery solutions from Hewlett-Packard. While the
infrastructure is being built by H-P, the implementation will be by IBM.
“We had diversified into new businesses like CFL and home light. We needed
advanced supply chain management software that would take care of end-to-end
demand management and market forecast and accordingly plan module for delivery
and despatch chain,” said Arup Choudhury, senior general manager (IT), Eveready.
Eveready currently has 34 warehouses in India and is looking to consolidate

operations into six mother warehouses, as a means to bring down overall costs.
“We expect to reduce inventory time to 10 days from 15 days right now. We also
intend to consolidate our warehouses into six, from 34 right now. Each mother
warehouse covers an area of 15-25,000 sq ft,” Choudhury said.
At Marico, the biggest challenge became its conventional financial management

processes and traditional methods of budgeting and strategic planning. The existing
system was not capable or flexible enough to incorporate the drastic surge in business.
Finance teams faced a number of problems when it came to collating data, managing
various budget versions and reporting, leaving Marico with a vast increase in manual
work, no time for critical analysis, and a strong need for an automated budgeting,
planning and reporting solution.
V Subramanyam, vice-president (information management), IBM Software Group

(India and South Asia), said: “Marico found that IBM Cognos TM1 helped take the
time and weight of collating, aggregating and reconciling data off their shoulders, had
a marked increase in flexibility and was easy to use. Employees found that they had
more time to analyse financial performance, identify opportunities and influence
better business outcomes, giving them a significant edge in the area of financial
performance management.”
Godrej Consumer Products, on its part, has outsourced its information technology (IT)
requirements to Hewlett-Packard (HP). H K Press, vice-chairman of Godrej
Consumer Products, said: “We have retained the core team of close to 7 people, the
remaining (around 23 people) have been shifted to H-P payrolls. H-P will take care of
both our software and hardware requirements for all kinds of operations.”
In the short-term, Godrej Consumer would be looking at reworking its supply chain
and logistics costs once goods and services tax (GST) is implemented from April
2010, and CST is phased out from 4 per cent to nil. The company also intends to
consolidate the FMCG companies in the Godrej Group and so, post-GST
implementation, it would be looking at how the group FMCG companies can get
together to use common depots and supply chain. This would not only reduce cost of
operations but also enable reduction of inventory levels.
4.2.1 RFID in the FMCG Supply Chain Management Application
The 20th century, the automatic identification industry can be said that the world of
bar code technology, since the 70 in the 20th century to promote the application of
the global bar code system of goods (that is, EAN-UPC system) Since the birth of bar
code technology in a rapidly developing situation occupation from the business-to-
industry, from warehousing to the flow of almost all data management applications,
can be said that the bar code technology on supply chain management, from the
commodity production, management and circulation is an important contribution to
the development of modern logistics, providing management, lower management
costs and the promotion of global economic integration process of laying a solid
foundation.
However, with the changing times and technology, constantly updated, bar-code
technology has been unable to meet existing Enterprise applications. Such as fast-
moving consumer goods supply chain management, as a result of the special nature of
the industry, short-cycle circulation of goods for goods in real-time transmission of
information requirements. The existing bar code technology within a short time from
a large number of commodities of goods to obtain information, the only way to be
man-made one-on-one on the way to complete the scan. Wal-Mart & RFID
program & The implementation of RFID is no doubt that in the fast-moving
consumer goods supply chain management in the development of a powerful fulcrum.
At present, many businesses have been aware of RFID in the FMCG industry, the
necessity of application of the domestic fast-moving consumer goods enterprises in
Guizhou Maotai Group has also launched a wine-based anti-counterfeiting RFID
technology research and application of RFID technology in supply chain management
applications. At the same time, as a fast-moving consumer goods supply chain
management is an integral part of the development of cold chain logistics needs of the
RFID technology more strongly.
4.2.2 System Solutions
To EPC Global standards for RFID smart label wireless Radio Frequency wave
through the issue, so that a new automatic identification technology breakthrough, in a
short period of 1 second, 200 commodities can read information, and through wireless
Internet data model to update. This technology into the entire supply chain of
enterprises, it will solve the existing bar code technology is not possible to identify a
number of product issues, the smallest unit for each of the flow of goods, the
establishment of a global symbol in order to achieve the entire supply goods chain in
real-time tracking and management. At the same time, greatly increased the fast-
moving consumer goods supply chain, the progress of the entire process.
System basic configuration:
(1) packaging using rf Tags: Smart Label sticker model, 915MHZ, ISO18000-6/EPC
standards, paste fixed position in the commodity.
(2) required RFID equipment: EPC Globe standards to support the two-standards-
compliant reader, and have the network interface; fixed reader; handheld terminals.
(3) software systems: label distribution system (including device drivers),

