CHAPTER 2 Supply Chain Management LEARNING OBJECTIVES After reading this chapter, you will be able to: Understand the emerging discipline of + Develop a framework for solutions to supply chain management ‘supply chain problems Know the concept of value chain + Lear the concept of supply chain of SCM relationships Leam the function and significant + Recognise the importance of combination of SCM harmonious relation Note the infra-structural functions + Understand strategies for conflict available for supply chain resolution effectiveness along with problems + Find out means for harmonious supply chain relationship MARUTI: USING THE SUPPLY CHAIN TO SUPPLY COST BENEFITS Supply chain management (SCM) is all about better relationships, Collaborating with vendors with a problem solving attitude and an underlying | trust in them is the key to its success, said A.R. Halasyam, Director (Finance), Maruti Udyog Ltd. (MUL). Addressing a session titled ‘Inter-organizational cost management through integrated supply chain management’ at the Cost Congress 2000 organized by the Confederation of Indian Industries (southern region) on Friday, he | presented a detailed account of the SCM practices of MUL, which enabled it to achieve cost management. The learnings are: * Delight customers: By providing better price-value offering. This can be achieved by re-engineering and re-configuring processes that reduce costs. At Maruti, this has been successfully achieved by adhering to the Kaizen principles diligently. * SCM strategies: \t encompasses all the processes from ‘Mother earth to point of sale’. Seamless flow of material and information is the key for supply chain. This helps in reducing the inventory, which in turn, leads to Contd.»pLY CHAIN MANAGEMENT Ao FEXTWOOK OF LOGISFICS AND SUPPLY CHAIN Contd, low costs and increases th This has resulted in reducing 1998-99 from nine days iatcoiaed SCM: MUL has achieved this relationships with the vendors, better in : in real-time information exchange, mo dor proximity. conecillon and vari has developed a long-term relationship with x the vendors by looking at them as extended enterprises. It trusts Is ce to the extent of asking them to do self-inspection of parts supp! - by = and by not going in for a second quality check at the factory point. This has duplication of work and thus avoiding the improving price-value offerings @ flexibility, ry level at MUL to two the indigenous invento 1995-96. e ioad this more by developing long-term formation management resulting larization, tiers and vendor resulted in minimizing nl rot non-value adding activities. eee Much attention has been paid by MUL in the selection of its vendors, as most of them have been identified as OEMs avoiding Tier-| category. This has led to an effective percolation of all SCM practices across the organization. Modularization: The key area of focus for MUL, modularization has encouraged proximity warehousing by locating most vendors close to the factory unit at Gurgaon. Modularization of vendors has helped MUL in addressing the specific problems of a particular set of vendors. Material transportation: This is the most tangible form of logistic cost and the same has been achieved by a milk-run system. This unique method of pooling supplies of various vendors of one area in a | truck has resulted in a drastic cut in this cost. MUL identified the vendors located in a particular area, classified their Production pattern and achieved | transportation of supplies from them at ‘one go. | + Material handling and storage: This is being effectively managed by using Plastic bins and metal trolleys. This has done | using no electric power or manpower. Source: The Financial Express, 13 January 2000. 21 0 'TRODUCTION Since, the beginning of the 1990s, th business scenario, mainly due to the ee the world, and revolutionar iS po discussed in Chapter 1), Particularly, j the meumunication infrastructure has resulted a ignitude of competition. To sustain themsel ere has been a p beralization Policy Y innovations in ¢ aradigm change in the Y of various economies he field of science and information technolog) ntinuous acceleration if Ves in such an errati¢SUPPLY CHAIN MANAGEMENT 47 environment, firms need to have core competency and productivity. That is why firms are perceived to have more systematized activities related to movement and storage of goods so as to make them available at a short notice with the lower inventory level. For instance, Godrej Locks—a division of Godrej & Boyce Company—has reduced its order-to-delivery cycle from three weeks to only three days. Computer giant Hewett Packard has cut the duration of its cycle to deliver to customers in India from the US by one third, from 37 days to 10 days. All this happened because of higher and systematic Supply Chain Management, the new buzzword in the corporate world. Due to its overwhelming contribution, more and more Indian companies are jumping onto the supply chain management bandwagons for that competitive edge. 2.2. NATURE AND CONCEPT The phase from 1990s onward is recognized as the era of Supply Chain Management, which has been defined by the Global Supply Chain Forum of 1994 as: The integration of key business processes from the end user through original suppliers that provides products, services and information that add value for customers (Acharya, 1999). American Production and Inventory Control Society (APICS) defines SCM as: Organizations that successively transform raw materials into intermediate goods, then to final goods and deliver them to customers (Deshmukh and Mohanty, 1999). According to T. Davis (1993): The supply chain is the network of organizations that are involved through upstream and downstream linkages in the different processes and activities that produce value in the form of products and services in the hands of ultimate customers. On the basis of various definitions and earlier discussions in Chapter 1, Supply Chain Management can be defined as: An external integration of interrelated functions of the firm with its channel members, vendors, and all third-party logistics service providers who contribute in the flow of goods (raw materials, semi-tinished and finished products) and related information from the point of inception to the point of consumption with efficiency (Agrawal, 2001). In other words, SCM is an integrated management of various functions in the areas of materials, operations, distributions, marketing and services after sales with a customer focus in perspective so as to synergize various processes in theNAGEMENT 48 “TEXTBOOK OF LOGISTICS AND SUPPLY CHAIN MA\ he total cost, 1.€. It refers to a Manageria| ‘oces: icipants to design, develo s of a joint aj y chain participa ts p PI pproach of all supply ¢ % she and ope ae hich responds to customer one: by mak: ee a he it q anti ht quality products at the right time and place 2! y ght quality produc ¢ he i ht ne cal ey ca Hence, SCM facilitates to offer best custome; right physi service in a cost-efficient manner. ‘After careful perusal of variou following are the prevalent features organization with a view of optimizing © definitions and prevailing environmen, ® ESCM to mect the challenges ahead. Single Entity control functions across the supply chain, the ha single entity. For example, a group consisting of representatives from purchase, manufacturing, ae re could be the entity for finalizing the marketing plan, the despatch plan, ¢ : production plan and the procurement plan. This has an impact on reducing administrative delays and improving empathy across the supply chain. For a variety of planning and responsibility is made to rest wit! Inventory Perspective While traditionally, inventories have been viewed as a buffer to reduce coordination requirements across activities, the current concept is that inventory is a buffer to be used as a last (as opposed) to first) resort after ensuring proper information sharing and coordination. For example, rather than quantifying the ‘appropriate’ inventory to protect oneself against uncertain process yields, working with lower and lower inventories will perforce highlight the top problem areas where efforts for improving process yields need to be focused. This results ina leaner and cleaner system, which is more responsive in the long run. Some of the key measures that would enable this perspective of inventory in SCM are: (i ea (ii) reducing lead times; (iii) reducing uncertainties; and quality. These measures address some of the major reasons why Inventories are held (the first to do with batching inventories, the second with Pipeline inventories and the last two with buffer inventories) Strategic Decision-MakingSUPPLY CHAIN MANAGEMENT traditionally the efforts would between, say, marketing and prod would have facilitated smooth Supply Chain Relationships The supply chain concept emphasizes more of harmonious relationships among, all the members such as vendors, channel Participants, and all third-party logistics service providers. The contributions of supply chain members are significant for the performance of the organizations. For instance, the experts on SCM suggest limited number of vendors along with their high level of motivation to take appropriate actions for achieving the objectives of the buying organization. Flexible Approach Today’s supply chain are designed for flexibility in all the processes of company’s supply chain system, starting from manufacturing to warehousing, which plays a very important part in improving the customer service. Since business conditions are certain to change, the supply chain configuration should be a flexible one. For instance, Flexible Manufacturing System (FMS) leads to more and more computerized distribution cost efficient systems. Furthermore, a flexible approach towards demand-focused manufacturing can help firms in minimizing the inventory levels in the supply or demand flow channels. 