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Vol. 2 No.1 June 2010 Supply Chain Management Centre Indian Institute of Management Bangalore Editors’

Vol. 2 No.1 June 2010

Vol. 2 No.1 June 2010 Supply Chain Management Centre Indian Institute of Management Bangalore Editors’ Note

Supply Chain Management Centre

Indian Institute of Management Bangalore

Management Centre Indian Institute of Management Bangalore Editors’ Note We have celebrated one year of SCMC

Editors’ Note

We have celebrated one year of SCMC Digest , the Newsletter of the Supply Chain Management Centre at the Indian Institute of Management Bangalore. We think the SCMC Digest has the optimal features in terms of size, contents and presentation. One of our readers called up to enquire when the next issue of the SCMC Digest would be coming out; he found the Digest informative and useful. We felt flattered. Still, we are embarrassed as the fourth issue of the second year has been delayed, ironically, because we did not adequately prime the supply chain. We hope to cover the lost ground and come out with two more issues this year. We continue to receive appreciative comments on the CentreÊs efforts to create bridge between the practitioner and academic worlds. As before, we bring you expert views from diverse sectors. The soft copy of the SCMC Digest will be posted in our website : www.scmc-iimb.org to reach out to more readers.

As always, readersÊ reactions and feedback is vital to improve. Please send your views and suggestions on SCMC Digest and we would try our best to incorporate them in future issues.

Happy Reading!

Editors

and we would try our best to incorporate them in future issues. Happy Reading! Editors Prof.

Prof. LS Murty

and we would try our best to incorporate them in future issues. Happy Reading! Editors Prof.

Prof. Dinesh Kumar

Contents

Focus 3 Student Projects 5 Insight 5 Frontier 7 News at SCM Centre 7
Focus
3
Student Projects
5
Insight
5
Frontier
7
News at SCM Centre
7

PERSPECTIVE

Intelligent supply chain management during uncertain times

Intelligent supply chain management during uncertain times by Mr. Bhaskar Bhat Managing Director, Titan Industries

by Mr. Bhaskar Bhat Managing Director, Titan Industries Limited.

I. Prelude:

The age old Supply Chain Management hovered around forecasting the market need and ensuring that quality, cost and delivery times are adhered and improved on a continuous basis. This Supply Chain Management Model is perhaps very logical and absolutely makes sense in a market where competition is not aggressive and the volatility of the market is low, and where the demand far exceeds the supply.

Supply chain management is the combination of art and science that goes into improving the way the Company finds the raw material and components it needs to make a product or service and deliver it to customers. The supply chain must be able to provide superior quality products seamlessly at the right time in the right place and right quantity. Thus the supply chain must be able to ensure high customer satisfaction and generate high returns for the stake holders.

In a manufacturing Company, between the retailer and manufacturer as well as between manufacturer and supplier, one biggest largely ignored portion of the supply chain is logistics management and warehouse management. Logistics management consisting of freight forward or transportation activities need to be extremely efficient in terms of cost, time and security of the goods. Warehouse management is extremely crucial in a business to determine the location of the warehouses, stock levels in the warehouses, modernization with good material handling facilities, service levels to the trade and ability to service the last mile delivery efficiently. The industry of logistics and warehouse management deserves much higher focus from the top management, academicians and business houses to appreciate the current efforts and improve for the future.

An interesting aspect that has come to the forefront in todayÊs environment, with Global meltdown, ever changing consumer behaviour, aggressive competition, and host of technological changes happening in all fields, is the enhanced role of supply chain management.

Is it enough if the Supply Chain Management continues to follow forecasting and Q, C & D, in expediting goods to market??

Can they continue to survive the onslaught of rapid changes happening in the market place??

Can a Company grow their market size, with conventional (yet relevant some years ago) Supply Chain Management strategies?

Can a company keep their business partnersÊ (Suppliers, Franchisee & Logistics partners) morale high, with conventional Supply Chain Management strategies??

Can the Company keep their employeesÊ morale high and keep the investors happy??

Perhaps not !!

We have seen many companies with traditional Supply Chain Management strategies, buckling under pressure and some even thrown out of the business.

II. Setting the context:

We need to perhaps shift from traditional Integrated Supply Chain Management to building an „Intelligent Supply Chain Management Model‰ to have sustained leadership in the market place.

Corporate Sponsors

sustained leadership in the market place. Corporate Sponsors Disclaimer: The views expressed in this Digest represent

Disclaimer: The views expressed in this Digest represent the authorsÊ personal views and they do not represent the official views of their organizations, the SCM Centre or the Indian Institute of Mana ement Ban alore‰

Vol. 2 No.1 June 2010 How can that be done ? Integrated Supply Chain Management

Vol. 2 No.1 June 2010

How can that be done ?

Integrated Supply Chain Management & Intelligent Supply Chain Management.

ISCM FC & Q.C.D.
ISCM
FC & Q.C.D.

to

ISCM RM & A.A.I.
ISCM
RM & A.A.I.

Does the above formula look complex? Here is the explanation

ISCM - Integrated Supply Chain Manage- ment working on a Forecasting

FC & Q.C.D

(FC) model, with importance to Quality, Cost & Delivery(Q.C.D)

ISCM - Intelligent Supply Chain Manage- ment working on a model of

Replenishing to a completed sale (RM), with agile, adaptable and innovative stakeholders.

Softer side of the Organisation and its culture has a huge influence on the agility, adaptability and innovative efforts of the Company and stake holders which, in turn, defines the pre-requisites for an Intelligent Supply Chain Management.

III. What Needs To Be Done !!

RM & A.A.I

A)

The organisation should have the agility, to adapt itself, to the changing market conditions, like understanding the changes happening in the market place, the changing consumer behaviour, etc.

Also the Organisation should learn to align its supplies to the market needs, rather than stocking based on forecasting, and many a times ending up with huge sludge stock.

