Supply Chain Cost Reduction Opportunities for Indian Companies | Special Report

Aqua MCG Special Report


Supply Chain Cost Reduction Opportunities for Indian Companies

Failed companies. Rescued banks. Panicked markets. Our current economic suffering is being hailed as one of the worst of all times. With a sharp decline in spending & wealth, now more than ever, have organisations realised the need for strategic thought and structured planning. This is where cost reduction has assumed its insurmountable position. Cost saving initiatives need to be shaped and implemented by all departments in the organization; the entire process of planning, monitoring and measuring needs the support of all. Everyone from the top to the bottom must be actively involved, and work towards the new goals set. Expense reports are obviously the most logical place to start. These should be over a relatively long period of time in order to remove any seasonal variations. It is also important to stay focused on the key areas that account for the major 80% of costs. Many organizations believe in myths like an “informal program for cost reduction is fine”; or even that reducing costs have a negative impact on quality. Nothing could be further from the truth. The most efficient cost reduction programs are those that very formal / specific and have clear objectives & accountabilities attached to it. Companies that have been successful in cost reduction realised that it’s not enough to just reduce expenses to remain competitive; rather it takes innovative measures to emerge as leaders. This is why the role of knowledge advisory groups is so important. They help provide a much needed innovative & structured program, designed through practice-proven tools and strategies from specialists. For example, it is easy to see why so many companies choose to downsize their workforce so that employee costs, which often account for more than 40% of a company’s operating budget, can drastically reduce overall expenses. But how many have actually considered outsourcing non-core functions, like outsourcing the entire supply chain. Many auto & chemical companies around the world have outsourced their logistics, and are saving considerable amounts of money. Even in the domestic Indian market (sans the effect of globalization) there is a tremendous need for companies to improve their supply chain processes due to:

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Shorter product lifecycles Product lifecycles are getting shorter and shorter mainly led by technological advances. “This is the time to do it” they say. the entire new product introduction will be a failure. be it HR. It requires a robust supply chain to reach out to these markets and achieve the desired ROI. This requires huge investment in infrastructure development.right from the development costs to the time-taken-to-market. Customer expectations today stand at very high levels where responsive. Take for example the tremendous impact that the invention of a tiny microchip had on so many products across industries. Reaching the rural customer More than 70% of India’s population lives in its villages. what is oft forgotten is the need to maintain lean cash. Information Technology and the local people. Companies are striving on new ways to reach out to this huge market.FASHIONING AGILE SUPPLY CHAINS Well informed. By this we mean: Cash tied to inventory by improving service levels through delivery and turns Improve working capital flows this will help unlock the potential of this one-time cash Rationalize the operational CAPEX this can help in reduction and postponement of CAPEX expenditures Under the maintenance of lean costs we need to look into the following key areas: Departmental costs optimize the all division costs. especially those related to supply chain. We will be examining some of these points. many businesses have not paid enough attention to pricing & costs. Unless one has a well co-ordinated and collaborative supply chain. This means that companies need to continuously introduce new products to stay in business. Public Relations and so on IT find new ways of automating processes and reducing manual human interventions Supply chain companies might want to outsource non-core activities and stop reverse logistic processes like returns. Business leaders are going on record to say that although Asia has been a growth story for so long. This “bottom of the pyramid” represents a huge untapped market potential. Legal. Finance. Although it is imperative to maintain lean costs to boost economic performance in the current market scenario. demand-driven ones meet the desired service levels. LEVERS TO IMPROVE ECONOMIC PERFORMANCE This section provides a brief look at some levers that help boost economic performance. further on in this report. For this supply chains need to be well integrated & at the same time help maintain low costs and high margins. damages etc Service levels reduce extra service costs like warranty Product development improve productivity & efficiency with focus on lowest costs Manufacturing adopt lean measures Page 3 . powerful customers The level of customer satisfaction is often driven by the supply chain.