2.3. VALUE CHAIN Nowadays, corporate enterprises are to a large extent alae aupely chain systems in their organizations in order to gain a competitive e¢ ee in 4 e mar! Ke place due to its value addition capability in cost-efficient eae oe SCM ensures superior customer value for core Conran Ne pied ott quality logistical services at minimum costs. That is ee eee eae SCM focuses on speedier flow of goods, cash, oe i ue within the complete supply chain process as illustrated in Fig. 2.1. [Link].C.M-55 rEXTBOO 5 AND SUPI IAIN MANAGEMENT i EXTBOOK OF LOGISTICS AND SU PLY CHAM s v a — — : FLow OF GOODS sag ul — Diteoision snaporer bol s : LL ind Operational) FLOW OF INFORMATION (Coordinating and Ope poamaptty Consistency FLow coms ‘Quick Response Fig. 2.1. Value Chain of SCM Source: D.K. Agrawal (2001), 7 Ms to Make Supply Chain Relationships Harmonious, Proceeding of National Conference on People, Processes and Organizations: Emerging Realities, Excell Book Ltd., New Delhi. In the value chain of SCM, which starts with vendors and ends with consumers, via the shipper (in-bound transporters), producer (manufacturer), out-bound transporter, distribution warehouses, transportation from there to customers and finally, to the end user (consumer), the flow of goods and value are in forward direction for greater market dominance and the flow of cash is in a backward direction to the total business system alive, whereas the flow of information isin both directions for activation and improvement of the total supply chain system. Value Flow Value is delivered through the defined busines: goods and services, The flow ; u ctivity of the firm in the form! snp chain res yeah supp ena ora detion i goods or source received by hire yep ate Participant adds some value in th delivery to the next part The pom is Proceeding member before makit! Costs, quick respon ie re value addition may be in the form of qualit!: » availability and Consistency of the logistical ea For instance generally, if g id due to late availability, its ¢ , » Ma product remaii ; , NS unso! a ilability, i increases due to involvement of working ee thee Bc, gradual decrease in the physical atr; apital and value decreases due © amiaed product (due to michs 4h » Or take the instance of delivery of! The same cannot be s 8 during transit) by the company toa dealt Product unless ir j to the d fs oe ‘ecrease in the value of th these embarras . e value o sn ie. Ay . allue of the east’ SCM prevents fo" the products, Stecovered from the dama nents and enhances the vSUPPLY CHAIN MANAGEMENT 49 traditionally the efforts would have been aimed at develo, bs between, say, marketing and production, or sourcing and cme eee eee would have facilitated smooth operational functioning, ines Ihenne eee which significantly cut across both sourcing and ee i ce outsourcing, been considered. The integrated concept of the supply cee oe IS. Doing the Best One can In the various activities of the supply chain, it is important to foc d what one can do best. This has implications on outsourcing or even inseun ee” and building effective partnerships. The more extensive the logistics requiemen and/or the more uncertainty due to logistics supply, insourcing en be te direction (as generally is in the case of bulk manufacturers). Else, the general norm in this business in today’s times is outsourcing (as is usually the cave of consumer goods and durables). : Supply Chain Relationships The supply chain concept emphasizes more of harmonious relationships among all the members such as vendors, channel participants, and all third-party logistics service providers. The contributions of supply chain members are significant for the performance of the organizations. For instance, the experts on SCM suggest limited number of vendors along with their high level of motivation to take appropriate actions for achieving the objectives of the buying organization Flexible Approach Today’s supply chain are designed for flexibility in all the processes of company’s supply chain system, starting from manufacturing to warehousing, which plays a very important part in improving the customer service. Since business conditions are certain to change, the supply chain configuration should be a flexible one. For instance, Flexible Manufacturing System (FMS) leads to more and more computerized distribution cost efficient systems. Furthermore, a flexible approach towards demand-focused manufacturing can help firms in minimizing the inventory levels in the supply or demand flow channels. 2.3 VALUE CHAIN Nowadays, corporate enterprises are to a large extent developing ee systems in their organizations in order to gain a competitive edge in ee words place due to its value addition capability in cost-efficient ways. ie 7 nee SCM ensures superior customer value for core competency ae es ae quality logistical services at minimum costs. That is oe i _ eee SCM focuses on speedier flow of goods, cash, value an ie De Within the complete supply chain process as illustrated in Fig. 2.1. [Link]. y CHAIN 50 ‘TEXTBOOK OF LOG ISTICS AND SUPPL’ gaa ee re Se cASHFLOW “| :| a e| a ‘| mec. | ; tssel | - ° | ~ ational) N lc LOW OF INFORMATION (Coordinating and Ope " | re vail consistency > Flow | E SS el / Fig.2.1 Value Chain of SCM Source: D.K. Agrawal (2001), 7 Ms to Make Supply Chain Relationships Harmonious, poe eesing of National Conference on People, Processes and Organizations: Emerging Realities, Excell Book Ltd., New Delhi. In the value chain of SCM, which starts with vendors and ends with consumers, via the shipper (in-bound transporters), producer (manufacturer), out-bound transporter, distribution warehouses, transportation from there to customers and finally, to the end user (consumer), the flow of goods and value are in forward direction for greater market dominance and the flow of cash is in a backwaré direction to the total business system alive, whereas the flow of information isin both directions for activation and improvement of the total supply chain system. Value Flow au dred soup fied busines activity ofthe fm in ce fos supply chain process as h of value is always in a forward direction in the goods or source received be ee chain participant adds some value in the delivery to the next part y him from his proceeding member before makit? costs, quick pn ah Ne value addition may be in the form of qualit': instance, generally fa rod Us and consistency of the logistical system. Fo" » a product remains unsold due to late availability, its co increases due to involvement of working ‘apital and value decreases due ment of wor ing capital and value dec 7 damaged pot (eto mshanng dung care ee eton ring transit) by the com le ‘ pany to a deale! these embarrassment: ge. Appropriate SCM prevents fro" sand enhances the value of the Products,SUPPLY CHAIN MANAGEMENT S1 Goods Flow The second item of flow in the value chain of SCM is goods or inventory, which is the heart of the total system. The flow of goods are always in » forward direction, ensuring better customer service, superior value, greater market dominance and higher market share. Raw materials flow from suppliers or vendors to the producer, the work-in-process flows between the various production subsystems and finished goods flow from the last production price to the ultimate users of a distribution warehouse and distribution channel. Smooth flow of goods from vendors to consumers prevent stock-out situation for any item of inventory. Systematic and sophisticated supply chain approach deals with better customer service with lower inventory level and flexibility to meet unforeseen requirements. Cash Flow Flow of cash in the value chain of SCM has commercial significance, which flows in a backward direction (against the value and goods flow) to keep the total business system alive and activated. Cash flow basically deals with the money paid for goods and services received by a supply chain member. For instance, the end user pays money to a retailer against the product received by him. Similarly, the retailer pays to wholeseller, the wholeseller to the company’s distribution warehouse; distribution warehouse to the head office; the company’s head office to the suppliers of the raw materials. Any credit/advance is with respect to the transfer of title and/or service delivery in the supply chain. Information Flow Information flow is as significant in the supply chain as blood is for human life. The flow of information in the value chain of SCM is in both directions tor activation and improvement of the total supply chain system. The nature of backward information flow facilitates coordination activities consisting of quality feedback, customer order and specification, procurement quantity with specification and timing, strategic capacity, production and despatch planning, etc. However, the forward information flow refers to operational activities consisting of availability of goods, order processing and management, order status, invoice, transportation and shipping advices, quality assurance, warranty card, operating manual, etc. Any delay in the information flow costs to the company ranges from higher transportation cost (o lost sales and tae image. In a broader sense, there should be a trade-off between value flow ani information flow, as between goods flow and cash flow. For instance, a more streamlined value flow needs quick response in terms of a speedier eh of information regarding the quantity required by customers oS , specification, timing of delivery, etc. Similarly, an a ier nue oe from company to customer leads to a speedier flow of cash from the ¢ to the company.K OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT [BUTIONS 52. TEXTBOOI 2.4. FUNCTIONS AND CONTRI global market, focus on time is the basic strategy for Supply chain management Is concerned with the he supplier and operate in a win-win situation }, he customer in a timely, cost-effective manner If the supply chain is not managed properly, the delivery Cae is bound to fa, resulting into customer dissatisfaction and finally, loss of business. Regardin, major contributions and functions of supply chain management, Raghuram ang Rangraj (2000) have identified the following 15 key thrust areas: In a highly competitive building competitiveness. philosophy of nurturing ¢ providing goods and services to U Minimizing Uncertainty due to unreliability of vendors; process uncertainty due to internal processes; and demand uncertainty are some of the major hurdles to effective SCM. Supply uncertainty can be addressed through a number of initiatives such as vendor development and certification, sharing of production planning information and joint attention to transport arrangements. Process uncertainty is due to machine breakdowns, uncertain yields and absenteeism, which can be addressed through good maintenance practices, better technology, etc. Demand uncertainty can be reduced to some extent by forecasting techniques and developing a better communication with customers. Supply uncertainty Reducing Lead Times Lead times at the stages of procurement, conversion and distribution can be cut down by faster modes of transport, better planning practices and process technologies Minimizing the Number of Stages In general, the number of stages that the goods and services flow through