Supply Chain

Management
• Supply chain management (SCM) is the monitoring and optimization of the
production and distribution of a company’s products and services.
• It seeks to improve and make more efficient all processes involved in turning
raw materials and components into final products and getting them to the
ultimate customer.
• EffectiveSCM can help streamline a company's activities to eliminate
waste, maximize customer value, and gain a competitive advantage in the
marketplace.
Supply chain management (SCM) is the centralized management of the flow of goods and services to and from a company and
includes all of the processes involved in transforming raw materials and components into final products.

With SCM, companies can cut excess costs and deliver products to the consumer faster and more efficiently.

Good SCM can help prevent expensive product recalls and lawsuits as well as bad publicity.

The five most critical phases of SCM are planning, sourcing, production, distribution, and returns.

A supply chain manager is tasked with controlling and reducing costs and avoiding supply shortages.
 Supply Chain Management

• The supply chain encompasses all activities involved in the transformation

of goods from the raw material stage to the final stage, when the goods and
services reach the end customer.
• Supply chain management involves planning, design and control of flow of
material, information and finance along the supply chain to deliver superior
value to the end customer in an effective and efficient manner
Evolution of Supply Chain Management
 The First Revolution (1910–1920):
Vertical Integration with Limited Product Variety

• Ford Motor Company pioneered the first major revolution with tightly integrated supply chains.
• Ford controlled every part of the supply chain, from raw materials to finished product.
• Focused on mass production of a single model (Model T) in black, offering limited variety.
• Efficient but inflexible supply chain; unable to handle diverse product demands.
• Competitors like General Motors offered more product variety and flexibility, leading to the shift
toward diversified models.
• Vertical integration was the standard, as seen in firms like Hindustan Motors.
 The Second Revolution (1960–1970): Integrated
Supply Chains with Wider Product Variety

• The second revolution arose from the need for flexibility and efficiency in handling product diversity.
• Toyota Motor Company introduced lean production systems and the keiretsu model (close, long-term
supplier relationships).
• Suppliers were located near assembly plants, reducing set-up times and improving efficiency.
• Toyota’s model contrasted Ford's rigid system and promoted efficient, flexible supply chains.
• The evolution also highlighted the limitations of close supplier ties, eventually leading to looser, more
flexible relationships as supply chains expanded globally.
• Electronic Data Interchange (EDI) allowed firms to work with distant suppliers without the need for
proximity.
 The Third Revolution (1995–2020): Virtually
Integrated Global Supply Networks with
Customization
• The third revolution was driven by advancements in information technology, enabling global
integration and customization.
• Companies like Dell, Apple, and Bharti Airtel showcased this new model.
o Dell allowed customers to customize laptops and tracked orders in real time.
o Apple integrated product offerings with personalized user experiences, such as iTunes and the App Store.
o Bharti Airtel outsourced core activities like network management, focusing on providing a personalized
telecom service.
• Businesses shifted from offering standard products to delivering customized experiences that
combined products and services.
 Key characteristics of the third revolution

o Strategic Partnerships: Medium-term relationships with vendors based on cost and technology
leadership.
o Global Resource Utilization: Resources from around the world are harnessed, regardless of
physical proximity.
o Platform Creation: IT-enabled platforms that allow low-engagement, global partners to enhance
customer experiences.
Virtual integration became critical to providing seamless, personalized user experiences,
revolutionizing how supply chains operate.
 Key Concept in Supply Chain Management