textiles etc. the top objective of leading supply chains was to increase profitability – while. auto ancillaries. processed foods. form the major source of economic growth.aquamcg. modern agriculture. About 60% of the work force is still in agriculture. However. leading the government to focus on improving the lives of the rural poor by developing basic infrastructure. leading companies are redefining key supply chain metrics and setting up programs to monitor and improve their performance. ANZ and India. In the early 2000s. companies are moving away from a direct focus on cost reduction to put increasing focus on . this is primarily due Indian companies using less stringent metrics for this measurement. as well as the services sector like IT. at the same time. a key question to ask here is: how are Indian companies performing on key supply chain planning metrics? The on-time delivery performance of Indian companies has improved over the years and compares favourably to global counterparts. and a multitude of services. reducing costs and improving quality. The government has also reduced controls on foreign trade and investment. for example it has raised the limits of foreign direct investment (FDI) in key sectors. 1 HOW ARE INDIAN COMPANIES PERFORMING ON KEY SUPPLY CHAIN METRICS? Now. such as telecommunications. when companies undertook supply chain management studies of a large magnitude. FACTS ABOUT INDIA & ITS SUPPLY CHAIN India's diverse economy ranges from traditional village farming. Europe. As you can see here. education. BPO's etc .Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA Reduce indirect procurement such as travel & healthcare Organization streamlining reduce management layers and improve span of controls. tourism. health services. finance. as rated by respondents in each of the 2006 Value Chain studies conducted in the United States. Now. handicrafts.high technology electronics. accounting for more than half of India's output with less than one third of its labour force. however. Services. Japan. the top three objectives (from a choice of eight). compared to worldwide 2003 results shows how responsiveness has emerged as the single largest focus. The Indian logistics industry is also poised for a significant leap forward in the coming years because of the view that India would become the leading global hub for manufacture of automobiles. pharmaceuticals . by putting responsiveness and customer servicing within its set of three top objectives. to a wide range of modern industries. and boosting the economic performance. 1 Source: IBM Institute for Business Value 2003 and 2006 Value Chain Studies Page 4 AQUA MCG LEADERSHIP REVIEW | www.

FASHIONING AGILE SUPPLY CHAINS For about one-third of these respondents. In such a context it is important to understand the current supply chain metrics being followed by the Auto and Auto Ancillary Industries in India. This clearly indicated how over 55% of costs come from transportation whether outbound or inbound. automobile companies worldwide are shifting their attention towards understanding & implementing an integrated supply chain. which is the tenth largest in the world. To take this one step higher. the break-up of typical supply chain costs in India is as indicated in the figure below. Other major costs include inventory carrying costs and warehousing costs.  inte rnational fre ight &  Re turn inve ntory cost Re turn proce ssing cost c le arance s) 4% 4% 6% Cost of damage s 5% Cost of transist  losse s 5% Inve ntory carrying cost 13% Break‐up Of Supply Chain Costs in India In‐bound transportation  Cost 2 8% W are housing Cost 7% O ut‐bound transportation  Cost 28% Now let’s take a look at the Automobile industry in India. In today’s competitive landscape and economic down-turn.2 O the r costs (insurance . the standard lead time from order to shipment is within a week. The cash to cash cycle of about half the respondent companies in India is less than a month. however. 2 Source: IBM Institute for Business Value 2003 and 2006 Value Chain Studies Page 5 . 30% of respondents have a cash to cash cycle of greater than 2 months.

2. 3. As the theme of this report suggests.e.18 days. we will primarily be focusing on the cost metrics and dwell on this in detail. Finished Product Inventory Holding (No. Cycle-time metrics Cost metrics Service quality metrics Asset metrics For the first metric i. Automobile companies can be broadly grouped into the following categories: 1. Supplies made as per the quantity ordered and Supply on desired quality) around 64% of companies have an on time delivery of 95. For some of the companies (4 percent). of days elapsed from the moment a customer places an order to the moment of receipt of payment) for around 37% of the companies is between 10 . This survey was carried out among 27 Auto and 51 Auto Ancillary companies. Engine parts Transmission Electrical Ancillaries others As in any industry. As indicated in the chart (Fig. of Days). 2. it is above 45 days.aquamcg. 4. of Days).100% & around 12% of the companies contacted have an on time delivery of less than 80%. 4. receiving. In service quality metrics (% of On-Time Deliveries. of Days) and Inventory Turnover (Times). It is typically denoted as a % of the total manufacturing costs. 3. In this context. Cars & utility vehicles. Work in Progress Inventory Holding (No. the four broad supply chain metrics considered were: 1. Asset metrics include aw Materials Inventory Holding (No. this is again denoted as a % of total sales. Tractors Trucks Two wheelers Auto ancillary companies on the other hand.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA A recent IIMM (Indian Institute of Materials Management) survey of the supply chain management practices in India revealed the major supply chain practices and metrics being followed. for 44% of the companies it was found to be 1-2%. Fig 2 Warehousing cost These costs are incurred at the warehouse and Fig 3 include elements such as . Fig 1 Out-bound transportation cost This is the cost involved in transporting the finished products / services to the distributors / customers. and denoted as a % of total sales. for majority of the companies the outbound supply chain cost is close to 2-3%. can be grouped into the following: 1. The break-up is shown in the pie-chart (Fig. Here. The main components of costs in this industry’s supply chain are highlighted below: In-bound transportation cost This is the cost of transporting raw materials / products etc from suppliers. Results show that around 26% of the companies have a raw material inventory holding of less than 9 days and about 8% of companies have this holding above 28 days. the Cycle-time (measured by the no. and shipment etc of the finished goods. 4. picking. About half the companies Page 6 AQUA MCG LEADERSHIP REVIEW | www. 3. 1). 2). 2.