add to the complexity of SCM. Unification of tasks and reducing the number of stages ease the coordination of decisions. This is the essence of another managemen concept, namely Business Process Reengineering. Improving Flexibility Red | : mee ea times in various processes and the use of flexiblé ind assembly techniques improve the flexibili In fog nprove the flexibility of response. = pes oe ee smaller vehicles provides flexibility in making despatch Benepe ne ‘out being constrained by batching economies. As an extende! » wher - P ‘ever possible, batch processes should be transformed int? continuous processes. Improving Process Quality A prerequisite to effective SCM i entories and wastae! i in the light of reducing i g : 7 ve 9G ie | icing invent. is to do things right the first time. This is ideal for improving the oe qualitSUPPLY CHAIN MANAGEMENT 53 The techniques for doing so include statistical process control, root cause analysis of poor quality and improvement of process capability Minimizing Variety Variety is one of the major causes for inventory in the downstream part of supply chains. One response is to modularize product designs so that variety is offered in a controlled way and some economies of scale can be exploited. Another is to standardize product and service offerings. Managing Demand Uncertainty and anticipated variations in demand should be dealt with by appropriate promotion and branding. This will enable a better control of the supply chain, right from demand generation. Delaying Differentiation The value addition through product differentiation should be postponed as far as possible, so that precise customer needs can be met without holding committed Stocks in the entire chain. There are numerous examples of how this can be done, such as shipping of component level goods to major points and assembling as per customer needs, postponing finishing operations like grinding and mixing of additives to cement till near the final point of consumption, etc. Kitting of Supplies In assembly systems, a major source of delay is during staging, where some components for assembly have to wait since matching components are not available. Vendors or internal facilities that supply components can be arranged so that all the components required for an assembly (or major sub-assembly) are manufactured or supplied to one stage where they are kitted into sets of matching components, ready for assembly and further operations. This could involve some restructuring of vendors or internal activities and some vertical integration, Focusing on ‘A’ Category This is a well-known idea from classical economics and inventory theory, where special attention is paid to items that account for a large part of the value, or which arecritical, and/or customers who are significant, and/or territories that are important. Planning for Multiple Supply Chains Doing better SCM would often require different supply chains for different customer segments based on response requirements. The tendency to club supply chains in the interest of efficiency can be counter-productive for effectiveness.SUPPLY CHAIN MANAGEMENT 54 TEXTBOOK OF LOGISTICS ANI . Measures ing Performance ees acl from being single-actor focused to multi-acto, move from Je, in the context of a warehouse, insteag For example, easure of warehouse performance. the primary SCM, since this focuses on bor, emi a transporter like the railway, Se eiverine a wagon/rake toa Customer gon utilization/turnaround. These measures need to focused in the supply chain. of warehouse space utilization as the retrieval time would be more in ‘un the warehouse and the downstream oe would focus more on the time taken : a from the time the indent is placed, rather Competing on Service ng-term competitive advantage is on the The big opportunity in SCM for lone ermner. Product quality and feature, service aspects of value delivery to th can only be short-term advantages. Moving from Functions to Processes Improved supply chain practices will require integrated process orientation rather than functional organization. Job rotation, and flatter and lean organizations will help. Taking Initiatives at an Industry Level Taking initiatives very essential, especially in dealing with poor infrastructure Industry-level (rather than firm-level) initiatives in specific product categories can focus on, say, transport and/or warehousing inadequacies and help develop appropriate service providers. There is a big Opportunity for third-party logistics services here, ae 5 » Customers, carriers, etc. It is responsible movement of products from vendors to Customers through manufeceurng facilities, warehouses - as transpor agers, etc. Hence, 5 and third-parties, such i 7 Porters, repackag . a supply chain must work effectively, for which there are five key iss : ues, (i) Movement of Products; (ii) Movement of Information; (ii) Timing of Service: , (iv) Total Logistic: ‘ 's Costs; (v) External and id Internal Integration of Activities For the Successful requirements of the abo Performance i : f Supply chain activities to meet the in terms of internal a ve key issues, it j 5 Ss well as eee i ana to have adequate infrastructut® 1a ‘acilities, Hence, an appraisal of theSUPPLY CHAIN MANAGEMENT 5S Indian infrastructural facilities is essential. S.K. Acharya (1999) managing director of Indian Container Leasing Company, has quite rightly identified the Indian infrastructural bottlenecks and challenges ahead are as follows: (a) When we look at the infrastructure available with us, we wonder how we are going to progress in this millennium. We have the second largest railway network in the world but it is getting clogged day by day. We have roads connecting the country from one part to the other but their width and surface are of serious concern. Average speed by rail is 22 km and by road it is 25 km, as against the average speed of traffic in the First World at 75 km. To this extent, the productivity of our rolling is less and to that extent, supply chain management is more difficult in this part of the world. (b) Inthe development of Supply Chain Management, we are still at the bottom of the ladder—we are still at the stage of trucking and distribution. There are not many companies we can remember who are in Thirty-Party Logistics Management business in India. Of late, corporates are professionally looking at this area. (c) There have been efforts by the government to create road infrastructures which will make us at par with the developed world. But the kind of funds. that we require to set up 10,000 km of super highway may pose a very serious challenge. (d) Our transportation and distribution management business process has a long gap to be bridged to take us to the twenty-first century. ‘As you have seen, the world is much ahead of us and we have a lot of gap to bridge. This, however, is not a matter of very serious concern. When things start changing, it is very, very fast. New dynamics step inside the existing processes and realignment starts taking place. To my mind, the change engines which have really made qualitative contributions to the economics of the world are the automobile revolution, the retail revolution and the container revolution. The automobile revolution has already started in India—competition has set in. The other two are waiting on the sidelines. In this revised scenario, there is a tremendous challenge before the Supply Chain Managers in the industry because here the opportunity exists best in saving wastage and adding value in the total process. The key to tomorrow’s success lies here—I see a tremendous role for the Supply Chain Manager(s) as a catalyst to the change ahead of us. (a) Despite the limitation of infrastructure, there is a lot to be done in the Supply Chain Management. We need to ensure that in a country of resources constraints like India, each resource is utilized to its highest capacity. This calls for creation of an attitude of partnership among supply chain partners. All the partners who are involved in movement of raw materials or finished products need to be made a part of the same planning process which will determine deployment of resources within the supply chain as also ensure the highest productivity in the same. This will mean that when we do our projects for sales, we do it together with all our supply chain partners and(b) PLY CHAIN MANAGEMENT TEXTBOOK OF LOGISTICS AND SUPI ' jon with the entire supply chain. bet only tha, create a complete plan aN recently been having discussions wy," I will go one step further - scnaret in India, who is trying to build , one very large white goods manula Fi, products in a vehicle which a container to take the optimum num! she problem, foeerer ease es will be this best suited for this Eee rill have limitations to = return loads vies Haat of which the total costing was becomip, other T7Pe® ay suggestion was that why should anyshing an US fron, vollaborating with our competitors in the ome pee * eater = carry their goods in the same vehicle? Let us leave ¢ oe er Marke, place and in the media, and share our resources in 0 i" PP. ly c ie Which will give us maximum possible cost-efficiency—this ts how we will redefing Supply Chain Management in the country. Let us now address the issue of infrastructure. We had earlier discussed the inadequacy of infrastructure in the country today. Despite being in an economic down turn, we still expect growth rate to be in the vicinity of ¢ per cent. Experience of the other countries says that interstate passenger transportation grows 1.5 times and that of cargo transportation grows |} times of GDP. This means that in 7-8 years’ time, passenger transportation will double, and freight transportation will double in 10 years’ time. We need to spend US $ 10 million to create the road infrastructure to help us get into the twenty-first century. The government is at it, but it will take time and itis not going to be an easy task. When we look at the West, we find that of late, there is a substantial growth in dome: transportation, which is ener; we look at India, ii stic intermodal gy efficient as also environment friendly. When whether to have ‘or the twenty-f; by rail or the road-based «SUPPLY CHAIN MANAGEMENT 57 2.6 FRAMEWORK FOR SUPPLY CHAIN SOLUTION, After comprehensive discussions regarding the Indian infrastructural bottlenecks, general perceptions regarding the prevailing logistics and supply chain scenario regarding opportunities and challenges today and in the future ar (i) Huge scope for logistical cost reduction and substantial improvement in service level due to government's serious concern about infrastructural development. (i) Revolutionary innovations in the field of information technology, communication technology and inventory control technology provide immense scope for their extensive use in solutions to logistics problems (iii) Due to an orthodox mindset of the corporate world, coordination is the greatest challenge before the supply chain management. But, a gradual increase in the awareness among them that it is a win-win solution to all, the supply chain process has become the need of the hour Keeping in mind the above perspectives, a framework for solutions to logistics and supply chain problems can be suggested in which initiatives should not only be taken at corporate enterprises level, but also at government, third-party logistics service providers, vendors and industry levels. Government 1. Macro-level policies and regulations should be made for smooth flow of products in the interest of the nation. 