Traditional Supply Chain Focus: Firms traditionally concentrated on

purchasing, manufacturing, and distribution, with limited attention given to
transport and storage activities.
Evolution of Supply Chain Management: Supply chain management initially
focused on internal integration of activities (purchasing, manufacturing,
distribution), but later expanded to include coordination across the entire
supply chain, from vendor to customer.
• Three Key Flows: A typical supply chain involves managing material,
information, and financial flows, all of which need to be integrated across
departments and organizations.
• Customer Pull: In well-managed supply chains, the flow of materials,
information, and finance is governed by customer demand rather than
internal company forces.
• Challenges at Boundaries: Supply chains often face inefficiencies at
departmental and organizational boundaries, which lead to bottlenecks and
distorted flows.
• Focus on Linkages: Studying supply chains should focus on linkages
between departments and organizations rather than individual operations.
• Focal Firms: Supply chains are typically analyzed from the perspective of a
focal firm (e.g., HUL, Asian Paints, Marico Industries), as these firms play a
central role in managing the chain.
• Reverse Supply Chain: Besides the forward flow of products, firms also
need to manage reverse flows (e.g., product returns, warranty claims,
product disposal), especially with increasing regulatory requirements.
• Growing Importance of Reverse Supply Chain: Reverse supply chain
management is becoming more important, particularly in light of tougher
regulations and the need for product takebacks.
• Forward Flow Focus: The book focuses primarily on the forward flow of
materials/products, with reverse supply chain management discussed in a
dedicated chapter.
 Importance of Supply Chain Management
1.Proliferation in Product Lines
o Companies offer more product varieties to meet diverse customer tastes.
Example: Supermarkets may have dozens of varieties of products like
soap, with brands offering different sizes, scents, and packaging.
o This increase in variety makes inventory management and demand
forecasting more challenging.
Example: HUL manages around 1,200 SKUs for its personal care products.
o Retailers may need to hold higher inventory levels to prevent stockouts.
Example: Foodworld, a retail chain, manages about 6,000 SKUs.
Shorter Product Life Cycles
o Products have shorter life cycles due to intense competition.
Example: Apple's product cycles for new iPhone models are very short, with
updates every year or even every few months.
o Companies like Apple manage minimal inventory to avoid obsolescence.
Example: Apple typically holds just 5 days of inventory, compared to an industry
average of 35 days.
o Firms with higher inventories may face write-offs as products become obsolete
quickly.
Example: Competitors with excess stock may need to write off obsolete tech
components.
Higher Level of Outsourcing
o Companies focus on core activities and outsource non-core functions to specialists.
Example: Dell outsources its logistics and manufacturing to focus on its design and
customer service operations.
o Outsourcing increases vulnerability in the supply chain, as firms rely on external
partners.
Example: Bharti Tele-Ventures outsources network management and IT services, making
their supply chain more dependent on third-party providers.
o Firms must develop stronger internal capabilities to manage outsourcing risks.
Example: Companies like Apple and Dell have to work closely with their suppliers to
ensure quality and timely delivery.
Shift in Power Structure
o Retailers are becoming more powerful in the supply chain, given their proximity to
customers.
Example: Walmart demands daily replenishment from suppliers based on real-time sales
data.
o Retailers are demanding more responsiveness and better terms from manufacturers.
Example: Retailers may require manufacturers to pay "slotting allowances" for shelf
space in stores.
o Manufacturers must adapt to retailer needs and focus on trade marketing to remain
competitive.
Example: Companies like Coca-Cola build strong relationships with retailers, offering
promotions to secure prime shelf space.
Globalization of Manufacturing
o Companies are restructuring production facilities to align with global standards.
Example: General Motors designs cars with global markets in mind, producing a "world
car" for different regions.
o Supply chains are integrated for global markets, creating more complex management
challenges.
Example: Electronics firms may source components from Taiwan, assemble them in
China, and ship final products worldwide.
o Managing the physical movement of goods across countries adds logistical complexity.
Example: Companies like ABB manage global supply chains, ensuring parts are produced
and delivered from different parts of the world.
 Logistics Costs in India

• India’s logistics costs are high compared to other countries, impacting

competitiveness.
• While customer service expectations differ, global tariff reductions make logistics
costs comparable.
• Inefficiencies in transport and warehousing hinder global competitiveness.
• Export costs (e.g., Punjab to Mumbai vs Mumbai to London) are often the same.
• Transit time variability and damages contribute to high transportation costs in
India.
 Performance of Indian Manufacturing Supply
Chains

• Inventory turnover ratio used to measure supply chain performance.