In inventory management. inventories at CFAs/DCs. primary/secondary movements and distributor’s margin. For about 50% of the companies this cost stands at 12% (Fig. unacceptable service levels & product obsolescence. On the other hand. products are pushed through the channel. However. distributors & retailers. Push-Based Model: Pull-Based Model: The major divisions of logistics costs in India are: cost of materials. Delivering on these costs is itself a challenge and added to that companies must deliver on profitability & responsiveness. labour. the inventories looked at are raw materials.FASHIONING AGILE SUPPLY CHAINS have warehousing costs less than 1% (Fig. the primary inventory replenishment process is the push system versus the pull system. finished goods. Page 7 . warehousing. 48% it is about 812% (Fig. It is often quoted in the industry that up to 85% of companies adopt the push system. production and distribution are demand driven so that they are coordinated with actual customer orders. 5). WIP. accounts receivable. The manufacturer sets production at a level based on historical buy patterns. Demand management & Inventory management. from the production side up to the retailer. In a push-based supply chain. accounts payable. Fig 4 Total supply chain cost In the automobile & auto ancillary companies the total supply chain cost for majority of the companies i. procurement.e. the three ranked the highest by respondents were: Customer service. production operations. goods in transit. Fig 5 SUPPLY CHAIN PROCESSES IN INDIA Among the many supply chain processes. 4). In India. in a pull-based supply chain. which may result in overstocking or bottlenecks & delays (the bullwhip effect). 3) Inventory carrying cost This is the cost involved in holding the inventory and represented as a % of total sales. inbound / outbound transportation. it takes longer for a push-based supply chain to respond to changes in demand. rather than forecasted demand.

However supply chain cost reduction needs to be followed with the customer in focus i. where volumes are more important. for planning or for order-to-delivery Developing variable cost structures as alternatives to fixed costs Using real-time information to create responsive. warehouse management. there should be no compromise on either the quality of the product or technology or customer service. suppliers and service providers. CAD/drafting. profitability and responsiveness can therefore be the real test. customer-driven processes In India too. In the surveys of many nations it was found that the reduction in cost has been replaced by the focus on quality in the top three objectives. cost reduction is a must to help maintain/increase margins.aquamcg. Supply chains are also an important driver of revenue growth and profitability.e. Another reason for this is the increasing maturity of many industries and the mass commoditization of products. manufacturing execution system. distribution. One of the key differentiators which influences a customer’s buying behaviour is the price of the product. supply chain management. sales. process control & optimization. All top-performing supply chain companies are actively adopting leading management practices. This also means sharing information & risks with partners to reduce overall exposure Coordinating business functions horizontally across the supply chain Managing supply chain cycles – for example. This is especially true for a mass market like India. With the cut-throat competition and increasing input prices. customer-driven supply chain – integrated across the business and with key customers. And to meet these multiple objectives. Secondly. partners. Also cost reduction has to be a continuous Page 8 AQUA MCG LEADERSHIP REVIEW | www. As operations cost for a major part of the cost that goes into the product. In such a case. Many companies therefore are evolving toward the on-demand i. as well as the primary source of responsiveness. the product price and ontime delivery becomes a very critical factor. such as: Synchronizing supply and demand through more efficient planning & forecasting Developing mutually beneficial outcomes to strengthen supply chain relationships. managing demand by making planning customer driven The perfect product launch and lifecycle management Effective customer order management through real-time information The procurement opportunity by realizing the benefits of holistic sourcing Efficient logistics services by driving efficiencies in logistics operations Another major development is the e-enablement of supply chains through various IT applications across the supply chain: computer aided process planning. engineering data management. customer-driven supply chain. scheduling & loading. supply chain cost is the single most important area for cost reduction. there is always a push from the shareholders to maximize their return on investments. supply chain leaders have realized that supply chain effectiveness requires more than efficiency and low . The shared vision is to have an integrated end-to-end. organizations are responding to the challenges of cost control & customer responsiveness in five key supply chain areas: Synchronizing supply.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA Delivering on all three i.e. ERPs etc THE NEED TO REDUCE COST IN THE INDIAN SUPPLY CHAIN The aim of any manufacturing/services firm is to produce goods to meet the end-customer requirements.e. demand management. cost. The competition is so intense that a small price rise of a product might cause huge reduction in demand for that product.