authentication system, the local database system and the local ERP system.
(4) other equipment: site computers and wireless Internet equipment.
4.2.3 RFID in the FMCG supply chain management applications in specific aspects
of To soft drinks as an example, manufacturers of RFID in the context of the
production line, the use of shipping links; in logistics and distribution sectors of
warehousing, distribution, transportation applications, as well as the shelves at the
retail chain management, order management, sales management, etc. applications.
Soft drinks cans in each package are the use of a RF tag. Tags size in each tab has a
sand equivalent of an electronic chip and antenna. In this tab of the micro-chip storage
of the electronic product code, or EPC. Cans of soft drink each have a unique EPC
code.
4.2.4 RFID applications in the manufacturing chain. Carried out in the beverage
filling lines, the lines at various locations on the RF tag reading equipment will be
automatically sent the data read command, and receive feedback from the label. The
data collected by the production control systems and records, and further into the
enterprise production management system, automatic counting and tracking database
product. At the end of lines, canned drinks have been put into the box, in the same box
with a RF tag, when a box of finished beverage packaging and production control
system of RF would be label printer driver (a special electronic chip to write data,
printers, usually at the same time the existing functions of barcode printers), will be
detailed information on the box (Transport bar, production date, etc.) to write to this
tab, at the same time, data storage management system into production in. These
boxes, stored in the warehouse when he was placed in the tray, each tray also has a
RFID label. Delivery platform in the top of the door there is a RFID reader device,
when the tray through the door, the read-wave radio equipment, the activation of these
labels. At this point, the label wake up over and began to send their EPC, a reader
only a label statement. It will be followed by rapid opening and closing of these
labels, until the entire label reading so far. Mature technology on the current view,
every second, RFID reader equipment can successfully read the RFID tags 200. First
of all, this information was passed to the software system, and then in the local area
network or the Internet service system to resolve the object (ONS), search with the
EPC-related commodities, like the Internet, like the registration, ONS role is the
software system data into the enterprise database, and retrieve objects Network. Data
for each product will be a physical markup language (PML) to store, similar to the
popular XML, can perform some tasks common enterprise. Tag reading equipment
and systems, will receive EPC data transfer, while the follow-up drive system. The
system via the Internet (objects networking) to the Object Name Service (ONS)
database to send information, the database is like a reverse telephone directory
service, that is, according to numbers provided by the address received; ONS server
EPC encoding and there are a large number of the product information that matches
the server address, the data all over the world not only for the use of software systems,
and software systems can be automatically added to the data; PML (Physical Markup
Language) server, storage of the data integrity of the plant products, in the example, it
identified the EPC code is received by a certain company canned drinks Cherry
Hydro. Software system as a result of inquiries to know the orders issued by the
location of the reader, so that it now also know which manufacturers can drink it, if
there is the issue of product quality, with this information can be easily traced back to
the source of the problem in order to achieve the tracking of products.
4.2.5 RFID in distribution and retail part of the application. Now, the whole of the
soft drinks packaging is transported to a distribution centre, located in front of the
loading dock platform RFID reader to work, will be packing all of the beverages out
of the EPC code to read. Because RFID can be collected non-contact, or even read
through the box, so there is no need for the loading dock to get checked out of the box
with the real information and the number of packaged goods. Tag read device data
obtained by the introduction of software systems, objects in the whole network, then
drink a change in location information. After the distribution centre business
processes, goods were delivered to retail outlets, in the ship on the platform, RF tags
are read once, when entering the warehouse when the retail outlets, RF tags are read
again, read the course of these two to verify the accuracy of the process of logistics
and transport, while the location of the new information reflected in the complex
network. Beverages served on the warehouse, the retail outlets of goods inventory
information was changed, so that shopping mall computer system of the soft drinks
will be able to achieve real-time monitoring of inventory to ensure that goods.
Similarly, the shelves of shopping malls also integrates the RF tag reading equipment,
when a staff member to the shelf replenishment, the use of hand-held reader will drink
the corresponding information is recorded in the shelf inventory. At this point, a
customer bought 6 cans of beverages, to the shopping centre shelf replenishment will
be issued a news system, the system is based on real-time inventory information (and
warehouse shelves in the number of goods) to determine whether to order, if the stock
of goods on the shelf down to a certain extent, but also to the staff to send
replenishment information.
4.2.6 RFID has brought convenience to customers. RFID technology also the
convenience of our customers. Customers can in the supermarket to the RFID device
in the pre-understanding of a variety of information products, including
manufacturers, production dates, such as product quality. In addition, customers do
not need to wait a long time to pay bill, just pushing through the selected items,
together with the door tag reading equipment on the list. The door of the reader
through the goods EPC, to identify the shopping cart items and automatically
complete the checkout, customers simply swipe card or credit card payment can be
left. Drinks were brought home in their refrigerator when the refrigerator on the same
label reader will automatically record these commodities, which constitute a small
inventory management system; when removed from the refrigerator can drink it, it
will be that was finished, when the refrigerator inventory change. Such as inventory
management has continued to the next, the refrigerator will provide a copy of its out-
of-stock list. RFID is the home refrigerator.
Finally, the beverage cans to complete its mission, was sent to recycling centers, RF
tags in the Recycling Center are automatically sorted into the appropriate re-use
categories.
4.2.7 RFID cold-chain logistics in the application Cold-chain logistics management

refers to the temperature-sensitive products in the production, storage and
transportation, marketing, to consumption in every aspect of the former is always
provided for low-temperature environment, in order to ensure the quality of goods and
reduce wear and tear of a logistics systems engineering, is frozen Technology-based
refrigeration technology as a means of low-temperature logistics process. Fast-moving
consumer goods in the dairy products, cold drinks, aquatic products, meat and other
fresh foods have to be cold-chain transport. Fast-moving consumer goods supply
chain as an important part, cold-chain logistics applications of RFID more intense.
The original cold-chain logistics management tool monitoring techniques is the
largest technology lags behind the bottleneck at this stage of our technology to the
main crux of the matter is: artificial measurement and paper records; unified data
systems support; real-time poor, out of line monitoring; evidence of the difficulties
can not be determined responsibility; no warning, such as the loss rate is high. In this
regard, the industry hopes will be the introduction of advanced RFID technology
needs proper temperature management of the logistics management and production
process management, temperature changes will be recorded in the "zone of the
RF temperature sensor label on the fresh products, the quality and meticulous , real-
time management.
Temperature sensor with RF tags and applications areas can do is: RF tag data storage
capacity, can be reused, the use of low cost, easy to operate, within 30 meters in
distance learning. At the same time, RF tags provide the ID code, and continuous
record of temperature data, there are accurate time records, easier to define liability
for retrospective information, you can quickly grasp the fresh degree of management
of the most important transit temperature conditions, and to promote the flow of the
process management of the fresh degree of improvement. If necessary, RFID can also
expand the grounds of the establishment of enterprises or Union-wide cold chain cold
chain monitoring centre processes data platform. In fact, RFID system works is very
simple. Will be collected as long as the temperature of temperature sensor into the
timing of the chip RFID tags, RF tags when the RFID reader antenna receiving the
signal, it will be the temperature inside the RFID chip data upload to the RFID reader
by the back-end system. The system can be managed in a real-time monitoring of
temperature change material, to achieve real-time monitoring, early warning
management. Can also read all the point-to-point one-time supply chain temperature
data, to generate static temperature charts, simply complete the supply chain of
temperature regulation.
With the RFID technology is getting more mature, if the supplier RF tags can further
reduce the price to domestic supermarkets to accept the price of RFID also the
relevant domestic policies introduced, then the full realization of the domestic
supermarket just around the corner of the application of RFID is still, after all, RFID
technology for all to see.
RFID applications is the future of information highlights the areas of systems