B)

How to develop the capability of agility & adaptability amongst stakeholder:

Three parts need to be addressed in an attempt to find answer to the above question.

a)

Culture

of

Organisation:

(should be

TRUST WORTHY)

Should be transparent, non-hierarchical, with defined values for doing business, practised by all Senior Management Team and demonstrated for others to follow. This coupled with structured knowledge imparting efforts to employees, on a continuous basis, with liberal R & R mechanism.

Also having a „Win-Win‰ approach to all matters dealings with partners and winning their confidence, by merely not giving a price increase when negotiated , but by genuinely giving them a listening, caring for their problems, collaborating with partners and going out of the way, in extending help to them.

All this leaves the employees and stake holders, with a positive state of mind and generates a high level of trust, between employees and stake holders, and with the organisation.

The culture of „Trustworthiness‰ is a basic pre-requisite for Supply Chain Management to be successful in any changing times and at all times.

b) Agility

stake

holders:

After having established „Trustworthiness‰ amongst stake holders, the next thing is to

prepare the employees and other stake holders

for the medium term and long term forecasted

changes.

amongst

employees

&

This can be achieved by

i.

Systematic imparting of knowledge, across the stake holders

ii.

Involving them in each and every stage of planning for future.

iii.

Exposing them to new technologies and IT infrastructure.

The knowledge that they get on a continuous

basis, when encouraged to be shared with others, leads to organisational learning and the learning, when implemented in work place, leads to improvements, more the improvements (or) continuous improvements (aligned to customer/ market requirements)

by

stake holders demonstrates the agility of

the organisation and readiness to adapt to changes.

c)

Innovation:

Creative ideas when implemented in the market place, benefitting the customer and business, is innovation.

While agility and adaptability can help a company to sustain in the business, even during changing times, it is important for a Company to „Create a Culture of Innovation‰ for it to become a leader and retain its leadership for decades to come.

The Company should have robust process for idea generation through stake holders, structure for scrutinizing the ideas and experimenting the short listed ideas and taking it to market place.

It would be very welcome, if the company

has learnt to direct its „Idea generation‰ to the „Unmet job‰ when our product is with the customer and, perhaps, „generating ideas‰ towards the unspelt out need of the customer.

After stabilising internal innovation in

a structured way, moving towards open

innovation, crowd sourcing, „Outcome

driven Innovation‰ etc., will help a Company

to retain its leadership position for ever.

IV. To Sum Up:

The success of a Supply Chain Management in todayÊs context, depends on the culture of the company which, in turn, influences the companyÊs ability to forecast changes, having the required agility in the stake holders to adapt itself to changes, and leading the market with systematic

„Innovation efforts‰ for it to retain its leadership

position.

Mr. Bhaskar Bhat is a B.Tech (Mechanical Engineering) from IIT Madras (1976) and has completed his Post Graduate Diploma in Management from IIM Ahmedabad (1978). He started work in 1978 as a Management Trainee at Godrej & Boyce Manufacturing Co. Pvt. Ltd. In 1983, he joined the Tata Watch Project which is now Titan Industries Limited. At Titan, Mr. Bhaskar Bhat has handled Sales & Marketing, HR and International Business. He was named as the Managing Director in April 2002.

Mr. Bhaskar Bhat received the Distinguished Alumnus Award in IIT Madras in 2008.

Best Practices Exchange Meet

The Supply Chain Management Centre organized a half-day Meet on 24 February 2010 at IIMB where the six Organisations shared their Best Practices in Supply Chain Management. The presentations revealed a fascinating range of challenges and initiatives to overcome them.

range of challenges and initiatives to overcome them. Mr. Rajesh Agrawal, IBM speaking at the session.

Mr. Rajesh Agrawal, IBM speaking at the session.

Mr. Suprakash Mukherjee spoke about how John Deere manages global supply chain risks by creating alignment among diverse global suppliers through carefully charted processes and interventions. Mr. Robinson KurienÊ explained how the newly formed Supply Chain Optimization Department in Bharat Petroleum Corporation Ltd., established itself by focusing on technology, organizational business processes and building a new corporate culture of cooperation to achieve integration in planning and operations among SBUs. Mr. NagendrapradsadÊs presentation highlighted TVS Logistics ServicesÊ efforts to develop trained warehouse managers in an area where practically no norms exist. Mr. Rajesh Agarwal explained how technology, scale and improved processes helped IBM to achieve significant savings and the procurement expertise thus developed has been offered to other clients also. Mr. HG Raghunath explained how Titan Industries closely monitors customer preferences and the challenge for the supply chain is to quickly respond to changes in the market. Mr. KN Srinivas presented the structured processes for supplier risk evaluation that have helped Genpact to successfully manage supply chain risks for their clients. IIMBÊsfacultymembersgaveÂexpertcommentsÊand brief research insights after each presentation. The participating SCM Professionals from Corporate Sponsors, invited organizations, faculty and students found the deliberations very interesting and valuable.

FOCUS

BPCL Supply Chain Optimization – Building a New Approach

BPCL Supply Chain Optimization – Building a New Approach by Mr. B K Datta Executive Director,

by

Mr. B K Datta

Executive Director, Supply Chain Optimization Bharat Petroleum Corporation Ltd.

.

Chain Optimization Bharat Petroleum Corporation Ltd. . Figure 1: SCO processes cut across a combi -

Figure 1: SCO processes cut across a combi- nation of different business units

SCO creating a sense of passion for the overall company goals among the different

units and thus drives value creation for the entire corporation. This requires making them wear the corporate lens and creates

a fundamental shift in mindset away from individual business unit goals.

4) Short-term and long-term implications

of decisions need to be balanced, requiring

a strategic view to be taken. SCO needs to

define and prioritize issues such as key vs. non-key customers, analyze and lay out profit trade offs in service levels decisions to key customers, etc.