As with S&OP it is critical to include various functions in the decision making process. COST MANAGEMENT BEST PRACTICES Cost management leaders confess certain best practices that are critical for it to be a success: Cost management initiatives need to be decided by several functions A well defined S& OP process can greatly help framing these initiatives. with the introduction & implementation of many advanced SCF (Supply Chain Finance) practices & technology (automated transaction processing). Performance Feedback Loops Measurable KPIs (Key Performance Indicators) should be set up to ensure the initiatives are being successfully implemented & adopted. supply chain and procurement groups need to ensure their companies are actively adopting SCF (Supply Chain Finance) or risk missing the next wave of cost improvement. Page 9 . these includeFinance Sales Supply Chain Production Human Resource Information Technology Should be specific & limited to shorter time-frames In these kind of focused small packages lays the long-term strategic advantage. This is especially applicable in the current context of the global melt-down. When the competition is no longer among individual companies but among entire supply chains. Clear accountability Cost management exercises needs clear accountability where it is necessary to map costs to specific departments / individual heads.FASHIONING AGILE SUPPLY CHAINS improvement program rather than a one-time attempt keeping in mind the ever demanding customers who wants a better quality product at a lower price. Financial supply chain optimization has helped many leading companies make their entire supply chain competitive. every area of endto-end cost reduction needs to be looked into. Finance. Thus supply chain cost reduction is one of the most critical tasks facing the Indian companies.

aquamcg. customer Objectives expectations. It should be breakable into clear units of Page 10 AQUA MCG LEADERSHIP REVIEW | www. opportunities & threats. a clear understanding of the relationships shared between various functions and departments. Team goals should be set with the involvement of all departments & functions. With overall business strategy we mean key business Goals & plans. Just as in any strategic exercise. The supply chain cost management & reduction exercises should be well aligned with the overall business strategy. marketing plans and last but not least. measurable and quantifiable.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA A STRUCTURED APPROACH TO COST MANAGEMENT Supply Chain Cost Management Framework Define Goals & Objectives A structured approach to cost management would obviously first involve defining its goals & objectives. supply chain . Those that are not tied to these long-term strategic goals are often misguided and create havoc due to the myopic focus on short-term productivity gains. focused. Again. They should also keep in mind that goals should be realistic. cost management drives also require a core team entrusted with adequate responsibility & authority to drive manage and monitor all cost management initiatives. a pure department-focused cost reduction exercise will only motivate a single department and not multi-departments that actually forms a team. so as to infuse the interest & concern of all.

Identify opportunities for cost elimination/reduction Cost reduction is a direct function of controlling the cost drivers related to each activity in the value chain. cost drivers are classified into two categories (Shank & Govindrajan): Structural: these drivers relate with the strategic choices made by the company o Economies of Scale o Scope: the extent of vertical integration in the firm o Learning and experience curve effects o Technology requirements o Complexity/broadness of the product line Execution: these drivers are related to the organizational skills i. production processes and other internal operations o Efficiency of linkages with suppliers and customers o Time-to-market of new products o Commitment of workforce towards quality Thus a firm needs to identify the key cost drivers in order to make strategic decisions aimed at supply chain cost reduction. It is advisable to first target the quick hits and then address the other identified areas Develop Road-Map. At each stage one can review this process and the core team. On the other hand. However. more relevant / value-add individuals and teams can be added Define the key cost drivers Identification of the cost drivers and the interaction between these identified drivers is very critical in gaining a clear understanding of the cost behaviour. this should possess clear action statements and action owners similar to a RASCI matrix. From the primary costs that have been stated in the previous step. If needed. Now the team can drill down on all the activities to be taken up in order manage all these costs step by step. unrealistic or vaguely defined goals can dampen motivation and guarantee the failure of cost management Identify Supply chain costs Now that the Goals & Objectives have been identified. Then classify the opportunities based on two criteria: investment required and time taken to implement. such a cost driver analysis does not give a proper picture when a long term analysis is done. they depend on the way management uses the resources available to meet the customer needs o Capacity utilization o Workforce Involvement and commitment to continuous change o Efficiency of plant layout.e. R is accountable to him/her Support: person who supports & assists Page 11 . to continually improve both. Therefore. Implement & Monitor The road-map that follows aims at breaking each activity or exercise into clear tasks and units of work. Hence the team needs to clearly identify the areas for cost elimination/reduction by quantifying each of them and perform a cost-benefit analysis for each cost reduction opportunity. the secondary costs and sub costs will emerge. RASCI stands for: o o o Responsible: the clear owner of the exercise Accountable: the authority who approves and signs-off initiatives. Traditionally cost behaviour was analysed solely based on the volume of output. In a typical strategic cost driver analysis.FASHIONING AGILE SUPPLY CHAINS work which can then be assigned to each team. it is now important to classify all the supply chain costs and its flow.