integration, RFID in the application of fast-moving consumer goods industry is bound
to raise the fast-moving consumer goods supply chain efficiency, reduce inventory,
reduce costs and improve consumer satisfaction. Which in the cold-chain logistics
RFID applications and RFID solutions for food safety issued, it is bound to give
reassuring consumers of food and medicine for the human to make new contributions
to the well-being.
4.3 GREEN Supply Chain Management
The climate change is happening faster and will bring bigger changes quicker than
anticipated. Ironically, market and the nature hitting the wall at once, is a sign that we
need to find better ways to be more sustainable options.
Whether the drive is to comply with the government regulations or to meet the
customers’ expectations companies are finding motivation to go green. Going green
does not just impact company’s thinking and strategy but influences supply chain as
well. Righteously, the focus is not just to attain cleaner water consumption and
alternative energy sources for server farms, but to make supply chains more
environmentally friendly.
Yet, despite the potential for significant gains, most supply chain managers are still
not focusing on environmental concerns. Typical to any supply chain are the
following processes and functions, which support the complete cycle of material
flows. Each of these functions has a profound impact on the environment.
Environment Management System:

After adopting the Green Supply Chain Management (GCSM), next in line are EMSs
or Environment Management Systems. Although the role coincides with the GCSM,
EMSs are strategic management approaches that define how an organization will
address its impact on the natural environment. More than 88,800 facilities worldwide
had certified their environmental management systems (EMS) to ISO 14001, the
global EMS standard, and thousands more had adopted uncertified EMSs6.
An EMS consists of a collection of internal policies, assessments, plans and
implementation actions affecting the entire organization and its relationship+s with
the natural environment. Although the specific institutional features of EMSs vary
across organizations, all EMSs involve establishing an environmental policy or plan;
undergoing internal assessments of the organization’s environmental impacts
(including quantification of those impacts and how they have changed over time);
creating quantifiable goals to reduce environmental impacts, providing resources and
training workers; checking implementation progress through systematic auditing to
ensure that goals are being reached; correcting deviations from goal attainment; and
undergoing management review7.
EMSs are intended to help organizations embed environmental practices deep within
their operational frameworks so that protecting the natural environment becomes an
integral element of their overall business strategy. EMSs implementation requires
companies to get ISO 14001 certified. ISO 14001 adoptions requires certification by
an independent third party auditor who helps to ensure that the EMS conforms to the
ISO 14001 standard. Once certified, the ISO 14001 label indicates that the
organization has implemented a management system that documents the
organization’s pollution aspects and impacts, and identifies a pollution prevention
process that is continually improved over time7. For example, Federal Foam
Technologies, Inc., a Minnesota-based company, adopted an EMS and certified it to
ISO 14001. By relying on its EMS structure, the firm reduced its annual landfill use
by 40 percent, and decreased its associated disposal costs and liability risks7.
Although organizations have been using EMSs to be more environmentally
sustainable, issue is that EMSs do not require organizations to improve their
environmental performance, instead focus on creating and documenting
environmental policies and procedures. EMSs therefore may represent only symbolic
efforts to improve an organization’s image.
The relationship between EMSs and GSCM practices has potentially complementary
and significant implications for an organization’s environmental sustainability
because together they offer a more comprehensive means of defining and establishing
sustainability among networks of business organizations7. However, when EMSs are
adopted in the absence of GSCM, environmental benefits are likely to diminish. This
is because the organization’s supply chain network does not share its environmental
goals and environmental sustainability of any organization is impossible without
incorporating GSCM practices.
Case Study 1:
A large Chicago-based electric utility company, with annual revenues of
approximately $7 billion, demonstrated that electric utilities and other companies can
successfully and substantially reduce their costs and environmental burdens with
innovative accounting practices.
Analyses of the total cost of managing materials and equipment revealed that the costs
related to environmental management were often overlooked. In the first phase of life
cycle management activities, company minimized the chemical inventories at
generating stations. After realizing its successes, company launched a formal Life
Cycle Management (LCM) initiative. Since then a small, dedicated LCM staff has
formed effective partnerships with the operating divisions to systematically assess life
cycle costs and benefits. This initiative has not only reduced waste volume but also
provided over $50 million in financial benefits. These gains include improvements in
supply chain management, facility management, and other business processes,
accruing to the supply chain activities.
Case Study 2:
As the largest manufacturer of wood windows and patio doors in North America, the
company achieved substantial financial and environmental benefits when it began
incorporating environmental considerations into its purchasing, materials handling,
inventory and disposition decisions.
Started as a directive to the staff to reduce emission levels of toxic chemicals; soon
became a Corporate Pollution Prevention Team whose mission was to eliminate the
use, release and transfer of hazardous chemicals.
The team conducted a waste accounting project, developed waste reduction goals, and
justified waste reduction projects by developing several business cases that quantified
environmental and other cost savings. For example, the team justified the purchase of
an improved system for mixing paints at point-of-use based on the savings from
improved material usage rates and reduced waste. Based on their initial success,
company managers recognized that a more systematic implementation of
environmental accounting techniques would improve their ability to make strong
business cases for a wide range of projects. Accordingly, they developed procedures
for environmental cost assessments for a number of supply chain management
activities. The process leads to more comprehensive and lucid business cases,
including detailed Internal Rate of Return (IRR) schedules that incorporate savings
from increased material efficiency and reduced waste streams.
Conclusion
With companies waking up to an environmentally aware world, whether it’s about the
competitive advantage or for regulatory reasons, greening the supply chain has
become a necessity. Greening the supply chain is not a onetime exercise, nor can it be
done overnight. It’s a journey that not only requires the four major functions -
purchasing and in-bound logistics, production, distribution and out-bound logistics,
and reverses logistics- to be the drivers, but also requires organizations to adopt an
EMS system.
EMS and GSCM adoption may not just provide a vehicle for organizations to “signal”
to market participants that their environmental strategies adhere to or exceed generally
accepted environmental standards but also lead to greater acceptance of the
organization’s strategic approach and insulate organizations from competitors’
criticisms.
5. Future of Supply Chain Management
5.1 A new approach essential to survival in the 21st

