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Ashwamedh 2009

Paper Writing Contest


Combating Recession through Operational Excellence

Team Details

1. Srikant Rajan
Contact: srikant.rajan@ifmr.ac.in, +91-9962552824
2. Vivek Prabhu
Contact: vivek.prabhu@ifmr.ac.in, +91-9380254288

Abstract

This paper attempts to identify the dominant variable during recessionary times and analyze its
impact vis-à-vis success factors for a high performing value chain. We then analyze the
modifications desired in the value chain for recessionary times.

Similarly we analyze impact on company strategy and evaluate possible alternatives to overcome
it. We then craft out a specific recommendation, keeping in mind the alignment of the former
value chain strategy and latter company strategy.
Green Supply Chain Management as a Strategic Tool in
Recessionary Times
I. Impact of Recession on Value Chain

Recessionary times are characterized by decreased consumption. Additionally the demand


patterns are highly erratic and volatile, for instance, output in the steel industry dropped by an
unprecedented 30 percent and prices by about 50 percent from June 2008 to December 2008.1

Such demand patterns, pose a challenge in market demand forecasts. This is due to the fact that
forecasting models are predominately based on historical demand patterns, with random patterns
eliminated to get a trend line. The forecasting challenge is particularly acute as in many upstream
industrial settings, as supply partners along the chain anticipate decreased demand, the chain kind
of decouples from downstream consumption which is the backbone of most forecasting models.

In essence your product is not being consumed, whatever is being consumed is showing a highly
volatile pattern so the focus should be more on making the delivery pattern more responsive, that
is following a pull based system. However, the chain responsiveness is dependent on the number
of links in the value chain as distortions in information, snowball along the length of a company’s
value chain. (Bull Whip Effect).

Responsiveness however comes at a cost. For instance, to respond to a wider range of quantities
demanded one alternative could be to increase the capacity, which in turn increases cost. Value
chain efficiency is the inverse of cost of making and delivering a product to the customer. Hence
the more responsive a chain becomes the less efficient it is. Hence in recessionary times an
optimum tradeoff needs to be achieved between value chain efficiency and its responsiveness.

The following table highlights some of the characteristics of a supply chain relevant in
recessionary times:

                                                       
1
Building a flexible supply chain for uncertain times, March 2009, The McKinsey Quarterly
Exhibit 1 - Tradeoff Analysis Responsive vs. Efficient Chains

Efficient Responsive

Primary goal Lowest cost Quick response

Product design strategy Minimum product cost Modularity to allow


postponement
Pricing strategy Lower margins Higher margins

Manufacturing strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense of Aggressively reduce even if
greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost Greater reliance on


modes responsive (fast) modes

Consider the factors highlighted in the above table. The ideal chain would incorporate desirable
characteristics of an efficient and responsive chain.

• The product delivered should be low cost, delivered as quickly as there is demand for it.
• The manufacturing unit must be flexible to handle variations in volume
• Buffer stock at key locations to reduce Bull Whip effect
• Creation of a fast and low cost mode of transport
• Maintain the existing margin, do not cut price, aim to provide additional value

Increasing the chain responsiveness can be done by reducing the number of links in the typical
producer, wholesaler, ware house, retailer chain. However, reducing the links by cutting down the
number of retailers would also reduce coverage and thus negatively impact the market share
particularly in the FMCG sector. Wholesaler decrease may be viable in say goods such as paints
but direct transportation to the retailer would involve a sizeable investment in resources such as
manpower that would offset the advantage of decreasing the bull whip effect.
II. Strategy Analysis

Exhibit 2 - Strategic planning process

• Mission
o Reason behind organization existence
o Long term
• Vision
o Evaluation of current position and establishment of the target position in light of
the defined mission
o Long term
• Design
o The methodology for achieving the vision
o For Instance - low cost, mass customer and emerging consumers
• Plan
o Establishment of objectives under the defined methodology
o Tactical & short term
• Implementation
o Allocation of SBU wise functional plans (Product, Marketing and supply chain),
o Allocation of resources and responsibilities.

Case Example

In the light of the above process, consider the example of Asian Paints, India’s largest and Asia’s
third largest paint company today.

Asian Paints is following a methodology (Design) of ‘going where the customer is’. The
company provides its customers with a service interface i.e. large dealer network. With a limited
set of bases and colorants, manufactured and transported throughout its supply chain, Asian
Paints provides a choice of over 1000 shades to the customer through a technology of tinting at
the last retail store.(Product Variety)

The company also introduced ‘Asian Paints Home Solutions’ which provides painting services in
addition to the paint. (Product and Service Bundling)
The reason of existence of Asian Paints i.e. its mission is: ‘To provide paints as per market
demand, ensuring desired level and quality of customer (dealer) service, continued availability of
the right product mix of right quality at the right time.’