2. Privatization of existing infrastructure should be made gradual to improve the quality of service. 3. Fresh infrastructural development should be initiated with greater pace. 4. Inthe strategy formulation, participation of industrial association should be encouraged. Third-Party Logistics Service Providers Being a major contributor in the success of logistics and supply chain system, third-party logistics providers should: 1. Recognize the importance of logistics and supply chain management by appraising the trade-off between logistics cost and value addition. 2. Identify the significance of customer service components affected by logistics. Put continuous efforts for reduction in the logistics costs and improvement of customer service. 4. Coordinate with other supply chain members because they act as a link between the buyer and the seller. 5. Continuously identify scope for further reduction of co: integration of inbound and outbound transportation, they alliances with corporate enterprises for return journey have lower transportation costs. » sts. For instance, the should have strategic loads so that all will TLSCMsj MANAGEMENT TEXTBOOK OF LOGISTICS AND SUPPLY CHAIN 58 X Vendors _ starts with vendors who supplies ra’ material, , a Any supply chain proces that they should fy and determine their role in the supply chain process along - Identity an ms of services. contribution in tert ; magnitude of ly can affect a client’s customer service capabjj, Realize a Siete of supply of only quality-certified Produc, Recognize the gr dente ed 7 quick response, lexibility in approac Pl od ctivity, for reducing their own costs and improving service capabjlr, rodu apal Industry ‘At the industry association level, there should be: 1) Regular organization of seminars, workshops and conferences fo, development of awareness regarding the overwhelming contribution anj significance of logistics and supply chain atmosphere and systems in corporate enterprises. 4) Organizing the unorganized sectors like vendors, C&F agents, distributors, transport industry, etc., who contributes tremendously in the success of logistics and supply chain. 1) Lobbying with government for infrastructural development, uniformity and streamlining of taxes, incentives and motivation, etc. 2.7 OUTSOURCING AND 3PLS usiness environme!"SUPPLY CHAIN MANAGEMENT 59 duet Gulf War in 1991, liberalization and globalization of of the world, which ultimately complicated the functionality ae all economies in terms of competition from cheaper countries, rising coe eh ees urther distribution, etc. The business world quickly studied ance nareeting and activities and non- value-adding activities, This action fachtged tee nadins their mindset and concentrate on only the former and lena fe redefine firms who have the expertise it doing that at a more ecome nn fee otter seeking the services of external agencies/organizations that cell foe an value adding services. This isthe genesis of ‘third-party lowercase nom” (3PL). The business activity of farming out identified nonce ee external agencies came to be known as ‘out sourcing’ (SCI. 2002) nents to f | Chennai-based SembCorp Logistics (SembLog) is another logistics provider with warehousing space, fleet management and the other value-added | services on offer. In many ways, Sembcorp shows how the 3PLs in India will look like, SembLog's core competencies are Integrated Logistics in the area of Supply Chain Management and other component services like warehousing, transportation, freight management services (ocean and air), trading logistics, cold storage and logistics consultancy. Currently, SembLog manages around 60 warehouses across the country, | spread out in 10,50,000 sq, ft area. As a part of the warehousing facility, | SembLog provides certain value-added services like MRP labelling, tagging, stickering, bar code scanning, repackaging, kitting, PDI, repairs/damages, payment collection and banking. | SembLog has 30 branches in India and has contacts overseas in terms | of parent company's presence and their strategic alliances in Southeast Asia, Australia, the USA, the Middle East and Europe. With the partnership of | SembCorp Logistics, Singapore with Swiss-based Kuehne & NageV/USCO Logistics tie up in place on a global scale, the network has further widened worldwide and spread out over 600 locations. Kuehne and Nagel are leading international ocean and airfreight forwarders. USCO Logistics, based in North America, has a strong American presence and is the leading integrated | logistics player in America. Sembcorp lays claim to several changes in the The state-of-the-art Logistics centre set up by Semb in India buil to international standards with the highest safety norms, racking for storage and latest material handling equipments. It is a multi-shared facility with the ‘pay as you use’ concept and is fully self-sufficient in all ae The logistics centre was first set up at Puzhal, Chennai. A similar faciity i also operational at Chakan Village, Pune and nate ae a facility wa: operational in Mumbai by June ity was expected to be oper: chennai with 100,000 [Link] of space This firm's warehouse at Puzhal, near Indian Logistics scene Log is the first of its kind Contd.IMENT y SUPPLY CEIAIN MANAC EK OE LOGINTTES AND 9 0) VEN Contd ds, can earty loads up to see Whas its fluent treatment plant and hy, own electrical suns ae ic eaien srclaliie auebage te vacuumed dewatered co Lead ore ny time, which is @ novelly in Indien stric dock levelers and forklifts may warehousing bedi oe Seearatees Gita ianaratira ai pte aa a ar cules In India, these points are More often ignoreg cases SembLog has also launched the cold storage facility at the Chennai logistics centre. His a multi-user facility to store products that require reservation at lower temperatures, for example, fruits, vegetables, trench nas ice cream, cheese, etc. The facility is segmented into ne a ante roam (10-15° C), cold room (2-8° C) and freezer room (—18-23° C) and is spread out in an area of 1500 sq. ft with a capacity of 24000 cu. ft in volume. SembCorp has a wide variety of clients, a must for a successful 3PL which enables it to leverage economies of scale. It has clients in FMCG. consumer durables, auto, tyres and apparel manufacturers and claims to handle more than $150 million worth inventory for them. ‘Our core competency is transport and containerization. We aim for 98 per cent reliability and satety and work on the basis of ensuring return cargo in the fastest possible time, says the company spokesperson. For IT, which is so crucial for 3PLs, SembCorp has a custom-made inventory software called ILIS (Integrated Logistics Information System) developed by Oracle. Along with other functions, it is also EDI and bar code enabled, which allows seamless information flow. Sembcorp has connectivity with alll offices and branches and users can, at the cost of a local call, log onto their lotus notes and access all shipment details, irrespective of the operating systems used. Beyond these 3PL functions, Sembcorp also provides consultancy. It claims races team can start up a depot 30-45 days from the date of signing agreement While there are several companies providing value-added services, what will separate the winners trom the losers is the abil ity to provide an integrated and widespread reach, very crucial for India. 7 ‘and built to international standar warehouse area can hold 2 Source: Supply Chain and Logistics, 2002, ETIG Knowledge Series, pp. 45-46 Outsourcing has not picked up in Indi increasingly, today, logistics Providers arour offering a suite of services that it logistics solutions, implementing t, shipme" consolidation, ¢; select agement, s! informati ny carrier selection, rate negotiation tleet management, log's ‘on systems, reverse logistics, order fulfilment Management x S| rag it, mult model transportation, value-added services lik cking a tracing or the shipment, ed relebelling/repack : ackii ae . estitt supply chain management, freight reap he ae assembly and fe » consultancy, etc. a the way it has in the Us. BY nd the world as well as in India, ludes logistics planning, developing custom!” solutions, Warehousing m: entor and processing, inven"‘SUPPLY CHAIN MANAGEMENT 61 Outsourcing and 3PLs provide several advantages for the long-run strategies cores competency to the firm which are as follows. Cost Reduction pL providers are specialized service providers with core competency in managing logistics operations. Just as an auto or a consumer durable company has manufacturing expertise, a 3PL provider offers benefits of economies of scale sind lesser cost of services. They are able to do this because of pooling in idle time of resources that translates into reducing operating costs and interest costs. Cost control benefits may not be immediately visible, but the experiences of the advanced countries in the use of 3PLs over the past 10 years do suggest clear, direct and indirect cost benefits. Maximizing Revenues By outsourcing the logistics function, companies are able to concentrate on their core areas and can utilize both financial and non-financial resources where it can maximize returns. The 3PL providers take care of routine work that frees human resources and time spent on routine functioning. Il Facilities ‘Timely flow of information from production centres to the shop floor is as important as the physical flow, because ultimately, the sourcing and production depends on the raw materials and production availability. Providers have entered into specialized operational research models to quantify the impact on the cost for different patterns for the distribution