century
- An interview with David Simchi-Levi by Penny Guyer
Supply chain strategies and management have, of course, always been a vital part of
any manufacturer’s or distributor’s profit picture. Despite this obvious fact, until
recently they were generally left to an ad hoc method of planning and execution.
Coordination and long-range planning were rarely part of the landscape for managers
in warehousing and shipping. There was certainly no full-fledged academic approach
to logistics management. That is hardly the case today. There now exist full-scale
programs at major universities for studying logistics and supply chain management.
Although these programs have existed for awhile, it is really only with the explosive
growth of the Internet that these formal study opportunities have attracted companies’
attention. One of the nation’s leading programs is the Centre for Transportation
Studies (CTS) Massachusetts Institute of Technology (MIT). CTS recently held its
annual Affiliates Day Event in Louisville, Kentucky, hosted by UPS. One of the
featured speakers was David Simchi- Levi, a professor of Engineering Systems at
MIT, who discussed the trends in e - commerce and supply chain management.
Professor Simchi-Levi is prominent in the field of logistics and supply chain
management. He has co-authored a prize-winning book, Designing and Managing the
Supply Chain, on the subject and teaches these topics at the undergraduate, graduate
and the executive levels. Simchi-Levi is also a technology entrepreneur and is founder
and chairman of LogicTools Inc. (www. logic-tools.com ), a software development
company focusing on tools for logistics and supply chain management. LogicTools’
software, LogicNet, a decision support system that facilitates strategic planning for
distribution systems, was featured in the April 2000 issue of Parcel in the article
“Designing Perfect Distribution Channels.”
During the fall of 2000, once-mighty dot-coms were dropping faster than the leaves.
Most of the demises were a result of the disenchantment of investors — and they had
a good reason: the companies were simply not making money. Why not? Primarily
because the companies’ supply chains were not functioning well, resulting in ongoing
operating losses as well as many dissatisfied customers.
It is becoming clear to those in Internet-based commerce as well as the traditional

brick-and mortar businesses that a brand new approach to supply chain management
is essential to survival in the 21st century. The following is a conversation with David
Simchi-Levi on his view of the future of supply chain management.
Let ’s start with the basics. What is your definition of “supply chain
management?”
Supply chain management is efficient integration of suppliers factories, warehouses

and stores, so that merchandise is produced in the right quantities and distributed to
the right location at the right time, so as to minimize total system cost while satisfying
service requirements. The primary objective is to reduce total costs - not just
inventory or transportation costs. In an efficient supply chain strategy, the
firm will, for instance, increase transportation costs but will be able to reduce total
costs by reducing inventory costs. This implies the firm needs to integrate all areas:
purchasing, manufacturing, warehousing and customers. In order to do this, you have
to overcome their conflicting objectives.
Conflicting objectives?
Suppliers typically want manufacturers to commit themselves to purchasing large

quantities in stable volume requirements with flexible delivery times. Of course,
manufacturers like buying in large quantities, since this implies all sorts of volume
and transportation discounts, as well as the ability to implement long production runs
that reduce production costs. Unfortunately, manufacturers also need flexibility so that
if customer demand is that much higher than anticipated, they can receive more raw
materials from the suppliers.
But, on the other hand, if customer demand is much smaller than anticipated, the
manufacturer wants the ability to return inventory. Hence, the suppliers’ objectives are
in direct conflict with the manufacturers’ desires for flexibility.
Note that the manufacturers’ objective of implementing long production runs typically
implies large inventory, which conflicts with the warehouses’ objectives. In fact,
warehouse managers wish to keep their inventories low, but with quick replenishment
capabilities. These goals, of course, increase transportation costs but greatly reduce
inventory costs.
And finally, the customers want the best of all worlds: they want a short order lead
time — instant gratification. They want their suppliers to have large stocks on hand
with a huge variety of products ready to ship immediately. And naturally, they want
low prices.
Each of these areas has a laudable goal. What’s needed, however, is integration; the
objective must be to reduce total cost and increase service levels. In that process, the
firm may have to increase inventory or transportation costs. However, by integrating
supply, manufacturing and logistics activities and by strategically optimizing the
performance of each, overall costs can be reduced.
This is exactly why many companies are engaged in strategic partnering and alliances
with both customers and suppliers. These strategies allow supply chain partners to
deal with conflicting objectives and efficiently integrate the supply chain.
In your presentation, you mentioned “the bullwhip effect” as a result of non-

integration of supply chain links. Can you explain?
The bullwhip effect is a term coined by Procter and Gamble to describe a problem
they observed in the supply chain for Pampers, its disposable diapers. Babies use a
pretty steady number of diapers daily. (Editor’s note: unless the father decides to feed
a six-month-old an eight-ounce bottle of prune juice, as in the case of the editor’s
daughter). But the orders placed by retailers to distributors showed a good deal of
variability. The orders from the distributors to the suppliers were even wider in their
swings.
The farther up the supply stream you go, the wider the swings in order quantities. In
the end, Procter and Gamble’s manufacturing plants were receiving orders that were
far out of proportion to customer demand.
The bullwhip effect stems from a number of sources. First, traditional inventory
management techniques practiced at each level of the supply chain lead to the
bullwhip effect. This is due to the need of each level in the supply chain to forecast
demand.
An important characteristic of all forecasts is that the more data we receive the more
we modify the forecast and therefore the inventory policy, leading to an increase in
variability. Second, volume discounts, transportation discounts and promotional
activities tend to destroy the structure of customer demand, forcing retailers to order
less frequently than customer demand, and therefore increase variability in the supply
chain. Finally, the longer the lead-time in the supply chain the larger the increase in
variability.
Obviously, the bullwhip effect has important consequences. As variability in the