this forms the foundation for modelling various other scenarios / initiatives to alternatively take. the schedules i.aquamcg.e. KPIs and KPI-reporting can be done through Dashboards and Metrics that allow top management to get an instant window into how effective the various cost management initiatives have been. and what is not. It also helps align the company’s strategic business goals with the daily operations plan in the most cost-effective manner. Effective planning of the supply chain helps in maintaining balanced inventory levels. start and end-dates with time-lines for critical activities should be listed out. it will at the same time help in continual improvement.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA o o Consult: person who provides the information & expertise necessary for the success of the initiative Inform: person who should be notified and informed of the results After developing a similar . Effective planning results in better forecast accuracy and better visibility. This in turn will be checked against the KPIs to review the process & its success. In case the need arises. KPIs (Key Performance Indicators) should also be set to measure the effectiveness of the implementation. COST MANAGEMENT INITIATIVES The importance of Sales & Operations Planning An S&OP process helps in balancing supply and demand with the help of a single operating plan spanning across all functions to achieve profitable growth. tracking progress and monitoring schedules. This entire road map should be easily implementable and the results / details should be fed back. They also provide instant feedback on what is working. and the current implications of it. increase inventory Page 12 AQUA MCG LEADERSHIP REVIEW | www.

they need to have a more formal meeting process. Each of these functions act as individual “silos” with their individual goals. then are frequently cancelled or are given very less importance. However. All these three factors together help achieve supply chain cost reduction. The demand forecasts developed by the Sales personnel are generally inflated to buffer the effect of late deliveries from the manufacturing plant. MIT). The use of software technology is at a minimum. Given below is a 4 stage S&OP process maturity model (From the “Journal of Business Forecasting”. without any idea of either the capacity constraints or the inventory levels. finance and production planning teams. sales. higher transportation costs due to large number of small shipments and lower customer service levels. S&OP Maturity Model Stage 1. Stage 2. For companies in Stage 1 to move to Stage 2. 2005 Spring Edition. and then aim for the next higher stage. frequent stock-outs. Even if there are meeting scheduled. mostly limited to the use of spreadsheets as each of the functions develops their individual plans and there is no integration whatsoever. however the participation is minimal and there is very little integration in the planning process. Rudimentary Process: Companies in this stage have formal meetings for S&OP. This results in different plans being created by different functions across the organisation with no or little collaboration. with each of the functions actively involved in working towards a common plan. A company thus needs to first do a diagnostic to determine at what stage of maturity it is at present. The manufacturing personnel in turn give an inflated projection to the sourcing and procurement team. or a lack of preparedness for the S&OP meetings.FASHIONING AGILE SUPPLY CHAINS turns and a better utilization of the resources. Marginal Process: The companies in this stage do not have any formal meetings for the S&OP planning process. higher inventory levels. The finance team gives another set of forecasts to the manufacturer purely targeted at meeting goals of the finance group. On the other hand a poor planning process results in higher costs due to expedited shipments. Page 13 . There is a lack of a consensus based plan due to minimum interaction between the functions. in most cases the existing process in place is far from an ideal state. forecasts tend to be poor. The result is a number of forecast figures most of which are inaccurate and unreliable. Most companies today have some sort of an S&OP process in place. Even the supply plan is not aligned with the demand plan. The chart below shows a typical 5 step S&OP process. which more often than not are conflicting to the goals of other departments resulting in locally optimal decision makings and higher supply chain costs. Even in companies where there is a rudimentary traditional S&OP process where a forecast number is agreed by marketing. . In this ideal state scenario. Classic Process: Companies in Stage 3 have an established formal S&OP process and have their supply and demand plans aligned. to make the best use of this maturity model. moving from a push based system to a pull based system helps drastically reduce inventory across the supply chain. which in effect makes the decision making very fast and proactive. 84% of inventory replenishment processes in the Indian manufacturing sector are push based (according to a report published by FICCI in 2004). there is a clear need of integration between the inventory optimization process and the S&OP. a company first needs to do a “as-is” analysis of its S&OP process and then make a sustained effort to move to the next stage. perform a cost benefit analysis. The supply and demand is continuously monitored in real time. which is then transmitted to the all the functions by the management so that the S&OP meetings are given due accordance. To add to the industry woes. Furthermore. The moment an imbalance is detected between the supply and the demand. Inventory segmentation for decisions into service levels. it is very important to have support from the management team. Inventory Management More than Rs 1. Also. is another popular approach to reduce inventory and retain customer-centric focus on the key products. The S&OP meetings are held at regular intervals as decided and find full participation and support from all the functions. there is extensive collaboration with the suppliers and the customers. This will help solve not only the inventory holding costs but the over-arching strategic problems that link into other issues.000 crores is tied up in industry inventories in India. Ideal Process: This Ideal stage should be used as a benchmark by companies for achieving further improvement. Stage 3. The lack of a holistic overall approach results in locally optimal inventory decision and in turn higher inventory holding costs with frequent stock-outs. the suppliers and the customers.e. which gives ready access to information to align the plan with those of the external agents i. The management team needs be first convinced of the need for a well designed S&OP process. The planning process is totally integrated resulting in a single consensus plan. Efficient production planning and an integrated. 00. responsive supply chain network are all critical to reducing inventories. a meeting is immediately held involving all S&OP attendees on a global basis usually through the use of advanced technology.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA The demand side functions develop multiple demand plans through the use of Demand Planner applications which are then transmitted to the supply side. For companies in Stage 2 to move towards Stage 3. One of the main reasons for the huge pile-up of inventories is the separation of the inventory strategy from the S&OP planning. Stage 4. Companies in Stage 3 can move to Stage 4 by having more frequent S&OP meetings and a constant emphasis on the building sustained relationships with as many suppliers and customers as possible. identify the quick hits and target these first. Other Cost reduction areas This section gives an insight into other areas in the supply chain where there exists tremendous scope of cost reduction specifically in the Indian market context. As emphasised earlier. The supply side in turn reconciles these plans and develops a supply plan aligned to it.aquamcg. Thus the plan can be quickly modified and put into action. Page 14 AQUA MCG LEADERSHIP REVIEW | www. S&OP meetings are generally event-based and are done only when there is a need to make amendments to the plans. It should then identify the gaps. This supply plan is generally not shared with the demand side. The intent should be towards arriving at a single consensus plan by the concurrence of the supply and demand plans.