chain for any combination of multi- model movement under given cost parameters. In this way, the customer can consider all possible scenarios before choosing the optimal supply chain. Cost Control Controlling costs is distinct from reducing costs. A company’s primary concern is to control costs and then think of reduction. Nowadays, it is quite visible efforts by almost all the companies at the shop floor and at stores that are driven towards controlling costs. So, while individually, these ‘kaizen’ or cost-control measures may not transform into tangible results but collectively, all the companies stand to gain in the long run. Working Models Outsourcing for companies in India has different meaning® From an organizational structure point of view, three distinct models may be visualized. First and the most widely used model in India even today is of internal purchase, sales and dispatch departments that handle all the commercial and sourcing functions for the company. This has been the traditional way of working with itsyppLy CHAIN MANAGEMENT Xp st oqistics AND scTROOK OF LC 62 . er, over the past few Years, We are seein, \s. Howe! 2 oiled by what companies term as the d and cot d by senior personnel such as oe c i ‘own hierarchy and contro! heade' ion ent that logistics and supply a te these functions getting ee ‘cupply chain’ of “logistics: 0" residents eneral managers: It is evi idents and gen al managers pecs companies. tant role in ¢ h med an import lepartment that handle; ,) management has oa ta separate logistics dep: al The second model Is house management and -s activities of transport, eee be the company itself Co naa h suppliers and its client s function to a third- ee fi of outsourcing the entire logistic: Par, The third option s nt. that epecialies in logistics manageme Roadblocks ETIG’s meetings with more than 60 manufacturing companies an) logistics ETIG’s ings fi id 7 rs, consultants and academicians have revealed a few factors hindering the players, c da few f. taster growth of 3PLs (SC&L, 2002). Some of them are: 1. Volume of Transactions: Almost all the companies acknowledged the need for a separate logistics department that monitors the inbound and outbound logistics and uses the synergies in handling the logistics function to its optimum. However, the volume of transactions is not big enough to set up an independent department or outsource the function. Hence, we find Indian companies still using the first two types of models. Cost Control: Indian companies believe that outsourcing and use of 3PLs for any function other than manufacturing will not benefit the bottom line. 3. Not Good Enough: The benefits offered by using an external agency to which all the functions can be farmed out are not clear. Most companies, when contacted for 3PL services, could do a better job than its own resistance to this concept. Mindset: Indian companies resist cha © until it is forced upon the! resist chan, iB it is forced ni : Ganga: d computerization in PSUs like banks, people fea! we Were not clear on how the external agency people. There does seem to be organizational ureaucrac} Y to a more efficient sses. : fee t player. Job losses are jus! ss of control by managers. ally picked up in India the wa iders around th Services that includes logistics pl and raat Solutions, wareh ton; c » alr a 3 Consultants now ee antes also offer to ce sea freight forwardine customers, often allocanae (eeo” the whole suppl and repack the goods. cating functions to 3PLs aap from vendor t© S, as shown in Fig. 2.2- y ithas in the US. But increasingly : gly '¢ World and in India, are offering a suite of lanning, d : ustomized logistics s ons, ‘Ouse management, logistics solutioSUPPLY CHAIN MANAGEMENT 63 Special ee “sor Delivery nventory \\) Handling Cost jousins anon Control Require- Control ment Change Manage- ment Ss > Activities Carried out by a Traditional Distributor ies Carried out by a SPL > >) > +) ) Activities Carried out by a 4PL Fig. 2.2 Trends of 3PL and 4PL Customer Source: Accenture India. THE CHECKLIST 3PL Services Shipment Consolidation Warehouse Mgmt. Carrier Selection Rate Negotiations Fleet Mgmt./Operation Logistic Infor, Systems Product Returns Order Fulfilment Order Processing Relabelling/Repacking Customer Spare Parts Inventory Mgt. Product Assembly Product Testing Multimodal Transport ‘Supply Chain Mat. Source: Armstrong's Guide to 3PLs and Global Service Providers.NAGEMEN1 TEXTBOOK OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT no other industry 1s currently ueiliaing the serig of outsourcing in India. In FMCG, paing 4 in India, the C&cF agents are doing the ion”! « do not feel the need to outsource. In." p for 3PL services. 64 Except for automotive, a 3PL, which reveals the state consumer durables companies the companie! viders so Seria cof the companies have gone cement and steel, non 2.8 FOURTH-PARTY LOGISTICS (4PLS) H lent C In today’s industrial scenario, there has been an unpreced ed Inereae . In i mee demand—for better service and on-time de! oe at reduced co. customer’s Th has put extra pressure on the area of logistics and supply chain managem.,, * expe from the suppliers are continually increays, tomers Liane cad has been further augmented by the proliferation This expectation and dei ead the web-based technologies and the emergence of the late, phenomenon called convergence. Traditionally, suppliers and big corporations have been meeting the demang, by increased inventory, speedier transportation solutions, posting On-site service engineers and many times employing a third-party service provider. Today they need to meet increased levels of services due to e-procurement, complet: supply visibility, virtual inventory management and requisite integrating technology. To meet these demands, the general trend has been to outsource the service providers—better known as third-party service providers. However, these service providers, many a times, lack broad set of skills, integrating technologies, strategies and global reach. To build up this strength, many third-party service providers are going for collaborations, mainly with consultancies and technology providers. Now Corporations are outsourcing their entire set of supply chain process from single organization which will assess, design, make and run integrated comprehensive supply chain solutions. This evolution in supply chain outsourcing is called Fourth-Party Logistics—the aim being to Provide maximum overal benefit. et =a rare = nies that — and manages the resources Organizations who provide en cae oe Organization and other a comprehensive supply at olanighe Th pa ea delve complexity, shares benefits of scale and cay i I ee ee ae ane ea sti and can drive innovation due view toward: : in the market today. Firstly? value thegh ee ensive supply chain solution and secondly, a TL delivers these concepts, 4PLs have evecare on the entire supply chain. In bot? hms €d' because of constraints f, st He ai ape competencies of 3PLs and business ea mat - ve dele lution through a centralized point of contact. A: the 4PL ters (0 . As the cal multiple clients, the iny i ients, ‘estment is spread a i of economies of scale. 2 cross clients, thus, taking the advantag*SUPPLY CHAIN MANAGEMENT 65 Stages of. Fourth-Party Logistics Solutions Reinvention ar the highest level of fourth-party logistics is reinvention. Reinvention tak advantage of the traditional supply chain management consulting still " es business strategy with supply chain strategy and is facilitated by technoley al im integrates and optimizes operations both within and across participating supply chains. Transformation The second level of fourth-party logistics solutions is transformation. It focuses on improving the supply chain functions. This includes sales and operation planning, distribution management, procurement strategy and customer support. Technological leadership and excellence is leveraged with strategic thought design and organization change management in order to improve process and integrate these supply chain activities by bringing about the best breed solution. Implementation The fourth-party logistics solution provider implements recommendations for an efficient use of supply chain management. This includes business process realignment, technology and system integration across the client organization and service providers, and transition of the operators to the delivery team. Execution ces the operational responsibility for multiple ortation management, ply chain, information customer service The fourth-party logistics provider tal supply chain functions and processes. It covers transp warehouse operations, manufacturing, procurement, sup] technology, demand forecasting, network management, management, inventory management and administration. In summary, the fourth-party logistics 4PL responds effectively to the broad complicated needs of today’s organizations by delivering a comprehensive supply chain solution. This solution is focused on all elements of supply chain management, continuously updated and optimized technology and is tailored to specific client needs. With the advent of IT’s role, the effectiveness of fourth-party logistics can be greatly enhanced by implementing systems at all levels-ERP, DSS—transactional and functional. It provides current information, allowing 3 organization to redirect the product flow, if desired, and forecasting the volumes. It also allows the user to track performance accountability at all levels within the supply chain line While monitoring continuous performance opporruntticspEXTROOK OF seasTICS AND SUPPLY CF N NI IN MANAGEM LOGE D x1 of Fourth-Party L 1 quali Proeilared by the application of leay, : 66 Cost Effectiveness w 1, Revenue gro" ; improved customer servic technol08y” suction can be achieved through ating cost re eae : Seat and procurements. oa e : outsourcing of supply chain Funct Lal peng Fi ions will resu! 7 3, Fixed capital ne fourth-party logistics organization will own tts physic, fe core co asset eas fering up the client organization to invest in core Competencie assets throuj CT AND SUPPLY CHAIN Logistics ty, product availability d by enhance’ th by vice —all faci yperational etfcaiencies, prog, Il be achieved by compi,, t selected components anster and enhanc, 2.9 BULLWHIP EFFE! ‘bullwhip effect’ in the supply chain occurs whe, ‘Mlarmation about demand becomes increasingly distorted as it moves upstrean in the manufacturing process. Procter & Gamble (P&G) first noticed the n with the US when the company examined order patterns for i at retail stores were ‘The phenomenon of the phenomeno