• The global financial crisis severely impacted the sector, and recovery has
been slow.
• Indian firms have shown marginal improvements in performance, lagging
behind international peers.
 Sector-Wise Performance Trends

• Most sectors mirror the overall manufacturing performance, except for

consumer goods, construction, and chemicals.
• Consumer goods and construction sectors maintained inventory levels,
while chemicals showed significant improvements.
• To compete globally, Indian firms must improve inventory management
and reduce logistics costs.
 Challenges in Supply Chain Management

• Indian firms face unique challenges due to economic factors, taxation

structures, and geography.
• Overcoming these challenges is key for Indian firms to enhance their supply
chain performance and global competitiveness.
1. Infrastructure Deficiencies
• Transport and Roads: Poor road quality and congestion can delay deliveries and
increase costs, especially in rural areas.
• Ports and Airports: Limited capacity and inefficiencies at ports and airports can
cause delays in both imports and exports.
• Warehousing: Insufficient warehousing facilities, particularly in terms of modern
storage solutions, can lead to high inventory costs and handling inefficiencies.
2. High Logistics Costs
• The cost of logistics in India is considerably higher due to the inefficiency of
transport, warehousing, and inventory management.
• Factors such as fuel prices, tolls, and high transportation costs further
escalate expenses, impacting the overall supply chain performance.
3. Regulatory and Taxation Issues
• Complex Tax Structure: The variety of state and central taxes, such as GST, and
frequent changes in regulations can complicate the movement of goods across
state borders.
• Bureaucratic Delays: Delays at customs and regulatory agencies often result in
longer lead times and operational inefficiencies.
4. Geographic and Cultural Diversity
• Regional Disparities: Diverse geographic conditions, including varied infrastructure
quality across states, make it difficult to maintain a uniform supply chain.
• Language and Cultural Differences: These can pose challenges when coordinating
logistics and communication across different regions, especially in rural or remote
areas.
5. Inconsistent Power Supply
• Unreliable electricity supply in certain regions affects the operation of
manufacturing plants, warehouses, and cold storage facilities, leading to
potential delays and higher costs.
6. Labor Challenges
• Labor shortages and skills gaps, along with labour law complexities, can
disrupt operations, particularly in the warehousing and logistics sectors.
7. Inventory Management Issues
• Poor demand forecasting and inadequate inventory management systems
can lead to either stockouts or excess inventory, both of which increase
costs.
8. Unpredictable Weather and Natural Disasters
• Seasonal factors such as monsoons and natural disasters can disrupt supply
chains, especially in agriculture, which is highly vulnerable to these events.
9. Supply Chain Visibility and Technology Adoption
• Many Indian companies still lag behind in adopting modern technologies (like IoT,
AI, and data analytics) for supply chain visibility and optimization, making it harder
to track shipments and forecast demand.
10. Lack of Standardization
• There is a lack of uniform standards across packaging, labeling, and documentation,
which can create inconsistencies in handling and delays in shipping across regions.
11. Inadequate Cold Chain Infrastructure
• Insufficient cold storage facilities for perishable goods lead to high spoilage
rates, especially in the food and pharmaceutical sectors.
 Indian Supply Chain Architecture