To manage these complexities, SCO has evolved a four-pronged strategy involving Technology (use of leading edge tools/solutions); clearly spelt out Business Processes cutting across units, People (selection and development) and Integration (driving reliability and consistency). Surrounding these is the creation of a line of sight between units to the overall company goal i.e., enabling different units to understand the overall NCR impact of their plans or decisions.

3)

the overall NCR impact of their plans or decisions. 3) Figure 2: SCOÊs four-prong Strategy to

Figure 2: SCOÊs four-prong Strategy to man- age complexities

Bharat Petroleum Corporation Ltd, a Navratna PSU oil Company and among the fortune 500 Companies, formed the Supply Chain Optimization (SCO) Department in November 2006. The strategic intent behind this pioneering move has been to maximize benefit for the overall corporation, improve dynamic capability and become more competitive.

The four main objectives of the SCO were:

1. To maximize ÂNet Corporate RealizationÊ (NCR). NCR, a holistic profit measure, is defined as: Sales realization less costs of landed crude, marketing costs, logistics cost and credit cost.

2. To support the internal supply chain processes across business units

3. To support integration between planning and execution

4. To ensure joint agreement on all plans to ensure feasible schedules, and linkage to overall goal

The SCO wears the ÂCEOÊs lensÊ and hence has a critical place in the BPCL organization, reporting directly to the Chairman. All other business units, on the other hand (e.g. Individual Refineries, Retail sales, Industrial & Commercial product sales, Aviation, Lubricants, LPG, etc.) report into functional Directors, reporting to the Chairman.

In meeting its stated objectives, SCO encounters four fundamental sets of complexities:

1) SCO operates in a global context both on the supply side, and in marketing. Crude selection and supply is the international arm of the business, and supply chain needs to drive decisions on exports/ imports vs. domestic sales of different products. This entails careful orchestration of planning to ensure smooth execution across domestic and international activities.

2) SCO operates as a ÂmatrixÊ organization, working across several different business units, requiring a move from traditional vertical command-and-control to horizontal interactions requiring collaboration.

On the Technology front, SCO has invested in a sophisticated linear programming tool, PIMS from Aspentech. For developing and rolling out the refinery production plan, a LP model is configured with 60 to 65 tables consisting of Refinery units, product specification, blend mix, crude oil axis, marketing demands, crude and product prices, crude oil availability, etc. With this tool, optimal refinery production plan for individual Refineries is developed. SCO has also put in use Periodic PIMS (P-PIMS) for periodic planning of few days, weekly, fortnightlyandmonthly.MultiplantPIMS(M-PIMS) is presently in the process of implementation for better optimizing across Refineries. SCO has also has extensive use of various supporting tools such as SpiralSoftÊs Crude Manager with Chevron crude oil Database for all regions.

Manager with Chevron crude oil Database for all regions. Figure 3: SCO has invested in Technology

Figure 3: SCO has invested in Technology tools to drive profit maximization

SCO has holistically defined six integrated Business Processes, namely, Demand planning and review; Crude selection, evaluation, and nomination; Refinery planning and review; Product exchange; Distribution Optimization and Inventory Management. These are described below:

1)

Demand Planning and Review

 

The group runs a time series demand planning model, and through collaborative discussions (among the regions, headquarters and SCO), comes to a consensus value of finalised demand. Over a period, SCO has made continuous improvements in this model, in discussion with IIM-Bangalore, achieving higher levels of accuracy.

2)

Crude

selection,

evaluation

and

nomination

The crude selection/ annual term contract planning work starts 6 months prior to the year beginning, through application of the linear programming based PIMS model. Robustness of the crude oil selection is checked for various other factors like historical and forward prices, Brent Dubai crude price differentials, crude availability, long term strategy of crude oil sourcing, term-spot ratio, different demand scenarios, shipping strategy, etc. Finally, it is subject

Vol. 2 No.1 June 2010 to thorough internal discussions and approval processes before implementation. Crude

Vol. 2 No.1 June 2010

to thorough internal discussions and approval processes before implementation.

Crude nomination plan for determining the right crude mix is formulated as a PIMS linear programming model that not only meets the available Refinery capacities but also the market demand where the objective function is maximum net corporate realization.

3)

Refinery Planning and Review

The refinery plan, using the linear programming model, is linked to the crude procurement plan, and other plans for distribution, inventory, exchange/buys plans and run on objective function to maximize net corporate realization.

4)

Product Exchange Plan

To meet the production shortfall of its marketable products, BPCL creates the products buys from stand-alone Refineries, private entities or thru product exchange plan wherein it has exchange programs with other PSU Oil companies. The exchange plan is always value based, with a focus on consolidation of BPCLÊs strength areas and protecting our weaker infrastructure.

5)

Distribution Plan

The robust Distribution Plan created with a Distribution Plan Optimization (Aspen DPO) model is linked with the PIMS model. Optimal modes of transport are chosen from among pipeline, shipping, rail and road to optimize total delivered/ placement cost.

6)

Inventory Management

SCO uses statistical inventory modeling tools for fixing the inventory norms, taking into consideration the lead time variability, demand variability, safety stocks, etc. Every fortnight the inventory is reviewed and corrective actions are taken.

One of SCOÊs first initiatives was to put in place a detailed Integrated Business Process Manual covering the six different business processes, key responsibilities for the sub-processes, their touch points with other units, and key points of sign off. This business process manual has formed the foundation of SCOÊs successful launch, with different business units gaining clarity and voicing their commitment toward following these defined processes.

SCO has laid strong emphasis on People, their knowledge and capability building. At the very outset, while selecting its team, SCO had defined the competencies required to succeed in collaborative role viz. Passion for the overall company goal, and commitment to excellence; Strong analytical skills; Initiative; Ability to manage ambiguity and complexity; Ability to inspire trust. Each candidate was handpicked to

ensure a fit with the new way of working. SCO has invested in training and capability development, rolling out technology training modules on PIMS and advanced versions by Aspen and building analytical capability of its full team. It has also launched training programs to enhance soft skills of its individuals for successful working in a matrix.