diaper brand—Pampers’. Sales of the diaper brand fluctuating, but the variability was not excessive. This was because the frequency of purchase ata single retail store 1s more or less constant or at least predictable since the same families shop at a particular neighbourhood retail store and babies change diapers at known intervals. For distributors’ orders, the degree 0! variability was much more. The demand order variability amplified at the hiy levels of the supply chain. When P&G looked at its orders of materials to their suppliers, such as 3M, they discovered that the savings were even greater The ‘bullwhip effect’ phenomenon first wdentitied by Seungyin Whang etal (729s) aun variations in reaction down the length of a whip otter cee he bullwhi rie fee expensive manufacturing problems. He explain Pte capPens in manufacturing when information about consumer de: : mand for any product becomes increasingly distorted as it move mes of the me ‘onth or year Companies makeSUPPLY CHAIN MANAGEMENT 67 practice of batching because it saves time and money. It is cheaper, for example, to transport infrequent large orders than frequent small ones. Likewise, the administrative costs of generating one large order of a certain item are smaller than the cost of generating many small orders of the same item. But while sporadic ordering is cheaper, it leads to unsettling surges in demand on the manufacturing side. Plants may scramble to accommodate beginning-of-the-month orders, then lie idle for weeks while the products they rushed to make sit in a retailer's warehouse. A healthier scenario, say Whang et al., would be to have manufacturers receive a steady stream of orders reflecting actual day-by-day consumer demand. The higher administrative and transportation costs of this system could be reduced by consolidating loads from multiple suppliers to achieve transportation economies of scale and switching from a paper-based to a computer-based ordering system. Yet another cause of the bullwhip effect, says Whang, is a practice known as “gaming’—intentionally presenting manufacturers with a false picture of consumer demand. For instance, an electronics chain might know that the maker of a popular new laser printer currently has a very limited capacity to produce the item. Meanwhile, the printer is selling rapidly and generating healthy profits for the chain, which wants to order 100 more. The chain knows the manufacturer is going to be rationing printers: retailers will be allocated half of what they request. So, in order to get the 100 printers it wants, the retailer asks for 200. When other retailers behave the same way and each orders 200, the chain may not receive 100 printers. But it also leaves the manufacturer with a very distorted picture of consumer demand for the product. To discourage gaming, Whang suggests manufacturers allocate scarce products to retailers based on past sales records rather than on the amount requested in a particular order A final strike against the bullwhip etfect, says Whang, would be to minimize price incentives. When manufacturers offer bargains, retailers stockpile inventory and don’t order again for months. This is not the way to keep the supply chain running smoothly, The logic behind an ‘everyday low price’ is that it promotes steady, regular purchases at all levels, from the retailer to the wholesaler to the manufacturer, rather than sporadic shopping binges, which are at the root of the bullwhip effect. The bullwhip effect in various components of logistics and supply chain are as follow: Manufacturing Cost The bullwhip effect increases the manufacturing cost in the supply chain mainly due to a variation or gap in the real quantity demanded and quantity for which order placed by the customer. This results in increased variability, either in building excess capacity or in holding excess inventory, both of which increase the manufacturing cost per unit produced. Inventory Cost and Replenishment Lead Time There is an increase in the inventory cost and a replenishment in the lead time inMANAGEMENT IN AND SUPPLY CHAI XTBOOK OF LOGISTICS 68 TEX It of variability in demang asa resul ply chain due to bullwhip eect, maitly asa ao an phe sup] : ly due to es 1 paving impact on dispatch schedule f, required one, s/raw [Link] by supplier firms for one H vai ; ell as : Firm as es wailable capacity and inventory level mph hee eins into higher replenishment lead time, re These are main! inventory than th finished goods by t to be supplied to ¢ not meet the order quantity, Transportation Cost ansportation cost increases due to bullwhip effecr, ficant fluctuation in the transportation requiremeny .d of time. This has the impact of raising transportation cost due to ee f maintenance of surplus transportation capacity to meet high eed riod Reeser Atthe same time, the bullwhip effect also increases re pe associated with shipping, receiving, loading ae eae of shipments in the supply chain due to uneven labour requirements resulting into idle or overtime labour costs. Within the supply chain, tr: which is mainly due toa signi Product Availability The bullwhip effect decreases product availability. Due to a lack of a trade-off between the actual demand and order quantity, firms will always face problems of stockout at some selling points, whereas over stock at others, resulting into both loss of sales and increase in the cost of the product. In this way, the bullwhip effect hurts the nature of relationships across the supply chain. In the case of stockout, the retailers or distributors have the tendency to blame the earlier stage of supply chain for poor performance, whereas in the case of over stocking at a retailer distributor point, the firm blames on them as it puts pressure to clear the stock because of the fact that the firm might be facing stockout at some places. Thus, the bullwhip effect reduces the profitability of i ! and conflicting relating in long run. 7 mots sepply chain immed) 2.10 SUPPLY CHAIN RELATIONSHIPS ips with various organizations suc consumers, transporters, etc der (0 : etc., in order e al ana dvantage in terms of technology, costs, marketing, a" -Itis happening mainly due to following fac age with greater diversi" : panies to respond quickly © ‘ation of resources and risks involve’ : » ICIS not possible changing customer wants due to tim com, in adaptation of cha inges; In the era of rapid inrow pid Innovations Benerally beyond the capabilities of field of scienc and resource Tequirements fo single Organi: ir the complexity of tec € and technology, if zation to meet the sk! hnology;SUPPLY CHAIN MANAGEMENT: 69 Information a makes ae Organizational elationshj flexible in terms 0! time, costs and ef ectiveness so as to keep ne PS more alive and active by aa beineication system; tonships Expansion of snl a ibera ee and Blobalization of al the economies of world further excel the need o) Baining access to ae all Effective coverage and reliable knowledge of the market ne ce ets, problems faced by most of the companies nowadays, unless the ae strategic relationships with their marketing intermediaries such as ca ave and retailers; and plesalers Emergence of third-party logistics service Providing or, professional high degree of core specialization have | performance of logistics service and SO, are dependable means for efficient logistics Operati Banizations whose hanged the overall largely acknowledged asa ions, Hence, to sustain itself in the highly-global competitive environment. effective coverage, reliable market knowledge and real time response are the Breatest challenges faced by the corporate world. That is why, Currently, the success of companies not only depends on how well they have integrated their functions for optimum utilization of resources so as to have Strategic advantages but largely on their ability to establish strategic relationships for comparative advantages with outside organizations or individuals such as vendors, channels Partners, third-party logistics service providers like transporters, banks, field warehousing firms, etc. They contribute significantly in the success of the company in terms of technology, costs, consumer satisfaction and long-term performance of the business. Although, conventionally, corporate enterprises have been maintaining relationships with their other supply chain members, but the nature and purpose of relationships were mostly ad hoc and operational, resulting in to transactional relationships. But, presently, all these have changed significantly in the era of global competitiveness. That is why, companies have been forced to shift their mindset from maintaining mere transactional relationships to Partnering relationships, whose nature and purpose should be long-run. Ongoing and stratepic relationships respectively aimed at cost-efficient value- pe mutual benefits, as suggested by Prof. Jagdish N. Seth which is shown in Fig. 2.3, However, every supply chain member has individual oe a ae ‘Pecialized knowledge and a complementary and unique role to ie Suaone ciation. This has resulted into a significant amount of ee haciog as other due to their limitation of resources in ea Esuidiation is ine access to market. Therefore, a . Gqrarepic and functional © among them on various issues such as Havcehanism, real-time Planning, dissemination of information, operational 1 to achieve long: r an be able Ponse and pay-off structure so that each member ¢ eee tun indivi, 2 As dual goals along with a joint common goal sa Nother, the greater ' © Breater the dependence of supply chain members on © le . : Possibility of conflict among them.ics AND SUPPLY CHAIN MANAGEMENT LoGIsTi 70 ‘TEXTBOOK OF Relationship Nature [| Ongoing ee f Partnership ? Alliance Relationship i B Relationships 5 | 4 a a #/3 € Cooperative $|8 nsactional . Bis “Felationship ee an Fig. 2.3 Typology of Relationship Marketing 1994), Towards a Theory of Relacionship Marketing’, Handy Jagdish N. Sheth Source: Jagdish N. Seth ( ¢ for Relationship Marketing at Relationship Marketing Faculty Consortium, Centr Emory University. Practically, in order to show their autonomy and display of power, the establishment of interdependencies creates conflicts of interest. Furthermore, man; times, supply chain conflict arises when one membex believes another is engaged in behaviour that prevent from achieving its goal, i.e. deviation occurs among supply chain members’ expectations with regard to organizational strategi objective, transparency in operations, flow of information, etc. In other words when individuals/companies work together in order to achieve shared goal Participate in a division of labour, have complementary role and depend: resources, conflicts are most likely to arise naturally. The combination °' interdependence and differing perspectives makes it impossible for a relationsh? to be free from conflict. 