supply chain increases, inventory levels must increase, or alternatively, service levels
decrease. In addition, the increase in variability makes it very difficult for warehouses
and manufacturing plants to manage resources effectively. That is, it is not clear
whether resources should be managed based on peak demand or average demand.
Either way, cost is going to increase. For instance, if transportation capacity is
managed based on average demand, during peak demand the firm will need extra
capacity, which comes at a premium.
But you see e-business as the means of changing that?
Yes. E-business can eliminate the bullwhip effect, thus reducing costs and increasing
profits but also increasing service levels and flexibility. Here, I am focusing on
providing each stage of the supply chain with complete information on customer
demand, so-called “supply chain visibility.” Supply chain visibility can reduce the
bullwhip effect: if customer demand information is shared among supply chain
partners, each stage of the supply chain can the use actual customer demand to create
more accurate forecasts, rather than relying on orders received from the previous
stage, which can vary more than customer demand.
Is e-business just another term for Internet commerce?
No, e-business is far more than e-commerce. E-commerce is defined as the ability to
perform transactions electronically. Thus, e-commerce is a part of e-business. E-
business, on the other hand, is the process of redefining a business model using the
Internet to improve the extended enterprise performance. Thus, the focus in
e-business is on using the Web to improve intra-organizational, B2B and B2C
processes and transactions.
So, you see e-business changing the supply chain?
Definitely, In fact e-business suggests a shift from the traditional “push” supply chain
strategy to a new supply chain model called “push/pull” strategy. A push system is a
traditional supply chain where production and distribution are based on forecasts. The
problem with that is that “forecasts are always wrong.” You can be close but never
precisely on the mark. It is difficult to predict customer demand and therefore difficult
to match supply and demand. And the farther out the forecast, the less accurate it is.
Thus, a push system is very susceptible to the bullwhip effect.
In the early days of the Internet and the dot-com companies, many believed that the
Internet suggested a completely different supply chain strategy, a pull system. In a
pull strategy, customer, rather than forecast, demand drives production and
distribution. That is, in just a pure pull system, the firm does not hold any inventory
and only produces to order. These systems are intuitively very attractive since they
allow the firm to eliminate inventory , reduce the bullwhip effect, increase service
levels, etc.
Unfortunately, it is very difficult to implement a pull supply chain strategy if there are
long lead times in the supply chain. Similarly, a pull strategy does not take advantage
of economies of scale, since production and distribution are in response to specific
customer demand, and therefore batch production or fully loaded trucks are hard to
achieve. These advantages and disadvantages of push and pull supply chains have led
companies to look for a new supply chain strategy that takes advantage of the best of
both worlds; enter a hybrid of the two systems, that is, push /pull supply chain
systems.
How does that work?
Consider a PC manufacturer. Typically, a PC manufacturer builds to stock and thus

makes all production and distribution decisions based on forecast. This is a typical
push system. In a push/pull strategy, the manufacturer will build to order. This implies
that component inventory is managed based on forecast, but the final assembly is
made in response to a specific customer request. So, the push part is part of the
manufacturer’s supply chain prior to assembly, while the pull part is the part of the
supply chain that starts with assembly and is based on actual customer demand. Dell
Computers is an excellent example of the impact the push / pull system has on supply
chain performance.
The book industry is a good example of the evolution of supply chain strategies from
push to pull and then to push /pull. Barnes and Noble, for example, has a typical push
supply chain. When Amazon.com started about four years ago, its supply chain was a
pure pull system — with no warehouses and no stock. Actually, Ingram Books filled
orders to meet customer demand. But this arrangement simply did not work well.
Today, Amazon.com has seven warehouses around the country where it stocks most of
the titles it sells. Thus, inventory at the warehouses is managed based on a push
strategy (based on forecast) while demand is satisfied based on individual request, a
pull strategy.
The online grocery industry is another excellent example. When Peapod was founded
11 years ago, the idea was to establish a pure pull strategy with no inventory and no
facilities. When a customer ordered groceries, Peapod would pick up the products at a
nearby supermarket. Unfortunately, stock-out rates at the supermarkets were very
high. In the last few years, Peapod changed its business model to a push / pull
strategy, adding a number of warehouses; stock out rates are now less than 2%. Of
course, in this industry there are other challenges, especially reducing transportation
costs. The problem is that no online grocer has the geographic density of customers
that will allow them to control transportation costs and therefore compete with
traditional supermarkets.
So, this sounds as though online distributors need to have an infrastructure

of, yes, good old warehouses and distribution centres around the country or
world.
Precisely, In that respect, brick-and-mortar to click-and-mortar companies (those that

have added an Internet shopping to their services) have a huge advantage over the
pure Internet companies.
They already have distribution and warehousing infrastructure in place. Wal-Mart, K-

Mart, Target and Barnes and Noble, as a few examples, have all established virtual
retail stores, serviced by their existing warehousing and distribution structures.
As a result of going online, click-and-mortars have now changed their approaches to

stocking their various warehouses. High volume products or products for which the
demand can be matched with supply, are stocked locally in the stores, while low
volume products are stocked centrally for online purchasing.
Can brick-and-mortar companies take advantage of the Internet in other

ways?
Yes. One important strategy used by retailers and suppliers is called collaborative
planning, forecasting and replenishment (CPFR). CPFR is a process in which supply
chain partners coordinate plans to better match supply and demand. This strategy was
first developed and implemented successfully by Wal-Mart in collaboration with
Warner-Lambert in early 1995.
The CPFR process, as implemented by these companies, requires buyers and sellers
to:
1. Establish a front-end agreement and a joint business plan (collaborative planning).
2. Create a sales forecast, identify and resolve exceptions (collaborative forecasting).
3. Create an order forecast (collaborative replenishment).
How do these new supply chain strategies affect the parcel industry?
The new developments in supply chain strategies mean good news for the parcel
industry. Both the pull and the push/pull system rely heavily on individual parcel
shipments rather than bulk shipments. This is especially true in the B2C area where a
new term has been coined: e-fulfillment.
Another impact of e-fulfillment on the parcel industry is the significant increase in