SCO has put in place two key Integration mechanisms: MIS and information flows by different units have been defined. These are integrated with the planning tools and modules that SCO has invested in, allowing for consistent, integrated and timely information flow. Secondly, SCO has instituted three key forums, which act as the centers of decision-making and review every month. These include:

The Supply Chain Council, where plans for the upcoming month/ quarter are finalized.

The Pre-Supply Chain Council, which precedes the Supply Chain Council, allowing for any clarifications / rework before plans are finalized.

The Retro Review, led by SCO analysis, where performance variances of all the units are discussed. Through root cause analysis, this allows for sharing of best practices/ learnings, and performance improvements to be made.

Along aside these forums, in-depth one-on-one meetings are conducted with each business unit throughout the month. These three forums have been ÂinstitutionalizedÊ, with representatives from each of the different units unfailingly attending each session, contributing to animated debates, and closing with mutual agreement on the way forward.

SCO has laid the foundation for creating a Line of Sight between individual units and the overall company goal. By allowing units visibility of their contribution toward NCR or an understanding of the impact of their decisions on NCR, SCO has started to transform unitsÊ thinking to meet the overall corporate objectives, even in the face of conflicting goals. Towards, this SCO also started a brief meeting on Retro Review major highlights with Chairman and other functional Directors to improve the line of sight and thrust areas.

SCOÊs conceptual model has had all the initial signs of success, in the highly complex role it performs. In a relatively short span of time, SCO has created a radical shift in thinking - from individual business unit performance to maximizing overall company profit (NCR). It has also begun to change the mindset to more collaborative, yet very analytically backed decision making.

Several decisions and actions driven by SCO initiatives have already resulted in certain bottom- line impact:

Product mix has improved by increasing products with a higher marginal contribution

(e.g. Bitumen) and reducing products lower or negative marginal contribution (e.g. Furnace Oil, Light Diesel Oil etc)

The overall crude basket has been widened and mix has been changed. The ratio of Arab Heavy vs. Light crude oil has been changed. Some spot crudes have been moved to term contracts. These actions have resulted in strong bottom-line savings.

Variance between planned and actuals has reduced.

Production gaps have been met through balanced imports and product exchanges

Inventory and Distribution now work to minimize the total costs of reaching inputs/products from alternative sources to destinations. Dead stock has been reduced.

By quickly demonstrating results, SCO has established that it is not just a pioneer in its field, but also that it is very possible to handle the greatest of business complexities. Going forward, in keeping with its philosophy of continuous performance improvement, SCO is charting out its plans for the corporation in the next phase of its journey.

Mr. B K Datta is a Chemical Engineer, working with Bharat Petroleum Corporation Ltd. since 1979. He held positions of General Manager (In- Charge) - Refinery overseeing the Operations, Technology, Projects, Finance & Administration of Refinery and Executive Director (Refinery) as Refinery SBU Head. As General Manager (Operations), he was associated with various activities of Process, Maintenance, Product Despatches, Materials and Fire & Safety functions in Refinery. Thereafter, he moved to Corporate Office as General Manager (International Trade & Supplies) and was subsequently General Manager (Information Systems) & General Manager (ERP SAP).

Advisory Council Meeting

The Advisory Council of the Supply Chain Management Centre comprising of the members nominated by the Corporate Sponsors and the Director, IIMB met on Tuesday, February 23, 2010 at IIM Bangalore. Prof. Trilochan Sastry, Dean (Academic), chaired the Meeting. The Council reviewed the activities for the year 2009 covering Research & Study Projects, Corporate Sponsor Relations, Communications and the activities plan for the year 2010. Members made several valuable suggestions including structured interactions with the Corporate Sponsors and contributing at the national level.

valuable suggestions including structured interactions with the Corporate Sponsors and contributing at the national level.

STUDENT PROJECTS

Contemporary Concerns Study (CCS), an optional Project Work based Course on an area of interest has been a very popular Course of the full-time Post Graduate Programme at IIM Bangalore.

Performance Measurement of Supply Chains

by

Arun Bagavathi & Gauri Gupta Students of Post Graduate Programme in Management of IIM Bangalore during 2007-09.

A performance measure system, or a set of

performance measures, is used to determine the

efficiency and/or effectiveness of an existing system,

or to compare competing alternative systems. It

is essential that the measurement criteria are so defined that they can comprehensively cover all the areas that are important for a business.

The supply chain management philosophy of a firm

is not adaptable across firms. It is dependent on

other factors like the nature of its product offering

- whether it is functional or innovative; efficient

or responsive. A performance measurement system

should be tailored to the nature of the firm and the products produced by it.

Norton and Kaplan found that the performance measures used in most companies were one

dimensional and therefore led to a biased view

of performance. They developed the balanced

scorecard model that views the organization from four perspectives: Learning & Growth; Business

Process; Customer and Financial Perspectives, and

the user has to develop metrics, collect data and

analyze it relative to each of these perspectives.

The SCOR model developed by the Supply Chain Council is a comprehensive system that has been accepted widely by the industry. It not only provides a set of criteria, but also evaluates the impact of these measures on business performance using benchmarking data. Some tools have been developed to monitor and measure Supply Chain Performance essentially based on the SCOR model. These tools provide therefore for managing the entire Supply Chain of a firm through five processes, process attributes and levels:

Processes : Plan, Source, Make, Deliver and Return

Process Attributes: Reliability, Responsiveness, Agility, Cost, and Asset Management

Levels: Process type level, Configuration level, Process element level and Implementation level

This model is applied to the supply chain of an organisation whereby the various processes starting from raw material sourcing through order fulfillment and return are tracked at the four levels.