By comparing itself with its industry environment Asian Paints has set itself a target position i.e.
Vision: ‘Asian Paints aims to become one of the top five Decorative coatings companies world-
wide by leveraging its expertise in the higher growth emerging markets. Simultaneously, the
company intends to build long term value in the Industrial coatings business through alliances
with established global partners’. As described above (Exibhit1) vision are aspirations
expressed as strategic intent.

Thus from the analysis above we infer that the competitive strategy of the company that directs it
towards its vision is:

• Product Variety
• Product Bundling (Asian Paints Home Solutions)

The above competitive strategy is built on its resources viz.

• Supply chain connecting its plants, suppliers, vendors


• Distribution and processing centers
• Technology

The consequences of recession highlighted in part 1, on Asian Paints would be the implied
demand uncertainty in its supply chain. For instance the retailers would be unable to project the
likely demand. This inability in forecasting would amplify over the value chain (bull whip effect)
right to the manufacturing plant. This in turn would lead to inventory build up of raw materials,
finished products, thereby locking up of valuable capital.
Thus the company has the following two options:

1. Reduce Short Term Cost


Cut down on existing resources such as the production capability and focus on a no frills least
cost product and utilize the savings so incurred to aggressively market the product. However this
process reduces value provided to the customer.

Additionally the above process is not optimum as this does not lead to effective utilization
(reducing the rate of fixed cost recovery) of the existing resources and lowers overall productivity.

2. Reduce Long Term cost


Provide a new value proposition to the customer and enhance productivity

Next, consider the following regarding recession:

1. A transient phase
Since the product variety of the company is its competitive strategy and the source of its
profitability, changing the product spec altogether would not be appropriate in a transitory period
such as recession.

2. Lead to development of a mismatch between allocated resources and established plans


The recession can be considered to be an opportunity, a wake up call for the firm to reduce long
term costs throughout its supply chain by leverage its existing resources2 ,focus on enhancing
productivity getting more bang of each buck spent.

                                                       
2
Strategy as Stretch & Leverage, CK Prahlad & Gary Hamel, Harvard Business Review, March – April
1993
Mission and Vision

      Resources

  Strategy

Competitive Strategy   Supply Chain Strategy 

Alignment for  
               Profitability

Exhibit 3

This leverage can create a new value proposition that would benefit its customers and
simultaneously realign its supply chain and competitive strategy without loss of profitability.
Thus leveraging resources can create a competency that is core, which in turn can create a
competitive advantage.(Exhibit 3)

III. Green Supply Chain Management (GSCM)

Green Supply Chain Management (GSCM) is an approach that incorporates environmental


thinking into the supply chain. GSCM takes into account the entire product life cycle and
propagates green thinking post final product delivery, as potential cost reduction measures.

Emphasis on recyclable material leads to significant cost reductions, for instance General Motors
reduced disposal costs by $12 million by establishing a reusable container program with their
suppliers3. Additionally such measures would not incur an increase in net life-cycle costs; the
decrease in material usage compensates the investment required in maintaining the reverse
logistics chain4. However the cost benefit is not immediate, rather long term.

Adapting sustainable measures in the supply chain would mean adherence to regulations and an
improvement in the brand reputation. Cost reduction and creation of a distinctive value
proposition to the user not withstanding, GSCM measures clearly differentiate products from
competitor products, which in turn may aid in creation of a suitable targeted marketing strategy.

Case Example:

GSCM approach in the Indian consumer goods industry could be utilization of recyclable paint
cans, procured from the end customers. A discount offered for every paint can returned, would
entail a superior value proposition to the customer.

One method to implement this reverse product flow would be to create strategic pickup points
specifically for used product flow. However, the challenge in implementation of this approach
would be:
• Increase in procurement costs of reusable containers
• Costs involved in transportation, post product use
• Managing inventory, both forward that is packed and empty paint containers
• Sorting and repair of containers
• Inspection and cleaning costs before reuse

Consider another alternative this time with regards to the case of Asian paints and its resource
base. Asian paints distribution and processing centers in supply chain connecting its plants,
suppliers, and vendors is unique in terms of the reach. The same chain may be leveraged for
reverse product flow. However not all of the challenges cited above are mitigated by using this
approach. Additionally this process would be complex in nature and require modification in
facility design and may also need augmentation of capacity again.

                                                       
3
 Energy savings and the Environment, November 2008,IBM Retail Solutions
4
Climate Change and Supply Chain management , July 2008, The Mc Kinsey Quarterly
This complexity may be reduced by channel segmentation. The channel may be segmented on the
basis of buy viz industrial and retail buy. These in turn differ in the following aspects:

• Concentration of buyers
• Frequency of purchase
• Volume of purchase

For an ideal reverse product flow the frequency should be low to enable ease in product flow,
volume should be high to realize scale economies and concentration should be region specific to
leverage resources with minimum modifications. Thus the reusable container program may be
initially implemented with large volume low frequency industrial buys.

Such buys in turn may be variations of modified Rebuy which are characterized by rational
buying behavior and thus the focus on cost reduction may be suitably exploited.

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