2.11 CONFLICT RESOLUTION STRA TEGIES Ft HARMONIOUS RELATIONSHIPS ok The transactional view of conflict is ne to be avoided. Whereas, the ‘modern ay Sense because it always le: ICs constructive or destr the earliest in order to legative and destructive in nature, belit'® ads to cise rh elomes eer i ae er a is the genesis of innovations. W he : aaa Ge «Proactively and strategically resolv - is strategically gj : Hs ntages and minimize disadvan : ips between ae cant in order to develop and ma" the natmonious relationships require annel members. According to Jagd sf to athe cn ‘sof the relationship = Boals for channel members ¢8"" tiveness and effici aS process convergence, that is yf requi lency j Guited by end-users,’ ag shown inFig we Process of delivering service 0%"SUPPLY CHAIN MANAGEMENT | Goal (the What Aspect) | __ ivergent Convergent R38 S Misunderstood Harmonious 2/2 Relationships Relationship 5 8 | 2 7 & Acrimonious Mismanaged | g Relationship Relationship | a a Fig. 2.4 Criteria for Harmonious Relationship Marketing Source: Jagdish N. Sheth (1994), ‘Towards a Theory of Relationship Marketing’, Handout at Relationship Marketing Faculty Consortium, Centre for Relationship Marketing, Emory University. Thus, in order to make relationships harmonious, convergence is essential in terms of individual goals of all supply chain members with a collaborative process. This process refers to constructive management of following aspects: 1. Clear definition and distribution of role, resource and power within relationships; 2. Frequent and effective communication of information; Proper grievance handling system; and 4. Proactive strategy for resolution of conflicts. » In other words, a strategic collaborative approach of all supply chain members is required for redefining the common goal in order to achieve their individual goals and maintenance of an appropriate harmonious relationship for a long run by means of resolving conflicts amicably. To resolve contlicts, strategic approach adopted by members largely depend upon the causes for emergence of conflicts, their own relative strengths and limitations and phase through which the relationship is passing. Generally, to occupy long-run harmonious relationships between supply chain members, most relationships eventually pass through four stages of development, namely, awareness, exploration, expansion and commitment. That is why, different strategic moves may be adopted by them based on two factor—two dichotomy Matrix (Agrawal, 2001) as shown in Fig. 2.5,[AGEMENT TEXTBOOK OF ocistics AND suppLY CHAIN MAN: vidual Goals Integrating 2 s Compromising by | 3 2 Negotiation | : 5 sacrifice 9 e3|5 rT e2 oF] | 5 Withdrawing oo \3 3 by z 3 Avoidance Domination . = Fig. 2.5 Strategies for Conflict Resolution Withdrawing by Avoidance nce and the nature of relationship When individual goals have a low importa parties have attitude to avoid issues maintenance is transactional, generally, both of conflict in order to do the best in the interest of the common goal, i.e. they may wish to withdraw themselves from a conflict and have a growth in relationship. Normally, this strategy is adopted and quite appreciable in the case when parties are new and passing through awareness or exploration stage of relationship. Forcing by Domination This strategy refers to the characteristic of high importance of individual goals = apuate nature of relationship maintenance, i.e. one supply chai" base att agen ee goal at any costs without having any when one party has 2 nance of a relationship. This strategic situation ass very commendable and dominating position in relationshi? over the other. For e: . xample, a well- A : econ oes aay pee ell-established Maruti dealer markets ‘* Compromising by Sacrifice This strategy in : of advil pied ene maintenance of a relationship even at the ©" value to a long-run eee: i.e. supply chain members give the highe to resolve conflicts. This pane and the least to their individual goals in order® when a relationshi i strategy is suggested and flict : ip is applied ontli of giving rather a Passing through the expansion a to resolve ¢ i an expecting to the relationshi stage, both possess a ips.‘SUPPLY CHAIN MANAGEMENT 73 Integrating by Negotiation The last strategy puts emphasis on reaching an agreement between channel members by integration by highly important individual goals and long-run maintenance of a harmonious relationship, i.e. negotiation to resolve conflicts so that the relationship will be kept alive in positive sense after giving due consideration to their individual goals. This strategy is most suitable to resolve conflicts when relationships became mature and have trust and respect for each other, 1.c. the relationship is in its final stage of commitment. 2.12. TOWARDS HARMONIOUS RELATIONSHIPS On the basis of the foregoing discussions, itis quite obvious that for a significant contribution of supply chain management, it is essential to have harmonious relationships with other supply chain partners, because they facilitate the supply chain system of the firm in the achievement of overall objectives of logistical competitive advantage. Hence, in order to remain in the market place actively, companies have to have a best marriage or true long-run harmonious relationships with supply chain members. While achieving the objective ‘how good the marriage is depends on how well the relationship is managed’, all supply chain participants require careful consideration and analysis of the following 7 Ms (Agrawal, 2001): Mutual Strategic Alliance As a concept, strategic alliances is not new. Yet, alliances have clearly emerged in the recent past as one of the most popular business development options available in the global marketplace. Strategic alliance is a long-term contractual symbiotic relationship between a company and its all supply chain members for the achievement of common as well as individual specific objectives and goals. In other words, a strategic alliance offers a natural linkage between the company’s internal environment with external supply chain environments as well as the interactive process so that all the strategic partners will enjoy a win-win situation. The reason is that in a strategic alliance, partners acquire from each other technologies, products, skills and knowledge to operate with greater efficiency and effectiveness. Furthermore, in the prevailing global competitive environment, companies need to have competitive advantages in terms of technology, costs marketing, quick response and long-run performance of the business. But, no company is self sufficient, mainly due to the following reasons li) due to greater diversity in the overall business environment, 1C1s not possible for companies to respond quickly to changing customer wants because of limitation of resources and risk involved in adaptation of changes; (ii) due to rapid innovations in the field of science and technology, it is generally beyond the capabilities of a single organization to meet the skills and resource requirements tor the complexity of technology; and[AIN MANAGEMENT. TEXTBOOK OF LOGISTICS AND SUPPLY CH: 74 ; ization and | -sansion of market asa result of ote So iberaliay, ON arto gain an access tO the marke aie ; coverage it is Ari eee ‘of the market are major problems faced by most ot! reliable know! ‘ companies der to overcome the above limitations and Probley, in or tablish strategies alliances (relationships) with vari se pievemeae of competitive advantages in the marketpi,., ‘h relationships should be long term and strategically aimed dded mutual benefits. lliances facilitate reduction in wastage and redund,, nomies of scale and productivity. It also allow. d resources and minimize risks. That is why, companies are re organizations fo i.e. nature of suc! cost-efficient, value-a Mutual strategic a activities which lead to eco members to pool their limite Mutual Cooperation and Coordination ‘As every supply chain member has an individual identity and goals, limite: resources, skills, specialized knowledge and complementary and a unique ro); to play in value addition, there is a significant amount of interdependence amon; them. Vendors supply raw materials as per specification and timing desired by the producer; producers specialize in production and national promotion; channe members specialize in merchandizing, physical distribution and local promotic: for making final sales, whereas, transporters contribute significantly by making goods available at the right time in the right physical condition. Therefore, high degree of cooperation and coordination is inevitable among these partnes on various issues such as strategic and functional planning, specific role to play dissemination of information, operational mechanism, real-time response, rewart on Aap along with pay-off structure so that each one will Cooperation refers to eer along with a joint common goal. _ a strategic alignment in the ee and suggesting potential opportunities to ana indicate the degree to which every supply cher wes Otner words hel ty supply chain member shall be flexible inSUPPLY CHAIN MANAGEMENT 75 Mutual Trust and Commitment cystem of norms establishing each performance. In other words, the prese a relationship believes that its counterpart’s commimene credible and will be honoured. Whereas, commitment highligh ehts an understandin, chain members that there will be an emergence c Commitment reflects loyalty, shared values, willingness t overlook the partner’s temporay orientation Once mutual trust and commitment ro work diligently at preserving their with one another. A shared belief opportunistically towards the other wl that they will pursue high-risk, high-r Thus, mutual trust and commitm ig between all supply > continuous relationships objectives and expectation, y short falls, trust and future Prevails, supply chain partners are likely relationship investment by cooperating emerges that neither partner will act hich dramatically increases the likelihood turn, supply chain strategies, ent lead to the development of a unique members so that they behave in a honourable manner and have the attitude to give rather than to expect. In other words, trust and commitment yield greater efficiency, productivity and effectiveness within supply chain relationships, i.e. how well the relationships are depend on how much they