A Supply Chain Management tool which essentially

makes

use

of

the

SCOR

model

was

studied

extensively next to understand its application and limitations. One limitation of the model is its applicability to single firms as the supply chain management philosophy of a firm is not adaptable across firms. On the other hand it is dependent on

other factors like the nature of its product offering

- whether it is functional or innovative; physically

efficient or responsive. While it does track the ability and adaptability of suppliers and customers to respond quickly to change in quantity of raw materials and finished goods, it does not gauge the effects of decisions on their performance.

In supply chain management, management and

control is increasing directed towards a set of firms around a nodal-firm or a steward-firm rather than

a single company. The model does not provide for

metrics or attributes which can be used to monitor inter-firm or intra-firm effects of SCM decisions.

Cases and examples from the industry and existing issues on Supply Chain Management across firms in an industry were studied to understand the inter- linkages between firms and their implications on Supply Chain Management. A list of issues outside the purview of the existing tool was compiled and corroborated with examples from the industry and existing literature.

Intra-Firm Issues:

a) Time Lag between implementation and outcome - a substantial lag exists between investment and realisation. In May 2001, Whirlpool piloted its SCM initiative involving an investment of tens of millions of dollars and the benefit horizon for this investment is said to extend till date and beyond.

b) Mergers & Acquisitions: Combining two different Supply chains - The strategic goals of M&A may be classified into two kinds. Efficiency deals that achieve performance improvement in a merger that will have high functional overlap and high predictability of value; and Transformation deals that „transform the rules, having low overlap and low predictable value.

Procter & Gamble acquired Gillette in 2004. GilletteÊs and Procter & GambleÊs product lines did not overlap, but the overlap in their distribution center networks was a problem, and one that proved to be particularly difficult to solve.

Inter-Firm Issues:

a)

Local Global Conflict.

b)

Time lag between SCM investment by one stakeholder and benefits realised by another stakeholder.

Procter & Gamble and General Electric adopted Electronic Data Sharing from Point of Sales Data manage their own products inventory/ shelf space in Wal Mart outlets. Wal Mart realises major benefits from this significant investment in terms of reduced inventory costs, cost of shelf space and enjoys higher product

availability levels and higher shelf turnover.

c) Challenges in Implementing changes when pay offs are uncertain.

Wal-Mart Stores announced that it would require its top 100 suppliers to put RFID tags on shipping crates and pallets by January 1st 2005, and the next 200 largest suppliers by January 1st, 2006. RFID technology was relatively new and the cost of implementing the technology was high. It was a huge risk for many companies as the results and the benefits of this change were unknown to them.

The issues identified above were shared with an industry expert in Supply Chain Management. The conflict between local and global decisions was one factor that received very positive feedback in terms of the need for such a dimension as well the framing of the issue as well. Some issues regarding implementation were also uncovered after this interaction. It was noted that within the consumer goods segment, inventory costs form a large proportion of total costs - especially in the current scenario - with high inflation and interest costs. This increases the importance of focusing on end to end performance rather than focusing on single entities. Another insight was that the effect of local decisions on global operations depends on the type of industry.

In order to ascertain that the issues identified were relevant and significant in an industrial context, these were discussed with the developers. All the issues identified through this project were ascertained as being significant in varying degrees.

INSIGHT

Stability Issues in Supply Chain Networks:

Implications for Coordination Mechanisms

by

Omkar D. Palsule-Desai, Devanath Tirupati and Pankaj Chandra

Indian Institute of Management Bangalore

While coordination issues have received much attention in supply chain management literature, issues related to stability have not been studied in detail. The authors aim to bridge this gap and develop a modeling approach to study network stability issues and examine the impact of coordination mechanisms on stability of supply chain networks.

The motivation for this work comes from mixed results in the cooperative sector of India. The success of AMUL is achieved within the framework of a network of cooperatives organized in a hierarchical manner. Recently, the AMUL

Vol. 2 No.1 June 2010 network has come under strain with competition from private players,

Vol. 2 No.1 June 2010

network has come under strain with competition from private players, and consequently, alternate avenues - such as changing supply chain alliances, severing linkages with the existing network, establishing independent production units, etc. - have evolved for the players in the network.

Specifically, in this paper, we examine stability issues in a two-tier supply chain network comprising of several producers operating in a competitive market. While some of the producers operate independently and offer their product in the market directly, the rest form a cooperative network and supply through a marketing agent that acts as a coordinator. Production decisions by the network producers are influenced by the coordination mechanism used for sharing the revenues generated. In this paper, the authors analyze a profit sharing based mechanism that is popular both in practice and the literature. The coordination mechanism involves procurement price paid by marketing agent to the network producers and surplus sharing. A game theoretic model has been developed to describe the problem context and characterize the decisions of both network and independent producers. It involves integration of

(i)

principles of coordination from supply chain management literature, and

(ii)

literature in economics and industrial organization on network stability.

The results can be broadly classified into two categories:

(i)

Characterizing the equilibrium solutions resulting from the parameter choices of the coordination mechanism and describing the impact of cost parameters and the number of independent producers on the network surplus, prices, production, etc.

(ii)

Network stability: Here the authors identify conditions under which the network is stable and develop bounds on parameters for assuring stability. In particular, they focus on three factors: cost parameters, number of producers vis-a-vis level of competition, and profit sharing. Response functions derived for the players involved show that optimal decisions by coordination leads to Nash equilibrium for the supply chain. For instance, the authors show that there exists a range of procurement price in which both network and independent producers compete together.

For procurement price below a threshold value, the network producers do not compete. Similarly, for procurement price beyond a threshold, the independent producers do not compete. In addition, the authors develop structural results to characterize stability of the network. The results are based on simplifying assumptions; nevertheless they are useful and provide insights and guidelines for managerial decision making. Of particular interest is the role of the profit sharing parameter. We show that while profit sharing parameter of the coordination mechanism has no impact on

network surplus, it has implications for network stability. These results bring out relationship

between the factors of interest and provide insights for determining the decision parameters of the coordination mechanism. The model and the results presented in this paper may be interpreted

as a building block in the development of richer and more comprehensive framework.

