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The Role of Supply Chain Management in

Economy

Supply Chain Management_Janat Shah

 Learning Objectives

 Why is the supply chain important?

 What are the key supply chain decisions made by a firm?
 How has the supply chain evolved over the last century?
 What are the unique challenges of managing a supply chain in
India?

Supply Chain Management_Janat Shah

Supply Chain Management: Success Stories
 Dell: Inventory turn-over ratio of 58.7 compared to industry
average of 12 (Net Profitability of 5.3.%) ( Drop from 7.8% in
2006)
 Wal-Mart: Inventory turn-over ratio of 9.9 compared to
industry average of 5.5 ( Net profitability of 3.5%)
 Zara Corporation: Lead-time from new product to stores is 15
to 20 days compared to industry average of six months ( Net
profitability of 11.3%)

Supply Chain Management_Janat Shah

Supply Chain Management: Horror Stories
 Cisco: Cisco wrote off 2.2 $ billion worth of inventory in May
2001. Biggest write-off in history.
 Sony: PlayStation II–a lost opportunity
 SONY could supply only 25% of the potential demand for
Christmas market
 Nintendo Wii Game Console : Shortage expected in year 2007
 Kmart Launched supply chain initiative in May 2000 worth $1.4
billion in software and services. In 2001-02, announced that it was
abandoning most of the software purchased and taking $130 million
write-off
 Nike- i2 Technology Controversy: Lost $100 in sales in last
quarter of 2000 i2 Technologies was blamed. “ This is what we get
for our $400 million”—Nike Chairman
 Wal-Mart: RFID Initiative
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Supply Chain Management_Janat Shah

Supply Chain Management: A Definition

 Encompasses all activities associated with the transformation of

goods from the raw material stage to the final stage when the
goods and services reach the end customer.
 Involves planning, design and control of flow of material,
information and finance along the chain in order to deliver value
to the end customer in effective and efficient way.

Supply Chain Management_Janat Shah

Supply Chain Management: A Pictorial Representation

C1

C2

C3

C4

C5

C6

VENDOR INBOUND INTERFACILITY DISTRIBUTION OUTBOUND

PLANTS CUSTOMERS
TRANSPORTATION TRANSPORTATION CENTERS TRANSPORTATION

Supply Chain Management_Janat Shah

 Managing Flows in A Supply Chain

 Material Flow
 Information Flow
 Financial Flow

Supply Chain Management_Janat Shah

 From An Automobile Manufacturer
Our aim is always to arrange the material and machinery and to
simplify the operation so that practically no orders are
necessary. Our finished inventory is in transit. So is most of our
raw material inventory. Our production cycle is about eight-one
hours from the mine to the finished machine (automobile) in the
freight car

Supply Chain Management_Janat Shah

Historical Evolution of the Supply Chain

 First Revolution: (Ford Motor Co. 1910–1920)

 Single product, that is, no product variety
 Vertical integration
 Second Revolution: (Toyota Motor Co. 1960–1970)
 Wide Variety
 Long-term relationship with suppliers
 Third Revolution: (Dell Computers 1995–Current)
 Customized products
 Medium-term relationship with suppliers
 Suppliers have to maintain technology and cost leadership

Supply Chain Management_Janat Shah

 Key Supply Chain Concepts

 Concept of focal firm

 Supply chain decisions
 Design
 Operations
 Logistics and SCM
 Reverse Supply Chain

Supply Chain Management_Janat Shah

 Supply Chain Design

 Deciding Scope ( What activities to be done in-house and what

activities to be outsourced)
 Design of Network
 Plant location and capacity decisions
 Warehouse location
 Vendor selection
 Nature of relationships

Supply Chain Management_Janat Shah

 Managing Supply Chain Operations

• Demand forecasting
• Procurement planning
• Production planning
• Inventory management
• Transportation
• Order processing
• Relationship management