• The "Indian Supply Chain Architecture" refers to the overall structure and
network of supply chains in India, involving the movement of goods,
services, information, and funds between various stakeholders such as
manufacturers, suppliers, distributors, retailers, and consumers.
• It encompasses the policies, infrastructure, technologies, and logistics
systems that support the movement of products across the country.
1. Infrastructure:
• Roads and Highways: India has one of the largest road networks in the world, but traffic
congestion and road quality in certain regions can pose challenges for efficient movement
of goods.
• Railways: The Indian Railways network is one of the largest in the world, playing a crucial
role in transporting bulk goods, including coal, minerals, and agricultural products.
• Ports and Airports: Major ports like Jawaharlal Nehru Port Trust (JNPT) and Mumbai Port,
as well as airports like Delhi and Mumbai, serve as key points for international trade.
• Warehousing: India’s warehousing sector is rapidly growing, with developments in both
urban and rural areas to cater to the growing demand for logistics and storage capacity.
2. Logistics & Transportation:
• Multimodal Transport: The use of various transport modes (road, rail, sea, and air)
is a common strategy to optimize time and cost in the Indian supply chain.
• Cold Chain Logistics: India has a growing cold chain infrastructure for transporting
perishable goods like dairy, fruits, and medicines, which is crucial for maintaining
quality and reducing wastage.
• E-commerce Impact: The rise of e-commerce has revolutionized last-mile delivery,
pushing supply chain networks to become more agile, tech-enabled, and customer-
focused.
3. Technological Integration:
• Digital Platforms: Technologies like blockchain, IoT (Internet of Things), and
AI (Artificial Intelligence) are increasingly used to streamline operations,
track shipments in real time, predict demand, and manage inventory more
efficiently.
• Automation: Automated warehouses, robotics, and drone deliveries are
some emerging technologies reshaping supply chain processes in India.
• Data Analytics: Big data and analytics help optimize inventory levels,
distribution routes, and forecast demand, leading to more efficient supply
chain management.
4. Regulations & Policies:
• Goods and Services Tax (GST): GST has unified India’s tax structure, making inter-state
movement of goods more efficient and reducing the complexities associated with the
previous indirect tax system.
• Make in India: This initiative aims to boost manufacturing in the country, which in turn
impacts supply chain dynamics by encouraging more local production and reducing
dependence on imports.
• National Logistics Policy: India is also working on improving its logistics infrastructure
through strategic plans, aiming to reduce logistics costs and improve the ease of doing
business
 Enablers of Supply Chain Performance

• Managing supply chains has become more complex, yet firms have reduced
logistics costs. In the U.S., logistics costs decreased from 15% of GDP in the
1980 to around 8.5% today, thanks to advancements in technology and
management practices. Three key factors that have helped reduce supply
chain costs.
 Improvement in Communication and IT

• Cheaper Computing Power: Lower costs in computing and communication

have allowed for more efficient global supply chain coordination.

• ERP Systems: Advances in Enterprise Resource Planning (ERP) automate

business processes and enable seamless information flow across functions.
• Impact of Internet Technology:

o Past: Only large companies could afford expensive EDI technologies.

o Now: Small firms can connect with partners globally using the internet at
a fraction of the cost.
• Replacing Physical Inventory with Information: Companies can now use IT systems to
manage inventory more efficiently.
o Example: Shared safety stock across multiple plants instead of individual stocks at each
plant.
o Customization: IT systems allow for better order processing, offering greater
customization.
• Challenges: Many companies still use IT to automate existing systems instead of re-
engineering processes.
Emergence of Third-party Logistics Providers
(3PL)
• Trend: Companies are outsourcing logistics activities to focus on core business functions.
• Global Perspective: In developed countries, nearly 90% of logistics activities are outsourced
to 3PLs.
• Advantages of 3PLs:
o Professionalism: Brings expertise to logistics.
o Economies of Scale: Pool demand across customers for cost-efficiency.
• Role of 4PL: 3PL companies in developed countries are evolving to 4PLs, providing
integrated supply chain solutions.
• Indian Market:
o Traditional transporters and warehouse providers are transitioning to 3PL
services.
o International 3PLs have entered India with global MNCs.
o Example: Toyota’s logistics provider Mitsui coming to India for logistics
management.
• Future Growth in India: Increasing use of 3PL services by MNCs and progressive
Indian firms.
 Enhanced Inter-firm Coordination
Capabilities

• Successful Coordination Across Global Networks:

o Companies such as Apple, Nike, Toyota manage complex global networks
effectively.
o Role of Strategic Centre: One firm within the network manages and
orchestrates the entire supply chain.
• Benefits: Efficient, responsive supply chains that leverage the core competencies of each
network member.
• Challenges:
o Misalignment of interests within the supply chain can cause network failures.
o The industry is still learning to improve coordination.
• Learning from Leaders: Best practices from companies like Apple and Toyota serve as role
models for other firms.
 Overview of the FMCG Sector in India