Omkar D. Palsule-Desai is Post-Doctoral Fellow, Devanath Tirupati is Chair Professor of the EADS-SMI Endowed Chair for Sourcing and Supply Management and Pankaj Chandra is the Director of IIM Bangalore.

TCI-IIMC

Freight Transportation

by

Subrata Mitra

Indian Institute of Management Calcutta.

We give below a brief summary of the TCI-IIM-C

Study Report ÂOperational Efficiency of National Highways for Freight Transportation in IndiaÊ commissioned by Transport Corporation of India (TCI) to assess the impact of government investments in national highways on the operational efficiency of freight transportation by road in India.

Problems Faced by the Road Freight Transportation Industry

Freight rates are seasonal in nature, vary with the type of commodity, weight/volume, source- destination pair and demand and supply of trucks. Because of low freight revenue realisations and high costs of operations, the Indian trucking

industry is making marginal profits or even losses. Reported profit margins are of the order of 4-5 per cent for unorganised players and 10-15 per cent

for organised players.

Poor maintenance of roads and lack of access-

control leads to slow speed, uncertain journey time equipment breakdown and accidents.

A considerable amount of time is wasted at

interstate check-posts for completing sales tax- related formalities. A survey done by TCI on the Kolkata Mumbai route shows that the vehicle took eight days to reach Mumbai with 32 hours or 16.67 per cent of the transit time wasted at various check-posts and the average speed of the vehicle was merely 11 km per hour.

Survey Findings

To estimate the operating cost and cost of delay

for a 15-tonne truck, a survey was carried out on 10 major routes in 2008. Discussions with senior officials of TCI in Delhi and Kolkata also provided significant inputs for the project.

The average freight rates for a 15-tonne truck between each pair of four metros, Delhi, Mumbai, Chennai and Kolkata, varies from Rs. 1.12 to 1.56 per tone-km.

Study

of

Road

The focus of the study is the Delhi Bangalore route accounting for 30 data sets.

From the data, it is seen that the average vehicle speed is around 20-21 km per hour. There are, on an average, 25 stops (15 for toll collection) on the way and the average stoppage delay is five hours, about five per cent of the journey time (delays of 15-25 per cent of the journey time are also not uncommon). The stoppage delay per km is within the corresponding range of 0.0012-0.0060 hours/ km reported by an earlier World Bank study.

Trip Expenses

Detailed analysis of the costs involved in a trip revealed the following:

Composition of Trip Expenses

a trip revealed the following: Composition of Trip Expenses Trip expenses including overheads. Overhead Expenses Table

Trip expenses including overheads.

of Trip Expenses Trip expenses including overheads. Overhead Expenses Table below shows the minimum, maximum and

Overhead Expenses

Table below shows the minimum, maximum and average, all-inclusive trip expenses, freight rates and profit margins for the 30 trips.

Para-

Unit

Min-

Maxi-

Ave-

meter

imum

mum

rage

Trip

       

expenses

including

overheads

Rs./

tonne-

km

1.21

1.52

1.32

Freight

Rs./

     

tonne-

1.18

1.60

1.39

rate

km

Profit

       

margin

%

-12.32

21.03

5.20

After allocating overhead expenses, 9 out of 30 trips (30 per cent) incurred ÂlossesÊ, although overall there is a profit of 5.2 per cent which is of the order of margins achieved by Indian transporters.

Cost of Delay

Findings of all the ten routes show more or less similar characteristics with respect to the above- mentioned parameters except for shipments to/ from the eastern region (Kolkata and Guwahati) where the average delay and on-road stoppage expenses are on the higher side and average profitability is on the lower side.

The annual profit, interest charges, depreciation, tax and insurance together amount to Rs. 610,250, which divided by the annual operating hours (5,000 hours) gives the cost of delay per hour, i.e. Rs. 122.05. This multiplied by the delay time gives the cost of delay for a trip of Rs. 124.18 per hour.

The average trip expenses after incorporating delay costs increase by merely Rs. 0.02/tonne- km (Refer to Table 7), or two per cent, and the contribution margin slightly reduces from 40.40 per cent to 37.66 per cent. After incorporating the shipperÊs inventory holding cost, the average cost per hour of delay becomes Rs. 148.88. The annual cost of delay for a vehicle population of 3 million vehicles would be Rs. 45 billion (USD 1 billion!).

Cost of Additional Fuel Consumption

If the mileage of a vehicle can be increased by

making it more fuel efficient, improving road conditions and reducing delays, substantial improvements in operational expenses and contribution margins can be realised. To give an example, if Re 1/km can be saved by using fuel- efficient vehicles, a vehicle traveling on an average, 80,000 km in a year, savings on account of fuel efficiency will be of the order of Rs. 80,000 per vehicle per year. Assuming three million vehicles, the annual savings to the economy would be Rs. 240 billion (USD 4.8 billion)!

Comparison with Other Countries

India has the second largest road network (after the US) and the highest road density in terms of road length per square km of land in the world. However, Indian road conditions are very poor compared to developed countries and even China and Pakistan. A truck on Indian roads averages 250-400 km per day compared to 700-800 km in developed countries. In India, a truck travels 60,000-100,000 km in a year compared to 400,000 km in the US.

A comparison of Freight Rates prevailing in 2002

in different countries the average freight rate in India of Rs. 1.39 per tonne-km (USD 0.028) is one

of

the lowest in the world.

In

developed countries and also in China, vehicles

move freely across state/provincial borders stopping only for toll collection. Commercial taxes are collected either at the origin or at the destination, and not en-route. Only traffic police, and no other department, have the authority to intercept vehicles on highways.

In the European Union the TIR Carnet System has

been evolved to facilitate cross-border movement

of goods. Vehicles carrying high-value, perishable

and time-sensitive goods are sealed at the source and opened only after reaching the destination.