Supply Chain Management_Janat Shah

 Importance of The Supply Chain

 Proliferation of Product Lines

 Shorter Product Life Cycles
 Cell phone, Laptop, Automobile
 Higher Level of Outsourcing
 Dell computers, Bharti Tele ventures
 Shift in Balance of Power in Chain
 Impact of organized retail chain
 Globalization of Manufacturing
 Impact of tariff structure

Supply Chain Management_Janat Shah

Enablers of Supply Chain Performance

 Improvement in communication and IT

 Better understanding of inter-firm coordination issues
 Entry of third-party logistics service providers

Supply Chain Management_Janat Shah

 Ratio of Logistics Cost to GDP for
Selected Countries*

• Does logistics cost capture every thing?

• How do we capture logistics cost of India versus
China?

* Source: Raghuram and Shah 2003

Supply Chain Management_Janat Shah

Logistics Costs for the Indian Economy*

Rs billion 93-94 prices

Total GDP Logistics
Logistics Cost/GDP
Cost (%)
95-96 1201.27 8995.63 13.4
97-98 1261.01 10163.99 12.4
99-00 1388.93 11485.00 12.1
01-02
1508 12679 11.89
03-04
1658 14305 11.59

*Source: Raghuram and Shah 2004

Supply Chain Management_Janat Shah

 Logistics Costs for the US Economy
Nominal Values
Organized Sector US: 1990 US: 2001 US: 2002

Transportation 50% 60% 63%

Inventory 20%
Warehousing
24% 40% 37%
Packaging
Losses 6%
Total Cost 11.4% 9.5% 8.7%
Logistics Cost 659 957 910
($ billion)

GDP ($ billion) 5,800 10,080 10,470

Source: CASS Information Systems, 2002

Supply Chain Management_Janat Shah

Performance of the Indian
Manufacturing Industry*

Data Source: PROWESS, CMIE

Supply Chain Management_Janat Shah
Sector-wise Industry Performance of
Indian Firms*

Data Source: PROWESS, CMIE

Supply Chain Management_Janat Shah
Status of Logistics Management in India

 Neglected area in organizations

 Taxation structure drives the logistics related decision, not cost
or service considerations
 Poor state of infrastructure
 Complex regulations affecting logistics decisions

Supply Chain Management_Janat Shah

 Supply Chain Challenges for the
Indian FMCG Sector
 Managing Availability in the Complex Distribution Set up
 Working with Smaller Pack Sizes
 Entry of National Players in the Traditional Fresh Products
Sector
 Dealing with a Complex Taxation Structure
 Dealing with Counterfeit Goods
 Opportunistic Games Played by the Distribution Channel
 Infrastructure
 Emergence of Third-party Logistics Provider
 Emergence of Modern Retail Chains
 Reservation for Small-scale Sector

Supply Chain Management_Janat Shah

The Marico Supply Chain

Supply Chain Management_Janat Shah

 Summary
 What is supply chain management?
 The supply chain encompasses all activities associated with
the transformation of goods from the raw material stage to
the final stage,.
 Supply chain management involves planning, design and
control of flow of material, information and finance along
the supply chain
 Why is the supply chain important?
 On account of globalization and increased competition,
firms have to manage a larger number of product lines with
shorter product life cycles under the situation of changed
power in supply chain performance would help Indian firms
equations within a chain.
 improvement in becoming globally competitive.
Supply Chain Management_Janat Shah
 Summary-II

 Supply Chain Evolution

 Technological and managerial innovations, along with the
development of logistics specialists, have helped progressive
firms to improve supply chain performance under trying
times
 Supply Chain Challenges in India
 Indian firms need to learn from progressive firms in
developed economies, which have managed to improve
supply chain performance considerably,
 But at the same time emerging economies like India and
China have their own unique supply chain problems and
challenges. Obviously, different geographies and their
economies have their own unique set of problems and we
need to look for specific solutions to these problems.
Supply Chain Management_Janat Shah