It is typical to find manufacturing second guessing forecasts because of production personnel with large number of years of experience and instinctive understanding of historical forecasts. and helps stream-line & automate various processes. even though a low cost option. Implementation of SCM in Mahindra & Mahindra led to an inventory reduction of a whopping 50% (this also increased the replenishment lead time from 52 days to 19 days). This can have costly and far reaching implications for the supply chain in the form of stockout. But introduction of new products and SKUs and changing market conditions result in stock outs and high inventory because of forecast unreliability. In addition. Reconciling all these plans might become a very frustrating and time-consuming task. contract optimization and increased vehicle utilization. For companies using spreadsheets.FASHIONING AGILE SUPPLY CHAINS In addition to this. Logistics and Distribution In India the logistics cost is very high compared to other developed countries comprising of around 14% of the GDP. for developing demand and supply plans as part of the S&OP process. technology platforms to cushion the impact of inventory. managers have done their supply chain planning using tools ranging from Excel based to huge software products. There is a huge scope for Indian companies to reduce cost in this domain by route optimization. Transportation alone accounts for 35% of this. The need to focus on WCO is primarily driven by financial stakeholders who continually urge companies to improve their financial metrics. This helps in coordinating between all the functions across the value chain (both internal and external) and quickly adapting to any changes in the supply demand imbalance. drop in exports and rising costs. Page 15 . stock outs of required material and high inventory levels of unwanted or not in demand items. improper mix at the shelves and inventory pile-up across the supply chain. it becomes very difficult to integrate these to arrive at a consensus plan. warehouse management and many other areas. According to a report published by FICCI. supply chain decisions are made or heavily influenced by either production or sales departments. multiple product introductions. Thus companies need to have an advanced (depending on requirement) and effective technology to support their S&OP process. which brings in the additional danger of data being outdated. This increases obsolescence cost and warehousing costs. transportation planning these tools tend to make supply chain managers life easier. the 2007 benchmark report on Working Capital Optimization (WCO) surveyed 400 corporations from across the world and found that for more than 65% of them. This is typically because of poor forecast reliability.1% and Work in Progress by 38.1%. Typical Indian companies are manufacturing centric. In an environment of high growth. Apart from this reduced turnaround time of trucks and number of expedited shipments are a couple of more areas that can be targeted. shifting economic conditions. transportation planning. From capacity planning. forecasting to inventory management. raw materials by 25. Directly or indirectly. WCO was a high-priority at any given point of time.). people tend to over forecast so not to miss sales demand. Ironically. by enabling better access to funding. a well designed and robust S&OP process requires a good technology support to achieve the desired results. a supply chain improvement program can help reduce Finished Goods Inventory by 32. stocking locations etc. companies have felt the need for Decision Support Systems to aid in inventory management (safety stock levels.7%. inventory scenario can be a mix of both stock outs and high inventory levels. However financial & inventory strategies are not enough to mitigate this. Technology Beyond ERP and robust enterprise systems.