Conclusions and Recommendations

The study recommends several measures including extending the national highways system, road maintenance, electronic tolling systems, computerised documentation and a system similar to the TIR Carnet System prevailing in the European Union should be introduced.

Prof. Subrata Mitra is Professor of Operations Management at Indian Institute of Management Calcutta. SCMC Digest acknowledges the kind permission of the Author and the sponsor Transport Corporation of India Ltd. (TCI).

FRONTIER

Integrative System Model of Innovation Diffusion :

A Conceptual Exposition

by Sanjay Bhushan & Janat Shah

System Dynamics (SD) methodology that incorporate internal feedback loops and causal relations between the dynamic behavioral and other variables enables to represent the structure and behavior of complex systems over time,

providing a method for systems description as well

as a useful computational support for simulation.

A system dynamic model serves as a simulator

for analyzing the consequences of different strategies. It allows an enhanced understanding of the influencing elements and the behavior they cause. It shows, for example, how innovation and imitation effect influence the dynamics of the diffusion process.

Innovation diffusion models are used to study how information about an innovation is disseminated to or within the social system. The traditional Bass model of innovation has been extended and expanded to incorporate the

supply chain dimensions and broader aspects of the innovation sector. Many supply chains such

as of innovation diffusion are complex systems

having high-order, multiple loops, and non-linear feedback structures and market sensitiveness. Hence, a decision controller needs to rethink the traditional linear flow of innovation with constantly creeping supply chain nonlinearities and their impact over the speed of innovation dissemination or diffusion.

The product/process innovation is delivered by the

supply side through its several active components Inventors, Supply line and Promotion interfacing with the diffusion process and the market side in

a way that overall innovation diffusion model

exposes its market demand stock to the supply line which in turn „moves‰ innovations to the market.

A sub-sector analysis of diffusion thus enables a

more elaborative representation of this dynamic phenomenon. A supply side sector of overall diffusion structure incorporates the sub-sectors of Research & Development, Supply-Line Efficiency and Promotion Efforts. It was realized early on that Âchange agentsÊ or supply intermediaries had a powerful influence on the speed of diffusion and uptake of new products and services by household and firm adopters. However, supply- side capability and infrastructure readiness factors have received very limited attention in marketing studies of the Diffusion of Innovation.

The production-market network is one of the other determining factors in the innovation

capacity of a territory. Production and backward and forward links are an essential mechanism

of technological diffusion in an economy. The

demand-driven innovation is driving every part

of the modern business, including the supply chain and more and more, direct market inputs are impacting every aspect of innovation process, from the overall product/ process development to the launch to the adoption and diffusion.

Supply Chain Networks are an essential feature of innovation diffusion. Networks allow the

system to solve problems using the large numbers

of individual nodes that have local interactions

with other nodes. The term „collaborative relationships‰ implies the fact that a certain level of communication, and interdependence of

firms in their transactions of various supplies has resulted in a reduced level of uncertainty and risk

in the market. A good collaborative relationship

allows trading partners to jointly have a clearer understanding of future demand, develop feasible plans to fit the demand, and coordinate relevant activities to achieve the plans in an efficient and effective manner.

In the studies of National innovation systems, the

framework of diffusion is broadened beyond the input/output system to include not only industries and firms, but also the role of technology policy conceived by the government. These include Market regulation, Infrastructure and Economic policies.

This research attempts to propose a new modeling approach for the investigation of diffusion of innovation in a general context by building

a conceptual integrative model of innovation

diffusion which captures the ÂwholeÊ along with the ÂpartsÊ dynamics of innovation diffusion mechanism and incorporates some critical Feedback and Feed forward loops defining the phenomenon of diffusion. It will be used to study certain high-tech industries.

Dr. Sanjay Bhushan is Lecturer (Sr. Scale) in the Dept. of Management, DEI, Dayalbagh and Prof. Janat Shah is Professor in Production & Operations Area, IIM Bangalore.

Biennial Conference on Supply Chain Management

The Biennial Supply Chain Management Conference jointly organized by EADS-SMI Chair for Sourcing and Supply Management, Indian Institute of Management Bangalore and Supply Chain Management Centre, Indian Institute of Management Bangalore will be held on January 7-8, 2011 in Bangalore, India.

The theme of the conference is „Opportunities and Challenges in Services Supply Chain‰. The „Call for Papers‰ notification has already been issued inviting papers from Academicians and practitioners with a focus on Supply Chain Management, especially Services Supply Chain Management. Deadline for paper submission is October 16, 2010.

Vol. 2 No.1 June 2010 NEWS AT SCM CENTRE Aerospace Supply Chain Symposium Mr. Ashok

Vol. 2 No.1 June 2010

NEWS AT SCM CENTRE

Aerospace Supply Chain Symposium

2010 NEWS AT SCM CENTRE Aerospace Supply Chain Symposium Mr. Ashok Nayak, CMD, HAL, Keynote Speaker

Mr. Ashok Nayak, CMD, HAL, Keynote Speaker answering questions at the Inaugural Session. Prof. Pankaj Chandra, Director, IIMB and Prof. Devanath Tirupati, Chair Professor, EADS-SMI Chair are seen. „Aerospace Supply Chain Symposium‰, an event convened to facilitate exchange of views on Supply Chain Management (SCM) in Aerospace Industry in was held on Saturday, October 10, 2009 at the Indian Institute of Management Bangalore. The event, organized jointly by the EADS- SMI Endowed Chair for Sourcing and Supply Management and the Supply Chain Management Centre, IIM Bangalore, featured invited talks by 12 industry experts in three Sessions viz. Developing Supplier Networks, Supply Chain Risks and Aftermarket & Engineering Services. 50 speakers and delegates from 33 national and international organizations participated.

In the Inaugural Session, Prof. Devanath Tirupati, Chair Professor, EADS-SMI Endowed Chair, welcoming the Chief Guest, Mr. Ashok Nayak, CMD of HAL, Prof. Pankaj Chandra, Director, IIMB & delegates, said that deliberations would help understand and identify research issues in SCM in the Aerospace Industry.