reverse logistics. Indeed, in the B2C arena, e-fulfillment typically means that the
supplier needs to handle many returns, each of which consists of a small shipment.
Parcel shipping is already set up to handle these returns, a major issue in B2C and in
B2B commerce. E-fulfillment logistics requires short lead times, global dispersion
and the ability to reverse the flow easily from B2C to C2B. Only parcel shipping can
do all that. Thus, the future looks promising for the parcel shipping industry. This will
be especially true for those carriers and consolidators who work to modify their own
systems in order to integrate them with their customers’ supply chains.
7.2 Rural Supply Chain Networks: The Future
Rural supply chains are the next big issue for researchers and businesses in India and
China. The reasons are simple: the urban areas are congested with deteriorating
quality of life and saturated markets. Nearly 60 per cent of India’s population live in
rural areas, and forecasts indicate that these numbers will remain the same, even in
2050. There would be 800 million people living in Indian rural areas in the 2040-’50s,
providing the scale and the markets for commodity supply chains to thrive. Thus,
there is a need for transforming rural India into a group of sophisticated vibrant
activity centres. Innovations in every layer – products, processes, business models,
and service models – are fundamental for this transformation process to happen.
Businesses need to be reinvented with high technology tools that can provide
employment and services for millions of rural dwellers at an affordable cost. In this
article, we provide an integrated framework, and also a glimpse of those technologies
and models that might work in rural scenarios.
7.2.1 Introduction
What is ‘global,’ ‘urban,’ and ‘rural?’ The difference between urban centres and
rural areas may seem so obvious. The criteria used include population size and
density, and availability of services such as communication, education, healthcare and
finance. Different population thresholds are used for different countries: for African
nations, it is 5,000 inhabitants, while for Latin American and European nations, it is
2,000 or 2,500, or even less. A large proportion of settlements classified as ‘rural’ in
China and India would fall within the ‘urban’ category, if these population thresholds
are adopted. Investments in services and infrastructure tend to concentrate on urban
areas. MNCs choose cities with good logistics and IT, educational and financial
infrastructure, and power and water facilities for FDI. As a consequence, investments
for betterment of rural areas are generally done by governments. Thus, rural supply
chains dealing with agro-products, handicrafts, toys, textiles and apparels emanate
from villages and small towns with not so sophisticated infrastructure and lifestyles.
The rural areas host the tail-end of very important food and apparel supply chain
networks, whether they are rural, urban or global. Global supply chains cross
countries and can originate either in urban or rural areas, depending on the product.
For example, American and European retailers source fruits, vegetables, meat, leather
and apparel products from rural areas in low-cost countries. Also, supply chains
migrate from local to global, urban to rural, and vice-versa. The first wave of
supermarket revolution occurred extremely fast in urban areas, with high sales growth
rates. The second wave starts with diffusion into second tier areas and the third wave
starts when super markets move in to rural areas. Rural retailing is portrayed as the
next sunrise segment in retailing space. Strategies and development initiatives have
been implemented all across the world to alleviate rural areas from these inflictions by
formulating revenue generating programmes. For example, in the US, agricultural
prospects of different regions have been identified and a cluster mechanism has been
adopted. In South Africa, policy measures have been taken to alleviate the Negro
community by providing agricultural lands on grant basis. In Thailand and Japan, the
concept of “One Village One Product” has evolved, which improved the prosperity of
rural communities in these countries. The model of Grameen Banks in Bangladesh
gave birth to the concept of “Micro-credit.” In India, there were several public and
private sector initiatives in the areas of agriculture, aquaculture, and also for
supplying farm inputs to the farmers.
For example, the Bharat Nirman project, with an allocation of Rs. 1.76 trillion aims to
build roads, provide electricity to 100,000 villages, extend irrigation to 10 million
hectares, or 24.7 million acres, and build 6 million houses by 2009. Across the
country, companies like HLL, Godrej Aadhar, DCM Hariyali Kisaan Bazaar, Triveni
Khushhali, ITC Sagar Choupal and Tata Kisan Sansar are helping farmers earn a
better livelihood. The Indian rural areas host two kinds of supply chains: food
products and apparel; and furniture, leather items and toys. In agri-business sector, the
food processing industry is small and factories are located nearer to demand centres,
i.e., in big cities or their outskirts. Integrating the agribusiness and SME sectors into
the global value chain is high priority item for India for the following reasons:
• India has 12.4 million SMEs, contributes 7 per cent of GDP, 35 per cent of exports,
over 29.5 million employed.
• In India, 51 per cent is cultivable land. India is ranked in the top-fi ve list in many
agricultural produce like vegetables, fruits, milk, animal husbandry, etc. But the
revenue generated from these resources does not match its optimal potential. With
growing importance for processed foods, the food processing industry in India still
remains at 1.6 per cent, while in countries like Thailand and Brazil, it is 65-75 per
cent. The wastage that goes into the agri-produce is almost 30 per cent.
• Retail in India is another vibrant story that is least saturated with global markets.
Currently there are 12 million retail outlets employing 21 million (7 per cent of total
work force) people, and these provide no entry barriers for big players. Organised
retail segment in India is small now, but has tremendous market size in urban and
rural areas.
Thus, the priority in India today is to develop its local rural and urban supply
chains and integrate them into the global value stream.
7.2.2 The Rural Supply Chain Network
Figure 15 presents an Input-Output representation of a rural supply chain.