• FMCG is the 4th largest sector in the Indian economy, worth around Rs 500 billion.
• It includes products that are frequently purchased by consumers, such as soaps,
dairy products, confectionery, soft drinks, fruits, vegetables, and batteries.
• FMCG products generally have low unit costs but are sold in large volumes.
• Top FMCG companies in India: Global players like HUL, Nestlé, Cadbury, and P&G,
along with home-grown companies like Amul, Dabur, Asian Paints, and Marico.
 The Role of Supply Chain in FMCG

• The FMCG sector relies heavily on efficient supply chains due to the nature
of its products and their widespread distribution.
• Companies with effective supply chain practices outperform competitors,
while poor supply chain management can result in a company’s struggle to
survive in the market.
• Supply chain innovations in FMCG often lead the way, influencing other
industries to adopt similar practices over time.
• HUL's Project Shakti targets rural markets with
poor connectivity.
• Partners with self-help groups (SHGs) to reach
untapped areas.
• Shakti dealers, rural women, sell HUL products
directly in their villages.
• Aims to expand market reach and build brand
influence locally.
• Provides sustainable livelihood opportunities for
underprivileged rural women.
 Key Challenges in FMCG Supply Chains

1.Managing Availability in Complex Distribution Networks

• India’s FMCG sector deals with a highly complex distribution system, with multiple
layers of small retailers between the company and the end customer. For instance,
Marico reaches over 1.6 million retailers across India.
• Availability at the last distribution stage is a huge challenge, with organized retail
availability as low as 65%. This results in low product availability at traditional retail
outlets.
2. Smaller Pack Sizes
• To penetrate the lower-income segments, FMCG companies in India offer
smaller pack sizes, which is the opposite trend seen in developed markets.
• Although small packs increase market reach, they raise packaging,
transportation, and handling costs, which companies must manage
effectively to stay profitable.
3. Entry of National Players in Fresh Product Markets
• National companies are increasingly entering the market for traditionally
local fresh products, such as atta (wheat flour) and yogurt.
• Maintaining freshness and quality while ensuring cost-effective
production is challenging for these national players, who typically rely on
centralized production facilities. Decentralized plants may be needed to
maintain freshness at scale.
• Milk as perishable: Rural farmers struggled with storing
excess milk and faced low prices from middlemen.
• Cooperative societies: Farmers formed village-level
societies to improve returns.
• Formation of unions: Multiple societies formed unions
to centralize milk processing.
• Amul's creation: Amul was founded in 1946 to process
and market milk efficiently.
• Efficient supply chain: Amul connects 2.41 million
farmers to 500,000 retailers across India.
4. Dealing with Complex Taxation Structures
• India's complex tax system across states leads to inefficiencies. State-level
taxes and the illegal movement of goods between states distort FMCG
supply chains.
• Smuggling and grey markets are significant issues, with counterfeits
accounting for losses of Rs 300 billion annually. Goods often move illegally
across borders to exploit lower taxes in specific regions.
5. Counterfeit Goods
• Counterfeit FMCG products lead to massive financial losses, with companies like P&G
facing sales losses of over 50% for some products due to counterfeits.
• Companies need stricter control over their distribution channels to minimize losses
from counterfeit goods and ensure product integrity.
6. Opportunistic Practices in Distribution
• It’s common for distributors to act opportunistically, taking a significant share of
promotional budgets for themselves rather than passing them on to the customer.
• Illegal product diversion during promotions causes inefficiencies, leading to the
misallocation of resources and a lack of control over distribution.
 Further Challenges and Trends

1.Small-Scale Sector and Sourcing Strategies

• Many FMCG products are sourced from small-scale industries in India. With the potential
liberalization of this sector, companies will need to adapt their sourcing strategies to
maintain competitiveness.
2.Growth of Organized Retail and Channel Conflicts
• Modern retail chains are gaining market share but are increasingly demanding higher
discounts, causing friction between FMCG companies and distributors.
• The rise of private-label brands from modern retailers poses a new challenge for traditional
FMCG manufacturers, threatening their market share.
3. Emergence of Online Retail
• E-commerce is booming in India, with online retail growing at nearly 50% CAGR from
2012 to 2015. This trend is expected to continue, driven by increased internet
penetration, including in rural areas, presenting both opportunities and challenges for
FMCG companies.