Supply Chain Management Centre
Indian Institute of Management Bangalore
Vol. 2 No.1 June 2010
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
Prof. LS Murty Prof. Dinesh Kumar
Contents
Focus
Student Projects
Insight
Frontier
News at SCM Centre
Corporate Sponsors
Disclaimer: The views expressed in this Digest represent the authorsÊ personal views and they do not represent the official views of their organizations,
PERSPECTIVE
Intelligent supply chain management
during uncertain times
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
3 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
5 determine the location of the warehouses, stock
levels in the warehouses, modernization with
5 good material handling facilities, service levels
to the trade and ability to service the last mile
delivery efficiently. The industry of logistics and
7 warehouse management deserves much higher
focus from the top management, academicians
and business houses to appreciate the current
7 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.
v Is it enough if the Supply Chain Management
continues to follow forecasting and Q, C & D,
in expediting goods to market??
v Can they continue to survive the onslaught
of rapid changes happening in the market
place??
v Can a Company grow their market size, with
conventional (yet relevant some years ago)
Supply Chain Management strategies?
v Can a company keep their business partnersÊ
(Suppliers, Franchisee & Logistics partners)
morale high, with conventional Supply Chain
Management strategies??
v 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.
 Vol. 2 No.1 June 2010
How can that be done ?
Integrated Supply Chain Management & holders:
Intelligent Supply Chain Management.
ISCM ISCM
to
FC & Q.C.D. 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
RM & A.A.I 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 !!
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 amongst employees & stake
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.
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.
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.
IIMBÊs faculty members gave Âexpert commentsÊ and
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
by
Mr. B K Datta
Executive Director, Supply Chain Optimization
Bharat Petroleum Corporation Ltd.
. refinery production plan for individual Refineries is
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
developed. SCO has also put in use Periodic PIMS
(P-PIMS) for periodic planning of few days, weekly,
fortnightly and monthly. Multi plant PIMS (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.
Figure 1: SCO processes cut across a combi-
nation of different business units
3) 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
Figure 3: SCO has invested in Technology
a fundamental shift in mindset away from
tools to drive profit maximization
individual business unit goals.
SCO has holistically defined six integrated
4) Short-term and long-term implications
Business Processes, namely, Demand planning
of decisions need to be balanced, requiring
and review; Crude selection, evaluation, and
a strategic view to be taken. SCO needs to
nomination; Refinery planning and review;
define and prioritize issues such as key vs.
Product exchange; Distribution Optimization
non-key customers, analyze and lay out profit
and Inventory Management. These are described
trade offs in service levels decisions to key
below:
customers, etc.
To manage these complexities, SCO has evolved a 1) Demand Planning and Review
four-pronged strategy involving Technology (use The group runs a time series demand
of leading edge tools/solutions); clearly spelt out planning model, and through
Business Processes cutting across units, People collaborative discussions (among the
(selection and development) and Integration regions, headquarters and SCO), comes
(driving reliability and consistency). Surrounding to a consensus value of finalised demand.
these is the creation of a line of sight between Over a period, SCO has made continuous
units to the overall company goal i.e., enabling improvements in this model, in discussion
different units to understand the overall NCR with IIM-Bangalore, achieving higher levels
impact of their plans or decisions. 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,
Figure 2: SCOÊs four-prong Strategy to man- term-spot ratio, different demand scenarios,
age complexities shipping strategy, etc. Finally, it is subject
 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.
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, 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 The focus of the study is the Delhi – Bangalore
stability. These results bring out relationship route accounting for 30 data sets.
between the factors of interest and provide insights
From the data, it is seen that the average vehicle
for determining the decision parameters of the
speed is around 20-21 km per hour. There are, on
coordination mechanism. The model and the
an average, 25 stops (15 for toll collection) on the
results presented in this paper may be interpreted
way and the average stoppage delay is five hours,
as a building block in the development of richer
about five per cent of the journey time (delays of
and more comprehensive framework.
15-25 per cent of the journey time are also not
Omkar D. Palsule-Desai is Post-Doctoral uncommon). The stoppage delay per km is within
Fellow, Devanath Tirupati is Chair Professor of the corresponding range of 0.0012-0.0060 hours/
the EADS-SMI Endowed Chair for Sourcing and km reported by an earlier World Bank study.
Supply Management and Pankaj Chandra is the
Trip Expenses
Director of IIM Bangalore.
Detailed analysis of the costs involved in a trip
TCI-IIMC Study of Road revealed the following:
Freight Transportation Composition of Trip Expenses
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 Trip expenses including overheads.
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. Overhead Expenses
Problems Faced by the Road Freight Table below shows the minimum, maximum and
Transportation Industry average, all-inclusive trip expenses, freight rates
and profit margins for the 30 trips.
Freight rates are seasonal in nature, vary with
the type of commodity, weight/volume, source- Para- Unit Min- Maxi- Ave-
destination pair and demand and supply of meter imum mum rage
trucks. Because of low freight revenue realisations Trip
and high costs of operations, the Indian trucking Rs./
expenses
industry is making marginal profits or even losses. tonne- 1.21 1.52 1.32
including
Reported profit margins are of the order of 4-5 per km
overheads
cent for unorganised players and 10-15 per cent
Rs./
for organised players. Freight
tonne- 1.18 1.60 1.39
rate
Poor maintenance of roads and lack of access- km
control leads to slow speed, uncertain journey Profit
time equipment breakdown and accidents. % -12.32 21.03 5.20
margin
A considerable amount of time is wasted at
interstate check-posts for completing sales tax- After allocating overhead expenses, 9 out of 30 trips
related formalities. A survey done by TCI on the (30 per cent) incurred ÂlossesÊ, although overall
Kolkata – Mumbai route shows that the vehicle there is a profit of 5.2 per cent which is of the
took eight days to reach Mumbai with 32 hours or order of margins achieved by Indian transporters.
16.67 per cent of the transit time wasted at various
Cost of Delay
check-posts and the average speed of the vehicle
was merely 11 km per hour. Findings of all the ten routes show more or less
similar characteristics with respect to the above-
Survey Findings mentioned parameters except for shipments to/
from the eastern region (Kolkata and Guwahati)
To estimate the operating cost and cost of delay
where the average delay and on-road stoppage
for a 15-tonne truck, a survey was carried out
expenses are on the higher side and average
on 10 major routes in 2008. Discussions with
profitability is on the lower side.
senior officials of TCI in Delhi and Kolkata also
provided significant inputs for the project. The annual profit, interest charges, depreciation,
The average freight rates for a 15-tonne truck tax and insurance together amount to Rs. 610,250,
between each pair of four metros, Delhi, Mumbai, which divided by the annual operating hours
Chennai and Kolkata, varies from Rs. 1.12 to 1.56 (5,000 hours) gives the cost of delay per hour, i.e.
per tone-km. 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 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.
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 ½ generation but production/processing is
in 2 ½ 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.
Prof. Devanath Tirupati Prof. Janat Shah