An integrated rural supply chain network (IRSN) (see Figure 16) is a group of
independent companies, often located in different regions, forming a strategic
alliance with the common goal of designing, manufacturing, and delivering right-
quality products and services to customer groups, faster than others. They compete
with similar cooperating networks. The IRSN is an integration of three different well
designed sub-networks for handling transfer of goods, information and funds: a
logistics network, an information technology network and a financial network. The
logistics network provides a streamlined material flow among all partners, cutting
down lead time and cost of moving raw materials, sub-assemblies, and fi nished goods
to their destinations. An extranet – a secure and reliable communications network
linking all companies of the enterprise – provides information integration enabling
efficient logistics and effective decision-making.
There is also a secure financial network that connects financing, insurance and
creditrating agencies, and all other stakeholders and financial institutions. Thus, we
see that the eco-system that enables an agile rural supply chain has players from
farming,
Figure 16: Input–Output Representation of Rural Supply Chain Network

“We need to reinvent rural supply chain networks using high technologies, keeping in
mind the inefficiencies and constraints imposed by the infrastructure and economic
environment.”
manufacturing, retailing, financing and finally from the customers. This is an ideal
rural supply-demand-financial chain and the current state of the Indian rural chains
is far from it. Currently in India, there are attempts to connect stakeholder’s
information networks through messaging, wireless phones, Internet kiosks, etc., but
these attempts are for supply of information rather than for efficient control of the
supply chain or for supply demand matching. The logistics network is the one that is
often blamed for bad roads, lack of cold chain, manual handling, slow transport such
as bullock-carts or tractors.
Rural financial networks exist with the support of organisations such as the World
Bank. The aim of rural supply chain in India is to reach the ideal described above,
using Internet and other technologies, to create agility in networks. The rural supply
chain stakeholders and researchers can learn from the well developed industrial goods
supply chains. The idea is to transform the way agriculture works and create a
business orientation among farming community.
7.2.3 Reinventing the Rural Supply Chain
We need to reinvent rural supply chain networks using high technologies, keeping
in mind the inefficiencies and constraints imposed by the infrastructure and economic
environment. To do this, we have identified two value-delivery processes in the food
supply chain for re-engineering: the production and sale of commodities by farmers,
and rural retail network. First, we present a decomposition of rural food supply chain
into its component value delivery processes.
7.2.4 Value Delivery Processes in the IRSN:
Operationally, the IRSN has four core value delivery processes. It is important that all
four processes are managed to work in harmony for the entire supply chain to be
competitive. The core business processes in a rural production organisation are as
follows:
• Procurement (procurement of farm inputs, procurement of fresh produce)

• Production of basic agriculture products (farming and non-farming)
• Processing (processing of fresh produce – grains, fruits, vegetables)
• Retailing (rural and urban retailing)
The support processes assisting the above core business processes can be identified as
follows: technology, transportation including cold–chain, mobile communications
technology, knowledge processes – pre-harvesting and post-harvesting techniques,
handling, packaging, and processing techniques, resource management and marketing,
and finally financial services.
Figure 17: Integrated Rural Supply Chain Network
7.2.5 Production of Basic Agriculture Products (Farming): A New Model
The ISB Kisan bandhu (IKB) model has been developed by the faculty of Centre
for Global Logistics and Manufacturing Strategies (GLAMS). A proof of concept
experiment and also a total supply chain design study are currently underway at
the Centre. The primary function of IKB is to enable farmers to sell their produce
at a fair price. It consists of a cyber intermediary (information and business
exchange), a commodity exchange, and logistics provider, quality grading teams,
finance and insurance agencies. The cyber intermediary maintains an updated
database of registered farmers, logistics providers, brokers, retailers, mandi managers,
food manufacturers and exporters. It also has real-time market information,
commodity exchanges information trading different goods, and other marketing
information useful to the farmer. The IKB is a sophisticated exchange, with natural
language processing capabilities, and farmer can deal directly using his cell phone and
transact in his native language. The farmer can get feedback on processing of the
transaction on TV channel at prescribed timings. The IKB can also be used for
procurement of inputs for farming.
7.2.6 Rural Retailing
In India, rural retailing can get support from omnipresent post office. The rural retail
group places an order with the call centre via post office, which communicates the
order to the State Distribution Centre (SDC). The SDC will pass on the details of the
order to the district/local distributor located near the village. Depending upon the type
of order, goods can be delivered. All consumer durables can be delivered by post
office mobile vans. Perishable and FMCG goods can be delivered by road transport to
the post office, who can distribute it to the village retail group. The payment for goods
will be handled by post office. Thus, IT enabling the post office, which is both a
delivery channel, as well as bank, will provide much needed supply chain visibility in
rural supply chain networks, in general, and retail networks, in particular.
7.2.7 Small Scale Industries in Rural Areas
There are several garment manufacturing and export centres – Ludhiana, Tiruppur,
Bangalore, Mumbai, Chennai, Jaipur and Delhi – exporting to USA, UAE, UK,
Germany, France and other EU countries. Major competitors are China, Bangladesh,
Indonesia, Sri Lanka, Pakistan and other Southeast Asian countries. There is a huge
opportunity – both in exports and domestic markets – for textile SMEs in Punjab,
provided there is attention to supply chain aspects like knowledge and information,
services like logistics and finance, and resource management. The Orchestrator model
(figure 17) is a widely popular model, based on the supply chain practice of several
MNCs, with a strong hold in the businesses of export sourcing, distribution and
retailing. In the above model, groups of SMEs, with competencies in several
production activities, necessary for manufacture of garments, fabrics, etc., partner and
coordinate with the product cycle. The supply and demand sides are bridged by an
orchestrator, who will pool the customer requirements and monitor production
activity, ensuring that there is appropriate matching between market needs and supply.
Figure 18: Orchestrator Business Model

Conclusion
8. Conclusion
The clubbing of various SCM practices of Indian FMCG organizations emerged as

few exclusive factors through research study, which were different on agreement
continuum and adoption continuum from each other. The result of study revealed that
supply chain partnership and supply chain networking are considered to be
dominating factors for Indian FMCG organizations. This seems to be quite true with
the rapid spread and development of IT and telecommunication tools and techniques
throughout India, which is facilitating the bi-directional flow of information and
enhanced level of coordination and collaboration. Besides that leanness or operational
efficiency factors have high degree of agreement but low level of adoption. The
reasons behind the same are basically infrastructural bottlenecks and the presence of
unskilled and semi-skilled suppliers at backend and distributors at front end of the
supply chain. However, cross functionality and strategic outsourcing are leading on
adoption continuum.
A truly integrated supply chain requires a huge amount of commitment by all