Prof. Pankaj Chandra, Director, IIM Bangalore inaugurated the One-day Symposium and spoke on „The State of Indian Manufacturing Capabilities and Challenges‰ presenting the salient findings of the research study „2007 Survey of Indian Manufacturing Sector‰.

Mr. Ashok Nayak, CMD of HAL delivering the Keynote Address said HAL has recorded 22% growth over last 5 years and has an order book of Rs. 60,000 Crs. When the 5th generation multi role fighter aircraft (MRCA) is under production, India will require another HAL (of manufacturing capacity) to meet the forecast demand for aircraft. HAL expects private manufacturing companies to supplement in a big way and has formulated a 3-tier vendor architecture involving Risk sharing relationship in core design innovations, Suppliers of components, sub assemblies and Subcontractors of processes, project and engineering services.

In the Session Developing Supply Network, speakers shared the challenges faced in developing aerospace supplier base in India.

Mr. Harvansh Batra (VP Sourcing, EADS) said that the drivers for Global Sourcing in EADS are market access, access to rare resources, value

for cost and risk management. EADSÊs suppliers are categorised as Standard Parts Suppliers, Key Components Suppliers, Risk Sharing Suppliers and Strategic Partners. It is critical to ensure that the raw material supply is assured. The goal of supplier development is to create a „Self Managed Supplier‰.

Mr. J.D. Patil (VP, L&T) viewed the key issue in aerospace supply chains is transparency in supply chain to manage risk & IPR issues. The supply chain has to ensure delivery response to respond quickly to fluctuating demands while maintaining lower inventory & project risk.

while maintaining lower inventory & project risk. Prof. Haritha Saranga moderating the Session on Developing

Prof. Haritha Saranga moderating the Session on Developing Aerospace Supply Network. Panel Speakers (l-r) Mr. Harvansh Batra, EADS; Dr. N Shama Rao, ADA; Mr. JD Patil, L&T and Mr. Shankaralingam, TÜV are also seen.

Dr. N. Shama Rao (Group Director Productionisation, LCA, ADA) said challenges are no longer in design, development and certification, but in bridging the process gap the product is in 4 generation but production/processing is in 2 generation; ramping up and improving manufacturability of the product.

Mr. Shankaralingam (Lead Assessor, TÜV) observed that there are shortages of insights and an inadequate understanding of criticality. The supplier industry has to imbibe the practices and culture of aerospace industry.

The Session on Supply Risk Management highlighted strategies to manage supply risk.

Mr. M. Krishnaswamy (Project Director-IRS Programme, ISRO) said that in the areas of satellite technology, ISRO has shown Leadership & world class expertise in space applications. Space systems involve technologically complex systems. Clear & complete definition of requirements exists only in the minds of people.

Dr. Cecil Daniel (Sourcing Manager India, GE Aviation) said Supply Risks are mainly in the areas of Quality, Delivery and Cost. GE expects integrity & compliance, quality & on-time delivery and strives towards cost competitiveness and continuous improvements. At present there are significant gaps in terms of knowledge of engine materials & processes; knowledge of where to buy materials, sources; certification & approval; special processes and ability to quote for parts of packages. Aerospace sector requires infrastructure in terms of certified labs and expert consultants.

Mr. Soundara Rajan (Director, Corporate Planning & Marketing, HAL) observed that in case of weapon systems 60-80% of the risks are in supply chain. Risk Management arises out

of factors such as the very large dependence on

global players e.g. engines; sensors;

composites;

opto-electronics; tightly controlled and regulated environment; transportation & logistics and domestic challenges. There is lot more risk in transfer of technology than in local development programme.

Mr. Anup Vittal (GM, Aerospace & Defense, IBM) observed that aerospace supply chain is global and more complex. The challenges are fulfilling compliance, leverage strategically and supply chain maturity.

The session on Aftermarket & Services Outsourcing brought out issues in outsourcing engineering and after-market services in aerospace industry.

Mr. Jean-Francois Safouret (Head, Airbus Engineering Centre India, Airbus) said Airbus Engineering Centre in India is engaged in Nonspecific Design Engineering Work (NSDW) on make activities on Systems, Flight Physics and Structures. Their experience of India is that there are right technical and programming skills but inadequate domain knowledge. The Main Challenges are developing domain knowledge.

Mr. Shiv Kumar (VP Product Engineering Solutions, Wipro Technologies) said Wipro lays emphasis on maintaining effective relations with client. One has to overcome apprehensions of job losses and loss of control and have a high level of intercultural sensitivity. The principal should be open to technology sharing, set up support systems and clearly specify service expectations.

Mr. Bejoy George (Chief Marketing Officer, Quest Global) opined that risk sharing business models are more difficult for pure services. One should know the budget processes of OEMs to offer the appropriate model. Deferred revenue models are attractive as they provide cash flow synchronization.

Mr. K. Subramony (GM, Overhaul Div, HAL) said that HAL plans to be more of an integrator and there would be significant outsourcing potential. HALÊs outsourced volume would increase nearly six fold from Rs. 291 Crs. to Rs. 1,750 Crs. HAL is being asked to provide post-sales maintenance (MRO) for the air force.

Profs. Haritha Saranga, Janat Shah and Roger Moser chaired the three technical sessions.

New Chairperson of SCMC

Prof. Pankaj Chandra, Director, IIM Bangalore has named Prof. Devanath Tirupati as the new Chairperson of the Supply Chain Management centre. He takes over from Prof. Janat Shah who has stepped down after completing his 3 year term.

over from Prof. Janat Shah who has stepped down after completing his 3 year term. Prof.

Prof. Devanath Tirupati

over from Prof. Janat Shah who has stepped down after completing his 3 year term. Prof.

Prof. Janat Shah