are concerned for others. Mutual Excellence Mutual excellence refers to the emergence of an implicit behaviour and internal capabilities of all supply chain members to exploit future opportunities efficiently and effectively by means of optimum utilization of all pooled resources while achieving common and individual goals. In other words, it recognizes the greater value of relationships by establishing positive and firm motives and intentions by all the members so that relationships’ objectives can be achieved in a cost-efficient and strategically-effective manner. Mutual excellence highlights the following characteristics which recognize greater value to supply chain relationships: 1 i * passion for work, i.e, a willingness to get on with tings lide _ le a willingness to listen to the customer and zeal for providing unpai quality/service; I h : pupled wit encouragement of practical risk taking and innovation coup kes ot the innovative tolerance of a reasonable number of mistakes as a part « Process; 1 and productivity ‘') all members are viewed as the root source of quality and p Sains; and a | mmunicated among the relationship, philosophy and values are clearly con all the members. (v)AGEMENT TEXTBOOK OF | ogisTics AND surpLy CHAIN MA ence brings 4 rmination and dedication harmonious relationship, ._ PS 5, be developed, i.e. there , te p the best way for utilizar, on ion, dete Thus, mutual excel ae ; nd soul of Qe forts cowards of resources and exploitation Mutual Informatio’ Sharing of a supply chain system the success of environmental dynamics, f In the era y’s ability of real-time response by means gi : " P a eae processin| their speedier communication to other supply chain members for accurate ation of courses of action, Quarterly/monthly planning is now replaced by weekly/daily planning due t) quick information sharing amon supply chain members, facilitating decision making to fulfil the requirement of real-time delivery, time to market and effective use of resources. ‘a the value-chain of supply chain many flow of information is 1m both directions fo system. The two sets ‘of information that flow in agement, as shown in the Fig. 2.2, the r activation and improvement of total different directions are: (i) The backward flow of information refers to coordination activities consisting of order, procurement quantity, specification, timing, etc., facilitating strategic, capacity, logistics, manufacturing and procurement plannings; and (ii) The forward flows of informati of goods availability, order status, invoices, order, distribution, inventory, transportation ‘on deals with operating activities consisting shipping advises, etc., involving and shipping management. 0 understand nd means fo" ships. Furthermore, speedier mutual information flow enables firms t the problems and trend in the market coupled with locating ways a! the best solution to the problem. That is why, in supply chain relation: more collaborative communication strategies are used. Relationships will 9° develop without a two-way exchange of information concerned with the part respective goals, wants, issues, inputs and priorities. Since relational exchans® are characterized by a high level of independence, supply chain partners need ee more to make relationships alive, working and conflict re. ee teas culkeegn bas relationships flexible in t¢! Baa ean he eeps the harmonious relationships alive, 4 y improving the communication system. sms 0 ctwve Mutual Involvement by Investment In order to market (cee further growth and more service from trade to sustain I the aoe the ; Paani have to offer the best services at the least cost a ae am uctivity and profitability by means of optimum utilization , avoiding idle time for any of them. So, quite obviously. companE SNACALP RAY | SUPPLY CHA IN MANAGEMY, j>) S expect valecaded service from thete supply ch wre from their channe : pect more from th i channel members in terms of investment, sh v Le eae ent, show. Wown space, skilled sales forces, mobility, state-of the-art facilities ; paces at , art service fa nd zero detect, 1n-tine, small Lot supplies, fixed replenishn i at plenishment cycle time, a1 partners. For instance, they ¢ ete ete., (OM vendors. That is why, when the success of the company is ontriburions of their members, a sense of ‘Made for sercloped, which ts Largely possible when there is muta ‘firms, Mutual investment bring always subject to the ach Other’ should be ere al investment in each a high level of bel Mat b : ongingness due to nvolvement, Mutual investment may be made in the following way oth financial investment should be allowed for other supply chain members in the company; and iu) the company should also invest in supply chain member firms, directly or indirectly, by way of providing financial assistance in infrastructural developments. 0) Mutual investment further strengthens supply chain relationships by means - of belongingness and involvement. of a deep den: Mutual Transfer of Technology and Skills In the modern era of rapid information in the field of science and technology, it capabilities of a single organization to meet the skills for the complexity of technology, irrespective of the with respect to the company, other supply chain d resources, coupled with professional is generally beyond the and resources requirements size of the firms. Generally, members have limited size of business an skills such as interactive skills, executive skills, etc. ‘At the same time, small companies with specialized competitive strengths are able to achieve an impressive power with larger firms because they have high levels of competence in specialized technology areas, and are able to substantially compress the development time. Furthermore, in order to cut down their own costs, companies have to undertake the responsibility to sharpen the professional skills of other supply chain members with regard to finance, technology, marketing, competitive stratceY and planning, leadership and people management. Hence, mutual transfer of technology and the opportunity to enhance the product valu supply chain members to establish long-term harmonious relat advantages notivates the and skills provides strategi fe, which ultimately ions among them. 2.13, SUMMARY shange in the concept Since the beginning of the 1990s, there has been considerable co ee : of logistics management from a managerial funetO 10 a comple Phin other words, logistical functions deal with mover"e™ ann strate er of the organization, whereas supply chain process oe = its customers. SUPPIY materials and ends with the delivery of frished products (©CHAIN MANAGEMENT 78 TEXTBOOK OF LOGISTICS AND SUPPLY re rdinated systematic approach of all Supply a | vailable at the place of use from the cour bay ae in gaining a strategic advantage in the mat t value in the product or service. : depicts the movements of goods/invento, chain management Is participants for making g00 least possible cost. It facilit place by the addition of righ T hain of SCM Ww : ee In the value chain of SCM, the flow of goods and vai vi tion for greater market dominance and core competen, are ina forward direc to keep the total business system aliy flow of cash isin backward direction f information is in both dire nercial significance; and the flow of info! MEction, c » cha gement is the most recent addition in the jargon eee ie ee bly to offer the best possible customer seryicg ic ee manner and gain a competitive edge by a flexible approach toward, movements. What it needs is a proper and adequate infrastructural Support i, terms of conditions and coverage of various modes of transportation, Conditions, high-speed vehicles, storage and warehousing facilities, communicatio, infrastructure, etc. India is too far behind in the infrastructural support from developed countries. Although initiatives taken by Government of India are i, positive direction, especially with regard to expressways and cyber law, etc, but efforts should not be made only at corporate and government levels but also by facilitators like third-party logistics service providers, vendors, customers, along with the level of industry associations. The success of supply chain management is largely dependant upon the bes: contribution from their other supply chain partners to achieve organizational objectives of core competency. Simultaneously, every supply member has an individual identity and goals, specialized knowledge and a unique role to play in value addition. It means more dependence with each other, which results into conflicts. Hence, conflicts should be Prevented and resolved at the earliest Efforts should be made to maintain harmonious supply chain relationships, for al strategic alliance, cooperation and coordination, TY, cash along with their relevance, 3. Write a cti Note on functions and contributions of SCM in the twenty-fit 4 logistic. | 6. What do you mean by § » £0 logistics and SCM problems. the success of SCM?” PPIY Chain Relationships? Why is it important f°"SUPPLY CHAIN MANAGEMENT 79 Why do conflicts emerge among supply chain participants? Suggest ’ various " strategies for resolution of conflicts. Define Harmonious Supply Chain Relationshi Ps. How can suppl y chain relationships be transformed into harmonious relationships? Ips? ‘Supply Chain Management is simply the extension of logistics functions with other participants like vendors, customers a nd third-party lo; y BIstics service providers.” Why? “SCM is a new buzzword for Core Com profitability.” Comment. petency, productivity and _ Discuss the emerging role of 3PLs and 4PLs in the achievement of supply chain objectives. | Write a note on the bullwhip effect on the Supply Chain. ENDNOTES s.K. Acharya (1999), Logistics Predicament and Indian Infrastructure— : Great Challenges Ahead, ICSCM, Macmillan India Ltd., New Delhi. . Hau L. Lee, ‘Paddy’ Padmanabhan, _G. Raghuram and N. Rangraj (2000), . Supply Chain and Logistics D.K. Agrawal (2001), ‘7 Ms to Make Supply Chain Relationships Harmonious’, Proceeding of National Conference On People, Processes and Organizations: Emerging Realities, Excel Books, New Delhi. _ T. Davis (1993), “Effective Supply Chain Management’, Sloan Management Review, 34(4). _§.G. Deshmukh and R.P. Mohanty (1999), Reengineering of Supply Chain: ICSCM, Macmillan India Ltd., New Delhi. and Seungjin Whang (1995), ‘The Paralyzing Curse of the Bullwhip Effect in a Supply Chain’, Stanford Business School Magazine, Stanford University. Lessons from Case Studies, Logistics and Supply Chain Management, Concepts and Cases, Macmillan India Ltd., New Delhi. 2002, The ET Knowledge Series.