members of the supply chain. The focal firm might require to overhaul the purchasing
process and integrate suppliers’ R&D teams directly into its own decision making
processes so as to leverage on it’s own core competency and partners’ core
capabilities. Integrating the purchasing and logistics processes with other key
corporate processes creates a closely linked set of manufacturing and distribution
processes. It further allows focal firm to deliver products and services to both internal
and external customers in a more timely and effective manner.
The future belongs to rural supply chains. With more than four billion people living
in rural areas, there is a tremendous need to focus attention on issues of product
designs, production, marketing and retail of food, and other electric and
communication items in rural areas at affordable prices. India has a huge
opportunity to become a leading global food supplier, as well as global garment
suppliers, if correct strategies are put in place and encouraged.
As the Case Study of Supply Chain Management, explains us the reason why Marico
Ltd is considered as India’s one of the top most FMCG Company. If we look at
current position then:
 Marico has India’s Most Trusted Brands
 Reaching over 25lacs Retail Outlets
 Rs. 23.9 billion (USD 478 million) Turnover
 In Beauty & Wellness Solution – Enjoying Leadership Position
 Overseas Consumer Product Franchise among the Largest for Indian Company
All this becomes possible because of effective supply chain management in Marico
Ltd.
Conclusion
REFERENCES
BOOKS/ eBOOKS / RESEARCH REPORTS / ARTICLES / PUBLICATION
 Managing The Supply Chain – David Simchi-Levi, Philip Kaminsky & Edith
Simchi- Levi
 mySAP™ Supply Chain Management at MARICO
 Marico Industries: mySAP™ Supply Chain Management
By Janat Shah and Angeline Pantages (IIM – Bangalore)
 Defining Supply Chain Management by Journal of business logistics
Vol.22.No.2,2001
 Advanced Planning & Scheduling and Supply Chain Management by Brendan
McGettrick, Richard Sewell, Claire Sivills, PLAUT
 The Future of SCM an interview with Devid Simchi-Levi By Penny Guyer
 Supply Chain Management by Eric Johnson & David F. Pyke
 RFID in FMCG Supply Chain Management Application
 Insights : ECS Private Ltd
 Implementation of SCM Practices in Indian FMCG Industry by Ashutosh
Mohan
 ISB Insight Jun 2007:Supply Chain Delivering Value : Rural Supply Chain
Networks : The Future by N Vishwanadham
 Seven Principles of Supply Chain Management by David L. Anderson, Frank
F Britt & Donavan J. Favre – SCM Review 4/1/2007
 Internet Based Supply Chain Management by Sarvanan Raju, Pradeep
Rajendran & Vishveshwara Rao Kotapalli
WEB
 www.supplychainlink.com
 www.tutorialsto.com
 www.logictools.com
 www.scmr.com
 www.sap.com
 www.supplychainmanagement.in
 www.supplychainonline.com
 www.supplychains.in
 www.iimm.org
 www.metricstream.com

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A PROJECT REPORT ON

SUPPLY CHAIN MANAGEMENT

MASTER IN FINANCIAL MANAGEMENT

PART-TIME MASTER’S DEGREE IN MANAGEMENT

CERTIFICATE FROM GUIDE

This is to certify that the project entitled “SUPPLY CHAIN MANAGEMENT IN

Name of Project Guide: PROF. RAMBABU

Signature of Project Guide:

2. RESEARCH MTHODOLOGY ……………………………………………… 1

3. SUPPLY CHAIN MANAGEMENT……………………………………... 4

4. BULL WHIP EFFCET

4. Supply Chain Management in Indian FMCG Industry ……………… 32

5. Modern Technology used in SCM ……………………………………….. 44

4.2 New techniques adopted by FMCG firms to improve efficiency46

5. Future of Supply Chain Management ……………………………………

1.1 A brief History of Supply Chain Management:

By the 1980s, Manufacturing Resources Planning (MRP-II) was developed, bringing

“Management is on the verge of a major breakthrough in understanding how industrial

Forrester introduced a theory of distribution management that recognized the integrated

He illustrated this phenomenon utilizing a computer simulation of order information

2. SUPPLY CHAIN MANAGEMENT

2.1 What is SUPPLY CHAIN MANAGEMENT?

Figure 1: Supply Chain Management

It has been noted that discussions of SCM often use

This section is, thus, dedicated to reviewing, classifying,

Defining the Supply Chain

Supply Chain Management in Indian FMCG Industry

The definition of “supply chain” seems to be more

Another definition notes a supply chain is the network of

Given these definitions, for the purposes of this paper, a

Encompassed within this definition, we can identify

Supply Chain Management in Indian FMCG Industry

Figure 1c illustrates the complexity that ultimate supply

Although we will address this point in greater depth later

Given the potential for countless alternative supply chain

Note also that within our definition of supply chain, the

TYPES OF CHANNEL RELATIONSHIPS

Supply Chain Management in Indian FMCG Industry

FIGURE 2a – DIRECT SUPPLY CHAIN

FIGURE 2b – EXTENDED SUPPLY CHAIN

FIGURE 2c – ULTIMATE SUPPLY CHAIN

Figure 2: Types of Channel Relations

Although definitions of SCM differ across authors (see

AUTHORS & DEFINITIONS OF SUPPLYCHAIN

Monczka, Trent, and Handfield (1998)

La Londe and Masters (1994)

Supply Chain Management in Indian FMCG Industry

Supply chain strategy includes: “Two or more firms in a

1) The supply chain is viewed as a single process.

Jones and Riley (1985)

Cooper et al. (1997)

2.2 SCM as a Management Philosophy

As a philosophy, SCM takes a systems approach to

Supply Chain Management in Indian FMCG Industry

function (Ellram and Cooper 1990; Houlihan 1988;

SCM as a management philosophy seeks synchronization

Based upon the literature review, it is proposed that SCM

1. A systems approach to viewing the supply chain as a

2.3 SCM as a Set of Activities to Implement a

Supply Chain Management in Indian FMCG Industry

In adopting a supply chain management philosophy, firms

Bowersox and Closs (1996) argued that to be fully

Related to integrated behavior, mutually sharing

Supply Chain Management in Indian FMCG Industry