For example. A number of Indian automotive companies are reducing the number of Vendor Base 1017 950 738 612 400 suppliers to achieve this. in the automotive industry. Indian companies typically have more number of suppliers compared to global best practices. It also helps in the time of unwanted interruptions like road blockades. emergency situations etc since now they can be rerouted onto a different path due to the increased visibility of the whole transportation process. As much as 97% of cars in India are moved by road due to the lack of availability of proper rail infrastructure. ISO / QS Certified Self certified vendors JIT% of PO value 245 210 62 281 240 72 364 260 74 382 290 77 400 350 82 LCL% of PO value 5 5 6 7 9 Supplier partnership is also needed to enable processes such as cross docking. Supplier consolidation not only simplifies the purchasing but also Status 00-01 01-02 02-03 03-04 04-05 leads to better utilization of resources. This increases the complexity of the whole sourcing and procurement process. This also reduces the number of expedited shipments. Government investments to make the transportation infrastructure more efficient can also go a long way in reducing costs. with telephone and fax coming as other means of communication. In the port sector. There is a tremendous need for development of transportation infrastructure in India in road. Cross docking requires Advance Shipment Notifications (ASNs) and barcoded shipping labels. A huge percentage of suppliers still use email as their Vendor Base Rationalisation primary means of order related . Page 16 AQUA MCG LEADERSHIP REVIEW | www.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA Sr. Cross docking can be an effective MRP% of PO value 26 23 20 16 19 way to keep costs low. price and cost analysis (industry cost profiles. total cost of ownership models). Typical procurement cost management strategies include negotiating price by leveraging volume. No  1  2  3  4  5  6    Elements of Logistics Costs  Transportation  Inventories  Losses  Packaging  Handling & Warehousing  Customer’s shopping  Contribution %  35% 25% 14% 11% 9% 6% Collaboration across different companies for freight consolidation.aquamcg. process cost models. The use of IT coupled with advanced tracking technologies like RFID/GPS increases visibility of the movement of goods across the supply chain. use of efficient equipment and proper packaging are some of the other areas where there is a potential of logistics cost reduction. all the major ports in India are running much above their capacity which causes congestion at the ports thus increasing the turnaround time of ships at Indian ports. rail and ports. But implementation issues abound. The use of IT can be a key enabler for achieving cost reduction in this domain. thus helping in better decision making and proactive decisions rather than reactionary. Also the cost of transportation within the country is tremendously high. Sourcing & Procurement and Supplier partnership On an average. typically an auto company sources materials from 250 suppliers compared to the best practice of 100 suppliers (According to a CII 2002 report).

As shown in the chart below 27% of outsourcing is done to achieve cost reduction. where costs are of primary concern. The diagram below shows the extent outsourcing of supply chain activities in India.3 Outsourcing Outsourcing the non-core activities in the supply chain is an important avenue for cost reduction. especially in the pharmaceutical and electronics industries. most of the business units may be sourcing same raw materials from the same company. This gives the companies 2 advantages: 1) get best quality raw materials 2) at the best prices. SC outsourcing will drastically reduce overall supply chain costs which form a major chunk of revenue costs. Many Indian companies are now using the power of internet to source materials internationally.FASHIONING AGILE SUPPLY CHAINS ESourcing/eProcurement is another important step that can lead to substantial cost savings. 3 AutoSCM India 2006 Page 17 . it gives them greater purchasing power in the form of bulk discounts.5% of total material cost. Also the use of technology increases transparency in the whole process. Aggregation of purchasing across all business units can result in substantial cost savings. This project also included other initiatives like global sourcing and eSourcing. On the other hand. eSourcing helped it achieve savings to the tune of 11. but the orders are placed separately. Inventory levels were reduced from 23 days to 18 days. of The host of benefits supply chain outsourcing will bring are extremely relevant to current times. if the companies aggregate their purchasing across all business units. Typically in India. The figure shows how Ashok Leyland through its project “Oscar Inbound” went about rationalising its vendor base and reducing inventories by JIT and LCL.

com .aquamcg. The On-demand supply chain would focus on elements such as: Excellent synchronisation between supply & demand through efficient planning & forecasting Integrating & co-ordinating business functions horizontally across the supply chain Developing outcomes that have been mutually decided & beneficial. customer-driven supply chain – which is well integrated across the business and all its stakeholders and service providers. But why? Page 18 AQUA MCG LEADERSHIP REVIEW | www. to strengthen relationships Managing the supply chain cycles for planning to order-to-delivery Developing flexible cost structures that focus on variable cost structures rather than fixed costs Collaboration and sharing of information & risks with partners to reduce overall exposure Efficiently using real-time data to create customer-centric supply chains that are totally demand driven and customer-driven We will look at some of the key points in detail. Synchronising supply & demand Understanding demand patterns and efficient planning of supply is the constant endeavour of all supply chain planners. Responsive supply chains are typically characterised by an early understanding of demand signals through minimum distortion of the POS (point of sales) data in near real time.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA FUTURE VISION OF SUPPLY CHAIN IN INDIA Where is supply chain management headed? The diagram below illustrates how supply chain is evolving into a more integrated end-to-end.

Innovation is undoubtedly the biggest competitive advantage and differentiator in the future. but this must still be the area of continued focus as this can enable organizations to respond to constant changes in the market place.quickly and ahead of the competition. Logistics services Today’s market demands: o More stocking locations o Frequent ordering o Smaller order sizes Page 19 . Customer Order Management being an important customer touch-point means a direct impact on customer satisfaction levels. production and service. This kind of synchronised supply chain planning leads to competitive advantage that helps provide superior customer service. This however requires process integration and alignment of objectives across the internal and external elements of the value chain. Effective product launch is obviously a key element in the innovation process. but your supply chain needs to support it! Efficient Customer Order Fulfillment Customer orders start with the order entry process and involve efficient maintenance of customer database. the constant fluctuations in demand and bottle-necks due to infrastructure. development. Therefore. up-sell. New Product Introduction Innovation is the key to future success. Leveraging the capabilities of value chain partners. But why? Many companies have adopted new technologies that churn data and extract meaningful insights to further enhance fulfilment capabilities. Companies are leveraging technology to enable supply chain visibility to efficiently accept orders & adhere to promised delivery dates. This helps in facilitating processes down the line like planning & scheduling. But why? All successful companies are distinguished by their ability to efficiently bring innovation to the market. This means integrating with suppliers & supply chain providers during the entire process of design. like suppliers and channel members. technology has played an important role in integrating the company’s order management process with the customer’s planning and procurement processes. In a growing economy like India. back-order processing and post order fulfilment transactions. and subsequently understand and respond to customer needs forms part of customer order management.sell.FASHIONING AGILE SUPPLY CHAINS Ability and flexibility are key strengths that come through from responsive supply chains. this means an evolved on-demand supply chain. opportunity evaluation for cross. After identifying and evaluating these capabilities / resources it is also important to nurture them. It is also critical for a company to maintain profitable growth especially in view of the increasingly competitive Indian marketplace. Overall. The company’s ability to receive customer orders through multiple channels. pose additional challenges to supply chain planning. it also reduces waste and losses due to the suboptimal planning and inventory deployment. in a collaborative approach can help bring products / services to the market faster. smarter and cheaper.

but possible to execute. They have higher service-level expectations which mean higher degrees of responsiveness and customisation from the company. This rings ever more true in the back drop of the current economic conditions. Innovations in technologies & logistics solutions have also been able to create new customer distribution channels and even existing channels are under pressure to change. it has ever more critical for companies to implement scalable yet cost-effective strategies in logistics. inventory management and shipments. among others Customers are becoming more knowledgeable & demanding. To summarise. This type of decentralised supply chain models and tighter trading partner collaborations. . Page 20 AQUA MCG LEADERSHIP REVIEW | www. means new and improved visibility. space utilisation. which fiercely call for an increase in profitability. to retain the market position a company holds. But why? Accurate & efficient logistics management and servicing means Customer satisfaction & retention coupled with continued sales growth. A mammoth challenge. Management tools can also help combat any inefficiency that arises in warehouse management.aquamcg.Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA o o o More sophisticated modes of transportation Multi-channel distribution Configure-to-order capabilities. especially in view of rising transportation costs and other complexities in the system. transportation. improvement in quality & reduction in costs. Customers today expect on-time deliveries and value-add services like real-time order tracking information.

anandan@aquamcg. introduce new products or increase market share. We help transform and manage supply chains for better business performance. improve quality standards. For more information. please contact: Mumbai: Ram Mantravadi Shiv Kumar Bengaluru: Gopal Manish K Singh New Delhi: Technology: Sanjeev Ganesh Anshuman Mukherjee ram.FASHIONING AGILE SUPPLY CHAINS Clients come to us when they need help to reduce cost.mantravadi@aquamcg. with our hands-on expertise and thought leadership in several sectors. Visit us at: www. utilize capacity etc. analytical rigor and defined metrics to deliver value for every project we undertake. through a lean and efficient supply chain and we at Aqua About Aqua Management Consulting Group Aqua Management Consulting Group (Aqua MCG) is a premier advisory and execution group committed to delivering superior operations & supply chains and maximizing business value for our Or contact us through our website: manishkumar. good domain knowledge and execution leadership. gear up operations to meet business objectives. We do this by providing High value consulting advice and complete execution support Business and functional Page 21 . on a BOT model Supply chain outsourcing solutions and services Steady-state operations monitoring & continuous performance improvement Our team comprises professionals with strong consulting experience.ganesh@aquamcg. We use structured methodologies. Our vision is to be globally recognized as highly valued partners for achieving supply chain leadership.aquamcg.mukherjee@aquamcg.aquamcg. understand the need and serve it with due diligence and anshuman.